Pigsty effect? Eight truths about the downturn in the shipping industry
2016-04-07 09:00
Currently, the supply of container, dry bulk, major bulk, and crude oil and gas shipping capacity is very abundant. Given such abundant capacity, why are so many ships still being delivered? The main reason is the clear "pig cycle" effect of ship delivery.
China's shipping industry is closely linked to the global shipping industry. The current problems facing China's shipping industry are a result of the combination of global systemic difficulties and regional issues facing the global shipping industry. To explore the future direction of China's shipping industry in this downturn, let's start with the core issues of global shipping industry development—shipping capacity demand, supply, and industry specifics.
Shipping capacity demand, simply put, refers to how much cargo needs to be transported by ships. Since international shipping accounts for more than 2/3 of global cargo transportation, the discussion of shipping capacity demand is actually inseparable from the study of the world economy. In recent years, slower-than-expected world economic recovery, a pessimistic international market sentiment, a decline in China's economic growth rate, and structural transformation have directly led to insufficient global shipping demand. So, how did China develop from nothing to a pivotal position in the global shipping industry?
Truth 1:
China's Economy Plays a Significant Role
China's economy, as a powerful engine for global economic recovery, maintains an annual GDP growth rate of around 6% to 7%, significantly higher than the global GDP growth rate (around 2.4%) and the US GDP growth rate (around 2.3%). As the world's largest consumer of iron ore and energy and the busiest importer and exporter, the development of China's economy is closely related to the global economic situation and more directly affects the global demand for iron ore, crude oil, containers, and chemical products.
After the First Industrial Revolution, the global industrial economic landscape began to shift from insufficient productivity to insufficient demand. That is, the products produced annually by the world's productivity were already able to largely meet the needs of the masses. The core issue for entrepreneurs shifted from improving productivity to seeking orders, reducing costs, and creating new demand. During this process, the United States, as the once largest cargo owner, fully implemented standardized containerized sea-land intermodal transport, greatly improving terminal loading and unloading efficiency, significantly improving transportation costs and convenience, and gradually stimulating the global industrial structure division of labor.
Due to the convenience and cost optimization of transportation, many factory owners began to emulate the shipping industry in finding cheap labor globally to reduce production costs. Because the shipping industry is the oldest and earliest industry to be globally oriented, its history of seeking cheap labor is also the longest.
Truth 2:
Trade Protectionism Exists in Western Countries
As the originator of the global shipping industry, the United Kingdom, in order to protect the employment opportunities of its citizens on merchant ships, once required that senior officers on merchant ships flying the British flag must be British citizens. This reflects from one aspect that trade protectionism and the search for cheap labor have long existed in developed countries, and the fact that the UK needs to protect the employment of British personnel at the regulatory level also proves the importance and prevalence of using cheap labor in industrial competition.
With the continuous strengthening of the secondary industry in the field of cheap labor, the global industrial division of labor has gradually formed: developed countries have gradually become brain-type countries, responsible for product research and development, design, and program integration; emerging developing countries are often responsible for detailed product design, production, and modular operations, earning processing profits, gradually becoming trunk-type countries; underdeveloped countries can only engage in some low-end raw material supply and primary processing, earning meager profits left over from fierce competition in a situation of abundant productivity.
Obviously, China before last year was a representative of emerging developing countries. On the world economic stage, China's rapid economic development has greatly promoted China's urbanization process, transportation needs, and consumer demand. It is in this process that China has gradually become a "giant" that the global shipping industry has focused on, becoming the world's third-largest ship carrying tonnage owner.
So, can China continue to maintain its previous development model? Can it return to the era of the "world's factory" and revitalize China's shipping industry through the export of a large number of products? This is obviously quite difficult.
