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The 4 causes of the shipping crisis

The 4 causes of the shipping crisis

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As you may know the shipping business has been going downhill, or more appropriately, has been drowning during this last years. A crisis has struck not only a country’s shipping business but the whole business internationally, including countries like the United States, China, the United Kingdom and cities like Monaco, Singapore and Hamburg. This crisis has made boat owners all over the globe question their involvement with ships, leading to many deciding to sell or scrap their boats, some of the big companies have already started to fall with a lot of them filing for bankruptcy.  And the main problem is that it doesn’t seem to be over soon, most specialists seem to agree that this crisis time will continue through the rest of 2016.

Last year in the month of February, the Baltic Dry Index, which measures cargo rates, was below three hundred, the first time in history. Most of the people involved in the business have gone inactive especially those who buy or sell dry bulkers. Veteran investors in the area and the new investors that had been taking interest in the maritime industry are avoiding committing to any business related to this area. Some of the consequences of the crisis are contracts not being renewed or are losing most of its value, ships on major routes have reduced loads with even ten percent less containers and companies are cutting jobs as many as four thousand.

But investors and people in the business may ask, what caused the crisis? A clear culprit can’t be easily found, but it seems to be related to four issues. These issues seem to have affected the maritime business heavily by causing instability in the area. We will go through them one by one, so you can make your own conclusions.

The evolving economy of China:

Lately China has been changing its economy model from a strong importer to a service oriented and ecological economy, taking advantage of their strong domestic consumption.  China has also stopped buying oil, iron ore and other raw materials for production, which has caused problems to different countries in the world, especially those with economies relying on that, like Brazil, Australia and Russia, managing to cause recession level problems in Brazil and Russia. These problems extend to other countries as they have less money to import from other countries. Another problem is the inability of other countries to take China’s role as a main actor in economy, even though countries like India are enjoying better growth rates, the size of China is still bigger and its economy stronger.

New American investors:

When private American investors started coming to the market since 2011 it cause an imbalance in the business. By buying boats that should have been scrapped they prevented a market adjustment, as these ships were being put under the management of different shipping firms. This has proved to be a bad move for both investors and shipping companies, as investors have not seen real profit and shipping companies have gone bankrupt and have had lots of economic loses.

High oil prices:  

The high prices of oil have made the shipping companies to look for more energy efficient alternatives, making units bigger and bigger. An example is the gigantic boats that can carry up to nineteen thousand containers, as they reduce the cost per unit by increasing the carriage capacity in the market. They may even cause the size based strategy to collapse as these ships are rarely fully loaded, causing surplus capacity which is making the freight rates even lower.

Image courtesy of Rennett Stowe at Flickr.com
Image courtesy of Rennett Stowe at Flickr.com

Boat loans and banks:

The last nail in the coffin comes from banks as many banks that are involved with financing ships are having trouble with their lending portfolios, as they are pushed from the inside to dismantle and get rid of the loan portfolios that do not perform well or don’t perform at all, causing more and more boats, and their loans, to be sold at extremely lower prices by the banks or by pressure made by those same banks. That makes pressure on ship values causing potential investors to wait for the results of the situation and not investing right away.

Though there are still those who think there is no hope for the maritime business, some specialists think that the shipping industry will eventually overcome the crisis. And though global risk will not go away, it will still remain under control. Banks will still stimulate growth in the area while the growth in international goods trading will mostly take place in the maritime sector, as there is no alternative for it. And when the market adjustment starts to bring the supply and demand back into balance, both the prices and the market will start doing better. Though it seems like this recovery will not come until 2017 there is still hope for the shipping and maritime business.

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