I spoke with a fellow who owns vessels and happens to be be Greek. Some of the business and social/economic threads of our conversation:
He discussed (with some obvious anger) a poor investment he had made two years ago. He purchased a ship for $6Mn. This was a 28 year old vessel (that still had some life) that fell into the (aptly named) category of “Handy Sized” vessels. In the good times (2000-2005), this ship might have gotten charters that earned $15,000 a day versus fixed costs of $8-10K. At that rate the cost of the vessel would be returned in about four years (includes down time and deadheading). Not a bad deal.
It didn’t work out. Cargoes for this vessel now pay a rate that no longer cover fixed costs. Layup times between cargoes has increased. Insurance companies charge more to cover shipments in older vessels; so this ship is shunned for newer ones. The final straw is that the ship needed repairs. A layup of three months, and another $1mn down a rat hole was necessary.
He cut his loss. The ship went from Singapore to India on its final voyage. There, it was run aground and chipped into pieces for scrap steel. In a month or two the ship will be converted to re-bar.
If you put this ship on a scale (empty) it would weigh 6,500 tonnes. All of this (nearly) is steel. The going rate for scrap steel is $425 a tonne; so he got $2.8Mn back on his original investment.
I bring this up as an example of how excess capacity is being worked off in commercial shipping. The story he told is being repeated daily. His loss on this ship is part of the healing process.
The good news is that freight rates are up a bit, and longer-term contracts are being written for vessels that are under twelve years old.
The bad news is that he doesn’t expect the recent improvement to last. There are more and more ships coming to market, and there are not enough cargoes to fill them all up. He reckons another down tick by June of next year.
He discussed China’s role in the shipping industry. It is the stated goal of the Chinese government to own 70% of the vessels that carry Chinese imports/exports. Today, that number is closer to 20%. This implies a huge transition in the ownership structure of the global shipping industry. It means that China, at one point, will have tremendous pricing power over global shipping costs.
China has purchased some vessels in the secondary market to achieve its goals, but the country’s strategy is to build its own vessels. This will keep the steel mills and shipyards humming. It supports dozens of other industries that provide components. Financing is available from the banks. Insurance is provided by Chinese companies that favors the Chinese vessels. Chinese crews (non-union) are much cheaper than crews from Greece.
He said that this was playing out in slow motion. It will be another decade before the Chinese economic hegemony in shipping is really felt. He also said that the trend toward Chinese dominance was irreversible, and that there would be casualties. Think of a steady stream of rusty old ships headed for the scrap-yards of India. Each one means China gets stronger.
Note: The USA is not a factor in global shipping. US flagged dry cargo ships exist because they primarily carry A.I.D. cargoes of grain. Without this subsidy, the country would have next to no fleet at all.
We talked about Greece. The country is grinding to a halt. He described the situation in rural areas that have been very hard hit. The social infrastructure is falling apart. The young people are leaving the islands looking for work. The old people are left. There is no money to pay bills.
Greeks with ties to these communities, who now live outside of the country, are aware of the hardships. They have been providing a steady stream of assistance. A family from London will pay the heating bill for the old age home. Another, from NY, will see that the soup kitchens have food to prepare and serve. Someone in Australia will pay to keep the clinic going. Without this uncoordinated support system, people would be cold, sick and hungry.
He reminded me that the Greek people are very proud. They will accept assistance, but they will not beg. Relying on ex-Greek nationals for essentials is not sustainable. But there is no alternative in sight. Not a pretty picture at all.