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Monday, 23 October 2017

There is more to sinking freight costs than a glut of ships

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Anthony Peters, SwissInvest Strategist

Yesterday saw the Baltic Dry index hit a 20-year low as it traded intraday at 647. Given that US Industrial Commodities PPI (input prices) has risen from 116.1 to 201.1 over the same period which represents a deflater effect of just over 73%,…

the real cost of shipping has fallen through the floor, if that is the right simile to use for a maritime disaster. There has been fair amount of noise around the cost of sea freight of late and the consensus is that the immense amount of tonnage which was ordered from the yards in the mid-naughties and which is now coming on stream is the cause of the collapse of pricing and that as the overhang of existing but no longer viable shipping is scrapped, the numbers will improve again.

In other words, the collapse in freight pricing is all smoke and mirrors in terms of it being an indicator of global economic activity.

Then, per chance, I tripped over an article from the Daily Telegraph by AEP which reported: “The shipping specialist Lloyd’s List said container traffic through the Port of Shanghai – the world’s largest – fell by 100,000 boxes in January from a year earlier, or 4%. Volumes fell by more than 1m tonnes. The figures may have been distorted by China’s Lunar New Year, but there has been a relentless slide in the Shanghai transport data for months.”

The sum of all fears

I never thought of donning an anorak and sitting on a rock at the entrance to a port counting ships, but it does make sense. The article then goes on to list the sum of all fears that a European recession could or would have a significant impact on the Chinese economy and thus on the growing property bubble which has been building up for several years and which Western economists have been expecting to burst “any day” for nearly as long as I can remember.

However, whereas over-indebted governments in Europe and the US are running out of stimulus ammunition other than in the form of quantitative easing or whatever moniker Eurocrats may wish to apply to it in order not to have called it by its Anglo-Saxon name, the Beijing administration has nearly as much fiscal flexibility as it may choose to play with.

The IMF reckons that it could tinker enough to boost GDP by as much as 3%. What would our boys not give to be able to do the same but running 3% or more deficits during boom times as our politicos did with electoral impunity is not conducive to having the reserves available to intervene when things go awry. I guess they were reading Superman and Asterix cartoons in their youth rather than the fables of Jean de Lafontaine – the story of the ant and the grasshopper springs to mind.               

Nevertheless, private sector debt in China is still at worrying levels as the broad populus has been leveraging savings in order to buy into property and to create the retirement income safety net which the social security system cannot offer.

I must confess to being slightly reminded of Japan in the late 80s; the irreversible “wall of cash” argument was applied to the Nikkei when it was at just under 40,000 points (it closed last night at 9,015.59 points) when we were all told that Mrs Watanabe had her savings boots on and that it couldn’t fall as long as the savings ratio remained high. The IMF is clearly hedging its bets by suggesting that there is a bubble but that it need not necessarily burst. Proof positive that even at the highest level there is no such thing as a one-handed economist.

The point which needs to be made is that there are evidently more forces at work in the global freight market than simply an excess availability of tonnage and that the chap who measures shipping movements needs to be listened to as well

Whatever, the point which needs to be made here is that there are evidently more forces at work in the global freight market than simply an excess availability of tonnage and that the chap who measures shipping movements needs to be listened to as well. The interdependence of West and East remains considerable and German investors should not forget that. They have driven the DAX up by over 15% – it opened this morning at over 6,800 points – since the beginning of the year which is a pretty aggressive position to take for a country which exports massively to the other great exporter which is in turn being talked down.

No wonder the country is in such a mess if all they ever do happens on the weekends. The five days in the middle appear to be nothing but an overall inconvenience created by Germans in order to needle the Hellenes

I stumbled over a piece I had written a couple of years ago in which I had noted that when America catches a cold, China sells it a handkerchief. That was quite witty at the time. I now wonder what the equivalent would be for Germany to do, were China to start to get a bit of a runny nose?     

Yet another day has gone by where the Greeks have promised to come to an agreement over the weekend. No wonder the country is in such a mess if all they ever do happens on the weekends. The five days in the middle appear to be nothing but an overall inconvenience created by Germans in order to needle the Hellenes.

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