Truth 3:
Government Guidance & Market Driven
The current slowdown of China's economy is mainly due to the contradiction between the industrial structure of trunk-type countries and the continuously improving living standards of the people. A large number of foreign-funded enterprises and foreign capital will inevitably continue to seek cheaper labor globally to replace China's position as the "world's factory," and this outflow of technology and capital is irreversible and something people are unwilling to see and powerless to change. The only thing the government can do is to slow down this process, cultivate domestic capital entities and business entities, and thus reduce the impact of this outflow on China's economy. Because this outflow of technology and capital is the main model of world economic development and a market-oriented means of rational resource allocation.
Truth 4:
Labor Costs Determine the Stay or Departure of Manufacturing
The reason for China's rapid development in the past was mainly to meet the needs of the world's industrial division of labor. This rapid development has brought about a significant improvement in people's living standards, but it has also gradually increased labor costs. The increase in labor costs has gradually weakened China's advantage as the largest trunk-type country, so China's economy will seek industrial transformation in the face of gradually declining growth rates, gradually becoming a brain-type country, and this may also sound a warning bell for those once-popular shipbuilding enterprises.
The shipbuilding industry, a "Made in China" that once made China proud, is destined to transfer production capacity to countries with cheaper labor, such as Vietnam, the Philippines, and India. Only two questions remain for China's shipbuilding industry: first, how to transfer production capacity? Second, who will transfer production capacity? Since the transfer of production capacity has become an inevitable choice for China's economy and shipping industry, can China, this once trunk-type country, successfully transform into a brain-type country? The answer is yes, but this process may be very long and difficult.
Truth 5:
The Secret of the Wealthy: Which Model Makes More Money
Stories of wealthy Chinese people buying up goods in Europe have long been circulating, and the statement that Chinese manufacturing is low-end and lacks technical content is also deeply ingrained. Many people can't help but wonder: "Since Chinese products are so low-end, how did these wealthy Chinese people who have shocked the world come about?" In fact, there is a big misunderstanding here. Low-end and making money are not necessarily related. Or rather, Chinese factory owners only need to lower production costs, expand production scale, and reasonably accept orders to make a lot of money, while foreign buyers can only make profit margins and ensure the survival of their enterprises through these seemingly high-end trade methods. Therefore, there is actually no high or low end in making money. With the change in China's industrial status, diligent and shrewd Chinese factory owners will inevitably gradually transform into so-called "high-end" industries in fierce market competition, and this change in model will also put forward more new demands on China's shipping industry.
Truth 6:
Ship Trading is the Path to Profit
From the four major statistical indicators of global shipping capacity, the supply of container, dry bulk, bulk cargo, and crude oil and gas transport capacity is very abundant. Since the capacity is so abundant, why are there still so many ships being delivered? The main reason is that ship delivery has a significant "pig cycle" effect. From the time the demand is raised to the actual delivery, it takes at least more than half a year, and the overall delivery volume has decreased, but the newly added tonnage is still increasing, which further exacerbates the oversupply of capacity. Since the capacity is already oversupplied, why are people still unwilling to reduce capacity to alleviate the oversupply situation?
The sharp plunge in the Baltic Dry Index has long been experienced, but what matches it is the soaring ship prices. Buying low and selling high, earning the difference is the most profitable "crown jewel" in the shipping industry. Therefore, the difficult maintenance of low prices is to prepare for the future resale at several or even tens of times the profit at high prices. Of course, this maintenance process is very difficult, with the risk of possible bankruptcy at any time, so people can't help but turn their eyes to distant London, the international shipping and finance center that has made a fortune from marine insurance and litigation arbitration.
Truth Seven:
The key to statutory law lies in keeping up with the times
The reason why London can become an international shipping and finance center is that its three strongest functions are ship inspection, ship insurance, and ship justice, while the actual ship operating capacity in the UK has fallen to ninth in the world, accounting for only 2.79% of the global deadweight tonnage, and the port handling capacity is insignificant in today's rapidly developing world. However, when it comes to ship insurance and justice, Lloyd's and English common law are almost basic common sense in the global shipping industry. So is English common law shipping really that perfect? Since the Chinese shipping industry must transform, can Chinese shipping law and shipping finance match the needs of the transformation?
