Summer Doldrums and Endangered Tradewinds?

Hard to believe, we are already in the middle of the summer, a time typically associated with dialing down on stress and appreciating a more leisurely aspect of the sea, whether from the deck of a yacht or a lounge chair on the deck of a beach house. While shipping seems to be having reason to enjoy this seasonal breather, there are two developments at present on the world arena that threaten to make this summer too hot to enjoy completely.

Front pages of world newspapers have been monopolized in the last month by the developments in Greece and efforts to find a solution, a solution for the Greek state mostly but also a solution that will assert the Euro and the Eurozone as a solid pillar and counterweight on the world scene. There is little doubt that Greek politicians have been exhibiting conspicuously a childish and narcissistic attitude (the former adjective is used rather generously), but a failure to have a timely solution would have repercussions in Europe beyond Greece’s borders. At present, the Greek banks have been closed since June 29th with no announced plans of date and manner that would open again. In short, the strategic importance of the Greek banks and their involvement in shipping is getting of less significance by the day. The immediate impact is rather contained since a great deal of shipowners have moved their operating business accounts outside Greece some time ago, and since the US Dollar is the denominating currency of shipping, there is little direct concern. On the other hand, the indirect impact is well noticed, although not easily quantifiable; with long queues to withdraw €60 per person per diem, and the political uncertainty, most players in shipping are ‘battening down the hatches’ to survive the storm rather than thinking of their next moves. For starters, there is empirical evidence that sale & purchase activity has slowed down, especially from the smaller mom-and-pop shipowners; of course, this partially also can be attributed to seasonality, in all fairness; but, to buy a ship and go long the market, it always takes a vein of hope and enthusiasm, which is hard to find in Greece at present. Besides the privately held shipowning companies, for Greek-managed publicly- listed shipping companies, there has been a great concern from institutional investors about the developments in Greece; once again, the direct exposure of publicly listed shipping companies to Greece is negligible as they are decoupled from the Greek banks and the Greek reality, they are incorporated abroad, as this is the case with their charterers, and of course freight revenue is collected in the Almighty Dollar; only the vessel management partially takes place in Greece, which can be both rather expeditiously and anodynously moved to another country, if things get out of hand. But again, you cannot share the concern of the investors of Greek shipping companies about sovereign risk and exposure, and in the weeks that followed the announcement of the referendum, the drop of share prices for many a Greek publicly-listed shipowners has been painfully onerous; it’s to be seen the impact of hopeful Greek shipping companies trying to have private placements, access institutional investors for new projects and eventually accessing the capital markets for IPOs and bond offerings.

Another factor of political uncertainty is that Greek shipowners have been enjoying a perceived lenient tax treatment in Greece, and there have been pressures – mainly from the creditors of Greece – that changes are needed so that shipowners contribute a higher share than presently to the Greek coffers. As usual, there has been lots of talks from Greek shipowners and their union (UGS) that if there is too much heat, then they would ‘get out of the kitchen’ and sail to calmer jurisdictions. None of the previous governments and neither the present government in Greece has made any efforts to systemically make the shipping industry a properly treated, in all respects, including taxation, strategically and nationally important industry; once again, it’s left to foreigners to tell the Greek government that shipping is just another area that could use an open-minded approach. And, while many a shipowner have been exploring plans to relocate, this past week the UK government ironically was taking another look at the tax benefits of non-dom, which likely eliminated the most obvious and preferred option of Greek shipowners to run their business out of cozy offices in Mayfair, Belgravia and Kingsbridge in cosmopolitan London. Political uncertainty in Greece, when combined with other factors, may also catalyze or at least influence the timing of contemplated transactions, such as RBS’s recent announcement to sell their Greek shipping loan portfolio of US$ 5 billion (it’s well known fact that RBS is retreating from shipping and the sale of the Greek shipping loan portfolio, allegedly the crown-jewel of their shipping exposure, had been expected; one wonders whether the events in Greece had anything to do with the timing of the announcement).

Given that Greek shipowners control more than one-third of the world fleet, developments in Greece, as much as detached from shipping as they are, would definitely be affecting shipping activity.

Shifting one’s focus on the globe, half–a-day ahead of Greece to the East, and almost a whole world apart, there is the second friction point that has the potential to make our summer a bit too hot: the Chinese stock market has been experiencing a roller-coaster reminiscent of the ‘dot com’ deflation in the US fifteen years ago. The Shanghai Stock Exchange Composite Index has more than doubled in the last six months, when the People’s Bank of China lowered interest rates in order to stimulate the economy; the index has dropped more than 25% in the last month, shedding more than US$ 1 trillion in market capitalization. It’s to be debated whether the Chinese stock market is in a bubble, but the majority of Chinese stocks are held by small, retails investors (the asset management and mutual fund market is not developed in China), and there has been anecdotal evidence that a great deal of those retail brokerage accounts had been highly on margin. Again, to erase any doubt, the Greek and the Chinese economies are as far apart as they can get, but developments in China can have an effect in shipping. China’s stated policy has been to shift the economy from heavily depending on industrialization and exportation to services and consumption (and redistribution of disproportionally allocated wealth from the last decade). A collapsing stock market cannot have a stimulating income on consumption by the average retail investor. Given that the Chinese economy had been acting as the prime driver of world economic growth, especially where commodities and raw materials were concerned, the ripple effects are visible in the world economic activity: the price of iron ore has dropped more than 10% in the past week and the FTSE mining index is lower by 15% so far this year. All along, the International Energy Agency (IEA) predicts for plentiful supply of oil throughout 2016, by way of weak oil pricing. It seems that demand for iron ore (and other minerals and metals, especially copper) can be driven even lower given that an accommodating interest rate policy by the People’s Bank of China would kill the ‘carry trade’ where traders used lines of credit in foreign currency (primarily US$) by domestic banks in order to finance inventories and stock piles of commodities and raw materials.

Shipping has never been an easy industry to understand and ‘model’; often little appreciated variables have shown that they could make a material impact to the market, but most of the time they remain ‘dormant’ and overwhelmed by great events. On the other hand, several years after shipping had presumably reached bottom, the still anemic recovery can afford little chances of ‘exogenous shocks’. But again, it’s times like these that have made fortunes.


 

© 2013-2015 Basil M Karatzas & Karatzas Marine Advisors & Co.  All Rights Reserved.

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