Empty rusty ships floating in the ocean. Forsaken. Hit non-stop by the everlasting waves, as a material metaphor of the coming crisis: the worst so far in our entire history. Zombie ships, those that have no other choices than repaying interests on its debts, without any hope of repaying the whole capital, are the sign of the economic disaster.
It sounds frightening, but it’s real. The mass debt, which has coincided with the slowdown of China and an accumulation of zombie ships have seen the Baltic Dry Index plunge to the lowest peak in three decades, since 1985: it has fallen by more than 20pc in the current year, to 369. The Baltic Dry indicates the cost rates of shipping dry bulk goods: grains, iron ore, coal, steel… but it is famous for its ostensible skill of making predictions about the world’s financial fortunes. So it is something serious without a doubt.
The most probable scenario is the actual way out of ships of the market by their owners, although most part of them still have hopes that there will be a market turnaround. But it is clearly not an over-supply issue: the fact is that trade has been decreasing tremendously fast: at the moment there is a widespread depression going on in the market. In October 2015, the World Trade Volume only grew 0.5 percent Year-On-Year. In US dollars, the World Trade Volume experienced a sharp fall of 12.2 percent Year-On-Year in the same month.
Jeremy Penn, chief executive of the Baltic Exchange in London confirmed this sad truth: “We are now at the stage where people are struggling to remember an era when it was this difficult, we’ve gone through what it was like in the 90s, the 80s and the 70s, so expressions like ‘living memory’ start to apply.”
During the past two decades, the driving force behind the shipping industry was, of course, Chinese economy. China was the largest consumer of commodities in the whole wide world. Thus, the slowdown of China’s economy has become the problem number one that demands a fast solution in the scale of priorities. Nevertheless, there are no excuses: the shipping industry has gone through moments of tremendous growth, thanks to cheap debt and a constant and stable demand. Nobody so this coming, and no one got prepared. Everybody thought that the fat-cow moment would last forever.
The truth is that shipping industry is a sector that has been losing investments. Businessmen, like rats in a sinking ship, jump first to save their money. The situation of loans for shipping industry is an example: the historic residual value determines the calculation of (a) the rate of interest and (b) loan repayments of the ship (when the loan expires).
Right now, for instance, a six-year old vessel can be bought for less than twenty million dollars at the current moment. It is 40pc lesser than the usual price of any vessel in that situation. In normal conditions, that vessel could sold for more than thirty million. Anyone would worry.
Secondhand ships are experiencing a price collapse, and it will produce serious effects in the balance sheet of banks and individuals worldwide. For instance, the United Kingdom might no longer be a big protagonist in the sale, purchasing or proprietorship of vessels, and, regardless to this, UK banks have total loan acquaintances of £8.3 billion. Why does Lloyds bank provide finance to that dying industry? London is still the center of the world for ship broking and is one of the world centers for ship insurance.
However, the situation of brokers is not that bad. On world oil markets, the glut of oil has led to one of the years with more movement when it comes to tankers. Iran is entering the fray with forty-one more tankers that will bring more profitable contracts thanks to the end of the US oil embargo.
But that’s an exception. Nobody is making real money right now. The Danish shipping/oil conglomerate A.P. Moller-Maersk, for example, underlined the lowest peak this year: the –low– crude prices have fallen 80% in last years’ profit. It is worse than the economic crisis of 2008. And more bankruptcies are just impossible to avoid. If the economic activity stands and ship owners are forced to reduce prices in order to compete, things won’t get better.
Let’s hope things change in the future. Nothing lasts forever. However, it’s time to take important decisions and to look ahead of the tough times coming.