The shipping supercycle
of the last decade was riding on the coattails of the commodities supercycle
and China’s incorrigible demand for raw materials due to its investment boom. Primarily
minerals like iron ore and coal (with the dry bulk market as a beneficiary) and
crude oil (with the crude tanker market as a beneficiary) experienced very
strong growth based on China’s strong demand, with a brief case in point of the
following graph depicting Chinese iron ore imports increasing from about 70
million tons in 2000 to about 745 million tons in 2012, for an approximate CAGR
of 20%. So far, so great!
China’s growth of an
average 15% annually during the last decade was primarily credit driven, and
such credit expansion has now reached dimensions ‘forcing’ the hand of the
Chinese central government. Total debt now stands at $17 trillion, or 210% of
the GDP, although admittedly, China’s external debt is only 7.2% of the GDP.
Recently, Fitch Ratings estimated that ‘wealth products’ of $2 trillion in‘shadow lending’ are effectively a ‘hidden second balance sheet’ for the
Chinese banks. Still scarier, this $2 trillion ‘shadow balance sheet’ is
financed on short-term, rolling basis of three-to-six months at a time. (We all
remember the ‘repo market’ and its contribution to the financial meltdown.)
The heavily
construction-driven Chinese growth has resulted in many excesses in the economy
(and in many other aspects of life and society, including politics.) Focusing
on the economy here, residential construction represents 20% of the Chinese
GDP, according to a recent presentation by James Chanos of Kynikos Associates,
one of the few successful short strategy hedge funds. By comparison, at the
height of the US real estate bubble, residential construction represented about
6% of the US GDP. Even scarier, in 1989,
at the height of Tokyo’s real estate bubble, real estate was valued at 375% of
GDP, while in 2007 in the US, real estate was valued at 180% of GDP; by
comparison, today’s price of real estate in China stands at more than 400% of
GDP.
As China, at present,
tries to contain a potentially ‘banking bubble’ and rebalance its economy away
from investment and toward retail consumption, the impact on the rest of the
world can be tangible. As Paul Krugman discussed recently in an article in theNew York Times recently, China’s reaching the ‘Lewis point’ when additional
capital on investment starts to generate diminishing returns (underemployed
‘surplus labor’ from the country side has only marginal contribution to the
overall economic output, as new industries cannot efficiently depend on cheap,
untrained peasant labor drawn from the mainland), it will have to focus on
domestic consumption. Focus on internal
consumption will translate to a need for lower imports of raw materials, and as
China – the largest world importer and consumer of commodities – curtails its
imports, the impact on shipping, especially on the asset classes most
dependable on the ‘China play’ like capesize bulkers and VLCC tankers will be
tangible.
Of course, China has made
a name of itself surprising the world in the last decade, mostly positively,
and many Cassandras so far have been proved wrong. Regrettably, even when excluding a
catastrophic scenario of ‘bubble bursting’ and focus on the likely scenario of
‘soft landing’ with a manageable rebalance of the Chinese economy and tapering
off of raw material imports, the prospects for certain types of shipping do not
seem so great; there are still 80 VLCCs on order to be delivered (with the
world fleet standing at about 650 vessels) and 180 VLOCs/Capesize vessels (with
the world fleet standing at about 1,400 vessels.)
© BasilM. Karatzas 2013 All
Rights Reserved
No part of this blog may be
reproduced, in whole or in part, under any circumstances, without the prior
written consent of the copyright holder.
No comments:
Post a Comment