Where’s My Bank?
November 5, 2012 Leave a comment
Where’s My Bank?
Eric Snaterse (MD of Shipping, NIBC Bank) opened the first session by turning the question around; Where is my Prudent Owner? At first this sounded like an attempt to deflect blame from the banks to shipowners, but this was not so. The scene he painted of the pre-Crisis era was of first iterations of the Basel banking regulations actually lowering the capital requirement. There were “rivers of money” available for existing banks to lend, and for new banks to “buy” market share. Shipowners ordered an abundant of ships, and he asked, are banks bearing the co-responsibility for the present oversupply?
Turning to today’s banking environment, Basel III (which is not yet in place, but banks are working toward) imposes higher capital requirement. This dams the “rivers of money” in the downward part of the cycle, which is when the owners need the support. What is left is “small creeks of money” and fewer banks. The true shipping banks remain, for they understand the cyclical nature of shipping. But, he said “banks are no longer ATMs”. These banks are working with their carefully selected groups of prudent owners. How does Mr Snaterse define a Prudent Owner? A Prudent Owner is one with access to cargo and can work with a bank over the long term to both their mutual benefit.
There were a number of “prudent” owners attending Mare Forum, for a former Dutch Transport Minister Tineke Netelenbos from the Royal Association of Netherlands Shipowners pointed out, the Netherlands has long tradition in shipping, starting with the Dutch East India company in 1602. Today Dutch shipping is in the expert category of specialised shipping. Looking around the conference room this was evident by the shipowners present, which included Coco Vroon (MD of Vroon BV), Jan Valkier (Anthony Veder Group), Michel Fransen (CFO of Spliethof), and Peter Schalk (MD of Arklow Shipping Nederland).
Where are We in the Current Crisis?
Having established that banks were around for the right sort of owner, the next question was to establish where we are in the current crisis? Ugo Salerno of RINA was the chairman of the next session on the geopolitical aspect, with the aim of setting the shipping into the global context. In his presentation he remarked that a key driver in trade is the middle class, those with disposable income. The middle class is growing in the developing world, with China leading the way. The middle class are partly responsible for the change in trade, with the value of Chinese imports growing by 9.0% compared to exports growth of 7.4% (CAGR 2008-2011). Chinese imports are forecast to grow by 9.8% (CAGR 2012-2016) compared to exports of 8.6% (source: IMF). This paints a positive picture for world trade. But what of the bigger geopolitical picture?
Dominique Moisi, Deputy Director, Institute Francais des Relations Internationales was on hand to add light and shade to the outlook. He is a regular at Mare Forum, and takes a high level overview. What was interesting that his thoughts below were constantly referred to in later debates. I have set out his ideas in full below.
Hurricane Sandy and other Storms
“Storm” he said “is a word I have been hearing a lot recently.” He felt is was fitting and he identified five storms.
1) The US Storm of the forthcoming election.
2) The economic and financial storm of the Euro.
3) The impact on the developed world of the storm from the BRICS.
4) The storm in the Middle East and the struggle with its identity.
5) The storm of Africa.
The US election has been delayed by the storm Hurricane Sandy, he said, but it is the closest election for many years. Moisi felt that before the storm the momentum was with Romney, who is almost a poster figure for the “Mad Men” era. Obama represents new America, the emerging Spanish-speaking electorate. But whereas he was elected on Hope for the young, now it is Fear from the old that Medicare will be taken away by Romney. But does the US election make any difference to shipping? No. On foreign policy, says Moisi, the US has no appetite. There is no big enemy state any more, such as communist Russia. There are serious issues to address at home. Every child born in the US in 2012 has a staggering $200,000 of debt from day one. He felt that over the long term this will bring about a change in US attitudes on tax and social issues.
Europe has weathered the economic and financial storm so far, but now, says Moisi, faces the social storm. This crisis is forcing Europe to do what it should have done before, integrate finance and the economy. Europe cannot abandon Greece, the message and social consequence is too great. But Greece was not his big worry.
“I am French, and therefore, as you know arrogant, but that is not the reason I choose France as my main concern.” he said. “France is not facing her responsibilities.” Italy had faced up to reality, the Monti government plainly told the Italian people what has to be done, and did it. Italy is now in much better shape. Moisi feels French President Hollande has been too weak, retreating from the big issues on tax reform. Without the balance of France, the reality, he said, is that the centre will be too German. London may be the capital of the world, but the rest of the UK is insignificant. Too long national leaders in Europe have used the EU as an alibi saying “we have to introduce this law because Brussels told us to” but now we are paying the price. But, said Moisi, Europe is in good shape compared to the BRICS.
