Sunday, February 5, 2012

Impact of China real estate slowdown on future cargo demand: is it the turn for the dry bulk sector to disappoint?

Despite present historically low freight rates, dry bulk owners continue to talk up their book with very rosy demand projections, as demonstrated in a recent Capital Link webinar on the dry bulk sector. Yet China observers see a hard landing coming and already  a very serious real estate slow-down. Last November, Chinese steel output was down -8.8% month-on-month, down for the sixth month in row.

Patrick Chovanec, a professor at Tsinghua University's School of Economics and Management, reports that Chinese domestic iron ore prices have plummeted as unused stockpiles have accumulated. In addition, more than one-third of Chinese steelmakers saw serious losses in October and November, and the industry as a whole saw a net loss of RMB920 million ($146 million) excluding investment gains. Chovanec sees real estate affecting as much as 20-25% of Chinese GDP. He makes the case of overall Chinese GDP growth down from 9.2% to 6.6% this year.

Wall Street shipping analysts like Cantor’s Natasha Boyden have begun taking a pessimistic view of 2012, expressing “concerns about a Chinese economic slowdown mean that there are real risks to weaker Chinese steel production growth in 2012” Evercore’s Jonathan Chappell expressed similar concerns about the oil tanker market due to slowing Chinese crude imports.

By contrast, RS Platou like many other shipping industry analysts, projects world trade in dry bulk commodities to increase some 5-6% per annum with iron ore and coal as the strongest drivers for tonnage demand. Participants in a recent Capital Link dry bulk webinar are similarly bullish on dry cargo demand from rising world steel production and fledgling Chinese coastal trade that soaks up dry bulk tonnage.

The conventional dry bulk industry viewpoint is that 2012 will continue to see low freight rates due to order book overhang, rather than any significant drop in demand. The tonnage supply-demand gap will narrow and finally will turn positive in 2013, bringing up rates. Jefferies’ Doug Mavrinac shares this recovery scenario.

No one expected the fall in dry cargo rates to be as large as it has been. Dry cargo owners are now suffering from the same margin pressures as their tanker owner brethren. There is a rash of cargo operators in increasing financial difficulties. The recent Deiulemar case, for example, led to the cancellation of a contract with Paragon for its Supramax tonnage. Paragon’s stock has been below $1 dollar since last fall. Now Cantor is setting a price target of 30 cents for Paragon stock with its Supramax tonnage on the market at rates close to vessel operating costs. Paragon is also facing loan covenant violations from deteriorating loan to hull value ratios.

There are plenty of other listed dry cargo operators who made over-valued purchases in the boom era and are saddled with very high leverage: Eagle Bulk, Excel Maritime Carriers, just to name two. They all have vessel provider business models with heavy exposure to charterer counter party risk and spot rates that cannot cover their debt obligations.

Indeed, 2012 may be the dry bulk sector’s turn to suffer what tanker owners like General Maritime and Frontline have been going through for some time now.

All this makes 2013 a very crucial year. In such a tight scenario, disappointing Chinese growth and lower demand for dry bulk raw materials for its steel and construction industry could mean serious structural market disruption unlike any we have seen in shipping since the 1980’s and aftermath of the petrodollar boom.

Greek Debt Crisis: The EU Political Trilemma and How Greeks have a bankrupt concept of National Sovereignty

The recent German proposal for an EU commissioner to supplant the Greek government raised a storm of protest in Athens, but in essence it brought home what is already the present status quo: Greece is a vassal state on economic life support from the European Union. Willfully entering what is essentially a greater Deutsche mark zone with a Central Bank in Frankfurt, Greeks mistakenly saw the abrogation of their national currency in 2002 as emancipation.  Few Greeks realized their over-dependency on the EU would ultimately lead to loss of nationial sovereignty at great cost to their well-being.

Dani Rodrik (Professor of International Political Economy at Harvard University and author of The Globalization Paradox: Democracy and the Future of the World Economy) has pointed out, economic globalization, political democracy, and the nation-state are mutually irreconcilable – something that the Greek political elite are woefully ignorant!

Greece retaining the nation-state with a borrowed currency and under an EZ bailout program must jettison democracy (as the EU has now done with the Troika and Commissioner proposal). Greece putting itself under direct control of Brussels is the end goal of EU forced integration, driven by the single currency zone.

Unlike Greece, other EU members like the UK, Sweden and Denmark recognized this confronted with Eurozone participation; cognizant that foregoing monetary policy and using a borrowed currency was significant abrogation of national sovereignty. In the UK, Gordon Brown (Chancellor of the Exchequer) advised Tony Blair to avoid Euro membership with severe reservations on room of maneuver, should Britain face a debt crisis. Swedish and Danish constitutions required a plebiscite to abolish national currency. Their people wisely rejected the idea in the face of their politicians. Both countries outperform the EZ. All three enjoy better credit rating.

By contrast, Loucas Papademos, Governor of the Bank of Greece, ignored the risks of entering the Euro when not fully meeting Eurozone criteria, much less Mundell optimum conditions. Greek finance minister Yannos Papantoniou saw the Euro as a means of credit enhancement to reduce cost of borrowing and increase capacity to borrow ever more money. Despite these dreadfully bad policy decisions, they are now both presenting themselves as political reformers.

Unlike other European countries, Greeks never believed in their national currency. They preferred EU transfer money on projects fostering consumption rather than promoting exports like their neighbor Turkey and successful emerging market economies with control of their currency at competitive parities. The free trade zone in Eurozone soon made them a dumping ground for German exports, Greece running up huge commercial deficits. Years of living on EU transfer money and cheap credit created complete structural dependency on the EU.

Greeks, in their present quandary, have a very muddled idea of national sovereignty. They rail about selling public property to private investors as humiliating.  Yet many of these same individuals foster the concept of a loan from Russia in return for granting a naval base as emancipation, when this is an even more dependent relationship! Out of fear of public hostility, no major Greek political party dare openly express public positions that foster foreign direct investment, entrepreneurship and a market-driven economy in goods and services that would enable Greece to stand on its own two feet, as Far East emerging market counties did after their debt crises in the late 1990’s.

The Greek political elite cannot understand the importance of production, exports and foreign exchange earnings. Returning to the drachma would increase national sovereignty and give them more tools to do this, but they show very strong signs of “Stockholm Syndrome” sympathy with their jailors (or new jailors like the Russians, naively hoping for better terms than the EU).