Free trade trumps the perfect storm

October 10, 2017

Trade disruption

There was a time when most shipping conferences included at least one presenter with a set of data pointing to a sustained increase in demand for commodities, goods and services well into the middle of this century and beyond.

From nearly a couple of decades in, the confidence in those assumptions looks shaky. Alongside potential disruption from technological advances, the rise of economic nationalism and changes in economic development mean that shipping can no longer rely on its position as globalisation’s silent servant.

Whereas before the financial crisis, a 1% rise in GDP growth meant a 2-3% increase in container shipping demand, the latter is now expressed in fractions rather than multiples.

Events such as the Brexit vote and the election of Donald Trump demonstrate the apparent willingness of administrations to use trade as a political tool while the longer term risk is that shipping demand will decline as 3-D printing becomes cheaper and more convenient.

However, just as with the arguments about the impact of other technologies in shipping, these positions bear much closer examination than they are often receiving.

As Jan Hoffmann, Chief of the Trade Logistics Branch at UNCTAD pointed out to the ICS annual conference during London International Shipping Week, the liberalisation of the maritime sector is in general positive for economic development and the job is far from finished.

“The obstacles to trade growth are not so much tariffs or quotas but efficiency, shipping port and transport connectivity, which can impact the cost of moving goods. The information on which decisions are based is poor,” he said, adding that so far the effects of ‘America First’ and other policies had been limited.

“All WTO members, including the US, have so far refrained from enacting big protectionist trade barriers and my personal view is that the negative impact [of the policy] has not as bad as we might have feared.”

Director General of the Danish Maritime Authority Andreas Nordseth struck a more cautious tone about the ability to maintain free trade as countries sought to bolster their individual positions. In addition to buying and selling of goods, there is a need to promote fair competition in maritime services, he said.

“In those countries that have realised maritime can be an important driver for growth, governments are drawing up strategies which look positive, but we also see an increase economic nationalism. Combine the two and you have a recipe for cargo reservation and protectionism that could hamper trade.”

Protectionism comes in many forms, he added, in particular the uneven implementation and enforcement of regulation that could result in distortion of a kind to which shipping would find it hard to react.

For Svein Steimler, COO NYK Europe and ICS Board member for Japanese Shipowners, the focus on the US trade ignored a far bigger shift: China’s stated aim to have 50% of its imports and exports carried on China owned and flagged vessels. “There is nothing wrong with that, but it is a completely different position to the US, they have the shipbuilding capacity, the funds and the ability to do what they say. It’s a concern, but we will adapt, we have always managed to adapt.”

Frans Waals, Editor of DynaLiners agreed, but for different reasons. Trade would always seek market efficiencies, even when more business was done with bits and bytes and in steel he said. The starting points and destinations change but it everything has to come from somewhere and that distribution pattern is wide.

“In the example of the US seeking to bring back car manufacturing, only 10% of the value is in assembly, while 90% is in the components which can be produced anywhere. It would not make sense to try and bring all that back and make it almost impossible to compete because products would be too expensive,” he explained.

Instead he said the trend for container lines at least is more consolidation. “If they don’t consolidate they will go bankrupt. Some are well governed even where the balance sheet is a black box, others hesitate to co-operate and fail,” he said. He reckoned there are still too many players – the wait for consolidation among the Japanese lines has been particularly long – but they will be unable to invest unless they do.

In the bulk trades there remains a very strong correlation with GDP growth and the upending of some trade patterns has not been all bad for the market. For example the resurgence of US crude oil production and the lifting of the export ban has helped to stimulate demand.

It remains a market of two halves – trading versus asset play – but Henry Curra, Global Head of Research at Braemar ACM Shipbroking noted a third sector emerging. Following on from a period of consolidation of freight players and in control and management of ships, he sees much more active participation from industrial players.

This is partly driven by a change in accounting rules from 2019 in which all assets on timecharter will transfer to the charterer’s balance sheet. “That takes away the incentive of big charterers to use third party providers and instead incentivise them to derive the benefits from new technology. We will see more control and asset ownership shifting to cargo owners.”

Whether or not this leads to a return to the ‘industrial shipping’ concept favoured by some commentators, he had a salutary reminder for the industry. “As use of technology grows in importance, we could start to see bulk shipping become more about logistics than trading, but [at the moment] bulk shipping is a commodity; you don’t get paid more for being a good player or doing something extra.”