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Shipping and the New China Syndrome

As we emerge from winter in the Northern Hemisphere the final results for 2014 of public shipping companies have also emerged and show, that for most, winter continues.

It is just over 10 years since the unpredicted growth in Chinese demand for raw materials and energy products fully emerged and with it a similar demand for the movement of finished goods. This produced a spike in charter rates across the board, never seen before in modern shipping history that generated huge profits for those owners with ships that could meet the various demands.

Inevitably this attracted new money, much of which came from the capital markets in the US and Norway. It also caused banks to loosen their rules and lend extensively to finance newbuildings, most of which had no contractual employment.

This was encouraged by the Chinese who dramatically expanded their shipbuilding industry to grab a large part of the newbuilding boom. It also had the secondary effect of flooding the markets with hundreds of new ships at a time when the Chinese economy began to slow down.

The combined effect of all these facts was a collapse of the market boom and a rapid slide into busted markets in 2009, which continues today.

Mainstream ships can be easily built and delivered in 2 years but economic turnarounds take much longer and are today affected by global trade which ironically is what shipping services.

Which brings us to today.

China is being financially and commercially reorganized with the power being transferred back to Beijing and away from the various regions. Wastage of raw materials is being aggressively attacked by the central government and infrastructure and residential construction is being sharply reduced.

All of this creates a new China syndrome which will greatly affect the shipping jobs industry.

The dry bulk markets across the board are a disaster with too many ships of too many different sizes competing for a volume of cargoes that is nearly 40% down from 8 years ago and with some 1500 new ships delivering between now and the end of 2016.

The container markets are equally troubled and facing a huge orderbook that focuses primarily on the very large ships which will not be able to trade with the US and have very limited backhaul cargoes. No amount of clever accounting will mask the cash flow shortages.

The tanker markets had a good last quarter by comparison with the previous few years but still are not generating enough revenue in the crude markets to pay for the expensive new ships and the dramatic reduction in crude oil prices has not increased demand, nor is likely to. It has however ended the purported fuel saving advantages of the new engines and so a sustained recovery is unlikely.

How the new equity will manage all this remains to be seen but the idea of consolidation of shipping companies will only mask the problems and not solve them.

Paul Slater
Chairman and CEO
First international Corp

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