English-speaking countries were the earliest to start in ocean shipping, accumulating a large amount of segmented experience, especially proposing many special judicial concepts suitable for the shipping industry, such as "constructive total loss" and "general average," and English common law is more inclined to explore the nature of the responsibility of the case, so it often feels professional, reasonable, and fair. However, a closer examination of these cases reveals that many are complex and highly controversial. This is also the two sides of the coin of London's judicial system. On the one hand, the high cost of litigation allows simple cases to be resolved quickly and difficult cases to be highly concentrated and attract a large number of high-quality judicial talents; on the other hand, it also sacrifices a certain degree of judicial fairness. In order to effectively change this situation, the UK has been actively enacting some statutory laws in recent years, attempting to regulate commercial behavior through statutory laws and effectively ensuring that judicial practice keeps up with the times.
Let's look at statutory law again. Since everything must be written in the legal text, for shipping, which involves a large number of legal acts involving objects, it often seems difficult to clearly define the relevant responsibilities. At present, the most experienced maritime courts in China mostly use the method of statutory law plus international precedents for trial. This method has effectively achieved flexible operation of statutory law, which is a good solution. Therefore, from the perspective of advantages and disadvantages, there is no absolute good or bad between codified law and uncodified law. The key is whether it can form an effective system that keeps up with the times and meets the needs of industry development.
Truth Eight:
Law is the oldest concept of crowdfunding
Law, whether in ancient or modern times, is actually a basic manifestation of the public will. Returning to the practice of maritime cases, whether it is the "International Convention for the Safety of Life at Sea" or the "Hague Rules," the deliberation and adoption are the result of relevant countries weighing the pros and cons, representing their national interests, and repeatedly bargaining on the basis of public cognition. Therefore, from small laws and regulations to large international conventions, they are all concentrated reflections of public cognition and interest games, with the purpose of ensuring that society and the industry develop in an orderly manner according to established fair cognition. Some puzzling legal provisions, if magnified to the whole society, often become more reasonable. For example, the innocent shipowner under bareboat charter, on the surface, is just a lever in legal practice, but strict liability can also effectively limit the authorized operation of bareboat charter. Therefore, the judicial practice of the shipping industry is not so unattainable and mysterious. As long as we carefully study and accumulate experience, the Chinese shipping judicial community will surely achieve extraordinary achievements.
Let's talk about shipping finance. Shipping finance includes shipping financing, shipping insurance, and related derivatives trading, etc. Its main purpose is to provide shipping companies with the necessary funds, risk diversification, and risk pricing, which can better use industry strength to smooth out the impact of single events on shipping companies. Financial institutions are wary of the shipping industry because the entire industry is currently sluggish, and the shipping industry generally has the possibility of bad debts.
Within the financial industry, the perspective has completely changed. The financing end integrates capital, the investment end seeks business, the risk control end controls risk entry, and then there are rounds of risk pricing. The basis of pricing is no longer just the risk of shipping itself, but also includes risk combinations with other businesses, risk transfer, liquidity requirements, cash flow returns, effective bad debt rate, etc. However, overly aggressive or conservative financial policies will affect the already nervous shipping industry. At this level, the Chinese shipping finance industry not only needs more experience, but also needs the transformation of China's economic quantitative change to qualitative change.
So where will the Chinese shipping industry go in the future? The gradual migration of the upstream and downstream industries of the shipping industry to Southeast Asia is basically an unavoidable reality. The competition between Chinese shipbuilding enterprises and Japan and South Korea in high-end ship types will also become increasingly fierce. Towing, heavy-lift transportation, equipment transportation, and commodity imports will gradually increase in the proportion of China's sea transportation. Chinese factory owners will gradually import and export goods at the cost and insurance freight (CIF) price, thus earning the transfer profit. The quantity and quality of Chinese maritime cases will both improve, and the maritime judicial system will also develop significantly. Therefore, the current downturn in the Chinese shipping industry may be the greatest opportunity, which is the inevitable transformation from quantitative change to qualitative change. In fact, the road is always under our feet. Only by firmly moving forward can we usher in the dawn of victory.
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