As world affairs go, the most recent Global Liner Shipping conference in London did not stir up much interest in the global news cycle. The Panama papers were still hogging the headlines and competing hard against dissections of mishaps in the private lives of British politicians. And let’s not forget the endless discussions on the subject of Brexit.

Coming back to the conference, every presenter had to acknowledge that the going is tough and one should not expect much change in the near future. What was even more interesting, was the difficulty in finding much understanding of, and sympathy for the carriers. Could it be, that everyone is somewhat confused about what is really going on?

Are we in denial or simply optimistic?  

I have the nagging impression that everyone, save for the shippers, placed bets on the speedy recovery from the financial crisis and is afraid to pull out of the game. The global trade is not cooperating and there are signs that recovery is going to be painfully slow and very uneven. Yet carriers are still talking up their new ships and cheering every uptick in container rates (already below cost levels), noisily celebrating this as a prelude to an economic spring.

This collective amnesia ignores the fact that the economic supercycle has lost its mojo and lit the fires in the overstretched balance sheets of the carriers and the banks behind them. From the commentaries, it is clear that the carriers have not seen this coming and are still pretending that the tough years ahead will last only a few more weeks.

The China effect

This irrational behavior continues in light of a 3-year effort by the Chinese government to telegraph in no uncertain terms the switch from an economy based on manufacturing to services. Allowing GDP growth rate to slip towards 6%, whether by design or circumstance, is the clearest confirmation of their long term economic strategy. It should not surprise anyone to see growth dipping below 6% before picking up on the strength of consumption spending.

This is driven by the fact that China will continue to rationalize resource-based and resource-dependent industries. Expect further reductions in capacities and workforces across mining, metals production, heavy industrial equipment, ship building, and many others. This is not the kind of news that drives consumer confidence up in the short and medium term, but eventually bad news will become scarcer and the confidence will return.

However, this is not what we are hearing from the carriers and cargo forwarders. Their forecasting of financial results is still based on the return of China as the factory of the world. And that return has to happen over the next two years, because that is when a huge tranche of new massive containers and bulk ships are going to be delivered. What a shame would it be, if the cargo volumes will not be there to fill their holds.

The price we have to pay to keep the industry afloat

At the conference, I spoke about the carriers getting to the point where their marginal revenues are falling behind the rate of increase in their marginal cost. Signs of commoditization are visible left, right and center. The proverbial carpet of profits is being literally pulled from under the carriers’ financial feet. The governments and the banks have to be prepared for continuing interventions and injections of cash. Some long term liabilities might forever remain unfounded creating financial overhangs like what we’re seeing with Hyundai Merchant Marine (HMM). It is in nobody’s interest to see any of the major carriers fold, as that would hugely impact the global supply chains of many companies, but that financial stress cannot accumulate forever.

Could there be a solution to the dilemmas faced by the carriers and their customers? If we assume that banks and regulators want to see healthy maritime shipping, then they need to perform their own analysis of global shipping alliances and help the carriers to rebalance the alliances in such a way that all alliance carriers can survive the downturns and benefit from the upturns.

Greater involvement from within – the key to salvation?

At this moment, alliances are created and modified in response to regulators asking the liners to meet the benefits of the markets under each regulator’s watch. Global view is lost in siloed financial analysis or some underlying narrow views of the benefits to the economy local to the regulator. Same for the banks. They cannot remain on the sidelines, simply extending financial terms and worrying about the value of the assets underlying the loans.

Whether the desire to get so deeply involved in each carrier’s strategy, remains to be seen, but there is no reason not to consider it. I am not calling for more regulation or oversight, merely for more advice on business strategy. At this moment, that advice might be coming from people without stakes in the outcome – management consulting companies. Their advice to the individual carriers to either buy growth or cut costs, has not produced well-balanced shipping companies. An alternative view could spur different thinking. Let this be the optimistic angle of this article.

If you found this topic interesting, leave your comment or suggestion. I look forward to responding to your feedback.