China is impressive, said Moisi, but is having a major problem with the transfer of power. There is growing nationalism in China and Japan. This will not lead to a war, in his opinion, but is indicative of the problems China is facing. The Communist Party does not have a democratic mandate nor commands under the rule of law. The Communist Party is small compared to the population, and rules because it has consistently raised up levels of income. But now the corruption is becoming visible and obvious, and this could lead to an Arab-style spring in China.
Who owns the Arab Spring? Those who started it, or those who keep it going? In Moisi’s opinion the Syria uprising is looking like the Spanish Civil War. On the one side is Syria + Iran + Russia = Franco + Nazi Germany + Fascist Italy. On the other side the Rebels are now Islamic Fundamentalists in disguise.
Africa is like Asia 20 years ago, but with problems Asia did not have; ethnic cleansing, AIDS, and corruption. Nigeria will have the third largest population in the world, and has the potential to be the next Brazil.
In conclusion Moisi sees that awareness of the storms should be the guiding principle. There is no stability, only complexity and unpredictability. China understands this, and is buying resources in the developing world (mines, agricultural land), and resources in the developed world (banks, technology companies). When a Chinese banker was asked why he was buying a bank in Europe he replied “A starved camel remains bigger than a horse”.
What Will Happen Next?
Moisi was followed by Maarten Leen, Head of Macro Economics at ING Bank had the unenviable task of forecasting the next stage of the continuing financial crisis. He came up with a neat matrix to forecast the possible scenarios.
The worst case is here is the double negative of a Hard Landing in China and a Fiscal Cliff in the US. Maarten Leen suggested that this scenario might actually have a positive outcome. It would force European leaders to take drastic action. In the baseline scenario the US decides on a gradual deficit reduction, and China manages a soft landing. This would delay the need to sort out the crisis in Europe.
China was very much at the fore of Casper Burgering‘s presentation on “Commodity Trade Patterns, prospects for the Dry Bulk Sector (Senior Sector Economist Hard Commodities ABN AMRO). He produced a neat chart linking GDP per capita to the density of the urban population and per capita steel usage (his presentation should now be on the Mare Forum website). One of the main driving forces behind the dry bulk trade has been China’s imports of iron ore for steel production. The steel is used in housing and infrastructure projects. China’s consumption is 445kg per person, the similar to Italy and not far behind the leaders Germany (500kg/capita) and Japan (539kg/capita). But the level of urbanisation (population/urban population) is much lower, as is the GDP per capita ($/head). Therefore China able to grow to reach the level of its developed counterparts. By 2025 Burgering expects the Chinese population will be 10% larger, but urbanisation will have grown to 63%. That’s a lot of steel demand.
In rounding up the world economy and shipping Robert Lorenz-Meyer (former President of BIMCO, and current President of Ernst-Russ GmbH & Co, KG) borrowed a phrase from Donald Rumsfelt; “We have” he said “known knowns, known unknowns, and unknown unknowns.” Looking ahead a shipping, the “known known” is the dire affect of oversupply. The major “known unknown” is the long term affect of slow steaming and fleet utilisation management. He remarked he has inspected young ships for possible management and he was shocked at the poor condition. Cutting costs on maintenance, and lubes is producing a tranche of the new fleet that barely conforms to class. Finally, the great “unknown unknown” is when will the market recover.
The debates following the presentations concerned two areas. First was how to fix the Crisis. The second was Eco-Ships.
How to Fix the Crisis?
An Italian shipowner asked if it was fair or realistic to ask governments to solve the Crisis? Yes, was the reply from Moisi, it is for the politicians to take action. The problems are at an institutional level. Shipping is too fragmented to have an influence on the process, it must be driven by politicians through the institutions in place.
This was picked up by Lorenz-Meyer. As a former President of BIMCO he detailed some attempts to form an umbrella trade organisation. There is now an executive committee containing most of the main trade bodies. One does wonder if having so many different representative bodies is actually a negative. How can shipping speak with one voice? Look at how the EU treats the IMO. The problem is that shipping is a vital service, but a service nonetheless, and too small compared to the industries and businesses it serves.
Eco-Ship versus Conversion.
This was not on the agenda, but debate was sparked by a throwaway line by Lorenz-Meyer. He mentioned in passing that as the President of Ernst-Russ, they were having to reject a lot of young ships seeking to be managed by the group. These relatively recent newbuilds were in bad shape. This sparked an Eco-Ship newbuild versus conversion of a current vessel debate. I will be looking at this subject in a separate blog.