While the value of the industry’s contribution to society cannot be questioned since – shipping transports 90% of world trade and has facilitated the relocation of much of the world’s industrial production to Asia, which in turn has driven up global living standards – the stakes that shipowners play with, involve billions and billions of dollars – something which it is hoped, is appreciated by policymakers. It is said that Shipowners are involved in a form of gambling, i.e. investing in high capital-intensive units, which are not always covered by an adequate guaranteed income. To an increasingly large extent, these high stakes are now being placed by Asian investors, with the majority of the world fleet now being owned in Asia.
It is common knowledge that much of the industry is still struggling with the serious consequences of the truly massive contraction in economic activity following the near-collapse of the banking system in 2008. Although 2010 was not quite as bad a year for shipping as some had predicted, the immediate future is still extremely uncertain, and it is still necessary for any prudent shipowner to continue anticipating the unexpected, especially if governments decide to withdraw much of the fiscal stimulus which has been applied to a number of major economies.
To coin a phrase, as well as the ‘known unknowns’, which include the possible impact of problems such as the piracy crisis in the Indian Ocean, there are also the ‘unknown unknowns’ such as the possibility that the crisis will continue to spiral out of control, the scale of the economic costs of complying with new demands from society such as the need to reduce CO2 emissions, the cost of the low sulfur fuels and others.’. This point is clearly illustrated by recent developments which it was truly impossible to foresee, namely the dramatic political events in the Middle East and the terrible sequence of disasters in Japan – the full implications of which are still very difficult to even begin to contemplate
Moving closer to things that can be understood more directly, much will also depend on the policies of China, which has continued to sustain demand in many shipping trades. Shipping is the servant of world trade, and its fortunes are inextricably linked to the demand for its services. The possibility of a change in policy in China, and the negative impact this might have on shipping’s recovery, cannot be overstated. The situation is also greatly exacerbated by the staggering amount of new shipping tonnage on order.
It is important to realize that the shipping industry is still going through probably the worst financial crisis ever and because of this, the industry is experiencing a ‘once in a lifetime’ event.
There have been many economic downturns, but never before did credit stop. Yes, banks by necessity would be more selective, as they should be; yes, terms may have changed slightly, but no one can remember ever, credit, more or less, coming to a stop. Without credit, there can be no trade, either in buying and selling ships or buying and selling cargoes.
Another new and dramatic factor was that the banks appeared to mistrust each other. Of course, such mistrust is understandable, because back in 2008/2009, almost every week, banks would keep increasing their losses, by billions of dollars.
No one knows exactly how the current situation came about, but giving the banks the benefit of the doubt, it was arguably because they did not know how to price their investments and liabilities. It has broadly been established that one of the biggest problems, and one of the main reasons why the banking system almost collapsed, was because of over leveraging, something that shipowners cannot do. Banks were thirty and forty times leveraged whilst shipowners were not even one to one.
More specifically, the key points that are relevant to the amount of money available for shipping are the following:
(1) Since the banking crisis, credit has not been readily available, and only recently have banks begun to consider lending.
(2) The terms have changed considerably, particularly with regard to the quantum, i.e. banks are not willing to lend more than, say, 60% of the value of the vessel, as against 80 and 85% before the crisis, thereby increasing the percentage of equity that shipowners have to invest in any given project.
(3) With the exception of very large shipping companies, as well as a relatively small number of companies that are in the stock exchange, there is no other possibility for the great majority of smaller shipping companies to raise money or borrow money to buy a ship.
(4) Because of the above, the number of shipping companies that are able to buy ships today has been greatly reduced, thus leaving those mentioned under (2) & (3) above and those that can pay cash.
(5) As a consequence, there will be a dramatic distortion of competition, and fewer and fewer companies will be able to stay in business on their own. They will either stop trading or group with other companies.
(6) The availability or rather the non-availability of loans from banks is thus crucial to a level playing field and to a competitive environment which is vital for the efficiency of world trade. In other words, the lack of bank financing for shipping is detrimental to world trade.
(7) Similar comments apply to the buying and selling of commodities, not necessarily to the same extent, but most probably and ultimately with the same final outcome.
(8) Governments, in their haste to save the banking system from collapsing, have not ensured that their assistance would be conditional upon the banks continuing to lend as before, albeit more carefully and to companies that are solvent, and without discrimination as to size. This latter comment is extremely important if a competitive environment is to be maintained. Over 90% of shipping companies worldwide are smaller companies with an average size of about 5-6 vessels each.
(9) It is not the bonuses that brought the banking system to its knees, it is excessive leveraging, uncontrolled, unchecked, and unregulated.
(10) Banks have been taking terrible risks by investing in products whose value was questionable and lending money to large corporations on the basis of a piece of paper without a tangible asset as collateral, as is the case in shipping.
(11) Such banks, some of which did not have a large portfolio in shipping or perhaps no portfolio at all, did nevertheless affect the entire banking system by the actions described above, thus affecting greatly the money available to shipping.
(12) The non-availability of loans to shipowners to buy ships may prevent them from scrapping older vessels and renew their fleets. This increases the average age of the fleet and may impact standards.
(13) The abandonment of marine loans by a number of banks has resulted in them closing their ship finance departments and releasing their experienced officers, which means that there will be a shortage of such personnel when the financial environment changes.
As can be seen from the above, the banking system is intricately woven into the very fabric of shipping and shipping companies, and ship finance is equally vital for world trade and hence for the wellbeing of all of the world’s citizens.
Competition and Choice Will Reduce
Shipping, and it is suggested the whole world, cannot depend on those few that can pay cash for their investments, nor is it healthy otherwise, from the point of view that as we progress into the future the number of such companies will dwindle, the competition will reduce and thus choice will reduce. In addition, the bigger that companies become the more they will diversify, and as has been observed in the past there may come a day, especially during a downturn in the shipping market, when they will move away from shipping altogether. There are other ways that shipping companies can raise money, but none is more crucial than the banking system.
One other element which tends to be forgotten is that ship owning has been a very traditional business, a very hands-on type of operation, which cultivated the love for the enterprise of shipping but which also enhanced the knowledge and expertise of those engaged in it, increasing efficiency, know-how, and expertise.
Our Word, Our Bond
Shipping is very complex, highly efficient and the most fascinating business there is, because of its international nature, but also because of the most important element. Trust. “Our word, our bond’’ is the motto of the Baltic Exchange, and without that, the industry cannot operate. The same would apply to banks who lend on a personal basis, thus money for shipping is dependent upon the word “trust’’.
A Greater Role for Governments?
There is one further observation. When the current crisis is over, the structure of the shipping industry is likely to have changed dramatically. There will probably be fewer shipping companies and, although they will still be competing in commercial markets, many companies, either directly or indirectly, through government loans or ownership by sovereign wealth funds, will to a much larger extent than hitherto be in some way beholden to governments. For better or worse nothing stays the same, even in a traditionally conservative industry such as shipping.