Coronavirus has changed dramatically all forecasts for shipping markets.

Covid 19 is now in a second stage, destabilizing the major consuming economics - US and EU - and unleashing a major global economic crisis of the magnitude of the 2008 meltdown.  It started in China and spread to other Asian countries in the first stage.  China, Singapore and Korea seem to have managed successfully the initial health crisis and contained the contagion, so that people have returned to work, but the problem is that export demand is now under threat due the second stage where the virus has now led to lockdowns that have incapacitated large sectors of the US and EU economies,

In the meantime, a price war has broken out between Saudia Arabia and Russian and oil prices have fallen dramatically.  These low prices threaten the US shale oil industry and many lead to more woe in the offshore sector that was showing first signs of some recovery after a prolonged slump for several years now.

We can make the following observations:

•  The best case recovery scenario is a U-shaped global recovery in the 2nd half of 2020 but lots of output destruction in the 1st half.  Hopefully better years in 2021 and 2022.
•  Scrubbers that seemed a major success story in January this year are now rendered problematic with the low oil prices and very small prevailing spread between LSFO and HSFO.
• The impact on this situation on shipping varies with the sector:

Containerships were badly affected by the factory shutdowns in China, now with the factories coming on stream they face the second wave that is reducing import demand in the US and EU.  Liner companies will face a new bout of financial stress with the weaker liner companies again in jeopard with serious cashflow problems. Likewise, third party vessel provider companies that have legacy debt problems.

Drybulk started the year with very low rates. The Capesize sector was very badly hit and still suffers.  There has been some recovery for the other sizes, but mixed.  

Tankers are experiencing a boom market with the low oil prices, but the first surge in rates has now abated, albeit rates are still very profitable levels. Both crude and products trades are currently profitable. The contango price curve favors liquid storage. With a looming recession, a lot of crude oil and oil products will go into storage.  Reduced oil demand from a prolonged economic slump would jeopardize the current profitability of the sector.   

The severity of this major global recession depends heavily on the ability of governments to contain the virus and get people back to work to restore normalcy.  The most successful cases seem to be Singapore and Korea in this regard.  Whether the US or EU can replicate this success remains to be seen.

The US government is particularly concerned about the need to restart their economy and get people back to work but they are just in initial stages in dealing with the health problems.  The EU is struggling over reflation mechanisms that are lacking in the Eurozone. The health crisis in Italy and Spain is still out of control.

CMA-CGT merger with Ceva and its challenges

The Ceva merger is a milestone for CMA-CGT.  It represents an effort to move away from a transport provider business model to a logistics operation, in hopes of creating more value content to services sold and better earnings margins for shareholders

The liner industry has been through years of stress.  This is related to many years ofovercapacity and intense competition sending box rates to very low levels, despite China entering the WTO and a global trade boom with a massive rise in volume of container traffic on head haul routes to Europe and the US for finished goods.

The liner industry has basically exhausted any possible way of improving profit margins within its present business model as transport provider to freight forwarders.

• Initially there was an attempt to move to large tonnage to defend earnings margins by lower unit costs.  The industry moved to Panamax size to post-Panamax for the huge 10.000 teu plus vessels that are employed on head haul routes today.  Whilst this process created a cascading of the small older tonnage to other routes. Every liner company was obliged to follow suit to remain competitive in the alliance system. Financially weaker operators resorted to chartering larger units from vessel provide companies, who could carry them on their balance sheet against the period charters. None of this provided any sustained relief with improved box rates and better earnings margins.  The larger units and cascading generated more overcapacity in the process.
• The Global Financial crisis in 2008 created substantial trade disruption that put all the major liner companies in massive losses.  |Defensively the major liner companies resorted to slow steaming for lower fuel costs and soak up as much tonnage overcapacity as possible.  This mitigated the operating losses and provided some reprieve. Eventually slower speeds became a norm in the liner industry.
• It did not prove to be any game changer, however.  Eventually two major Korean lines - Hyundai and Hanjin - had serious financial problems leading to debt restructuring and the bankruptcy of Hanjin.  The Hanjin bankruptcy helped rebalance the industry. There was a revision of the alliance system to three major alliances.  For a brief period there was some improvement in box rates with this industry consolidation.
• IMO2020 and higher fuel costs is a tremendous challenge to the liner industry.  The liner industry has been the most proactive shipping segment to deal with these challenges.  All the options are painful.  Using compliant low sulphur fuel requires securing in advance necessary fuel supply to support continuation of liner service without disruption.  Fitting scrubbers on larger container vessels is an expensive CAPEX investment and means the immobilization of the significant number of vessels for refitting. Use of LNG requires new building orders for another generation of container vessels.

Last year there was a partial recovery for some of the liner companies, but others remained with operating losses.

After the 2008 GFC, CMA-GGT nearly went into bankruptcy.  They were compelled to take on a Turkish partner for fresh capital.  Only recently last year did CMA-CGT start to generate again operating profits.  This despite a merger with APL and moving operations to Singapore.;

The CEVA acquisition is an major attempt to revise their business model.  But CMA-CGT remains with a weak balance sheet and the merger execution is a major financial challenge for them.  They are looking to divest of their terminal business to raise cash to complete this merger.  CMA-CGT has also ordered a new generation of LNG powered containerships.

CMA CGM is saddled with US$ 20 bio debt and serious liquidity issues.  They must get a grip on  their debt and improve  liquidity in 2020 or CMA CTGT may have to restructure its balance sheet, 

Meanwhile the liner industry faces further challenges.  The Chinese economy is maturing and China is moving to slower GDP growth.  Trade patterns are changing.  Trade is becoming more regional.  Production is moving closer to consumption areas.

The general containership outlook remains bleak.  Box rates are likely to remain low. Older vessels may be subject to extraordinary value depreciation.  We have seen this before with container vessels even younger than 20 years going to scrap.

The only bright side is improved supply-demand balance in interregional trade and better time charter rates for old Panamax vessels and smaller containerships.

Tail Risk in shipping recovery still very much present!

Lately there is a lot of capital chasing shipping assets, arbitraging on vessel prices.   Oaktree Capital is one of the high profile leaders.  Wilbur Ross was an early forerunner in the Diamond S. venture, doing the Cido deal in 2011.

It has nothing to do with business plans, building value with companies to gain competitive advantage and market share in transport and logistics services. This is pure and crude asset speculation, betting that we are at the bottom of the shipping cycle, vessel values will begin to move up and a quick profit will be made by unloading these assets on the next company, who in turn riding the cycle will hope to gain themselves on the next leg upwards until the last guy in – like a Villy Panayiotides at Excel with the Quintana merger – gets stuck carrying the candle and goes bankrupt with the losses as the market crashes.

My personal view is that Oaktree and others are desperately looking for yield without many options in the present world of ZIRP.  The FED policy under Ben Bernanke’s reflects today's conventional wisdom, trying to push asset inflation to reflate and get out of the current Great Recession aftermath of the 2008 Global financial Crisis.

Shipping assets have caught their radar.  Putting money in risky assets and companies for yield has not always gone very well in past shipping cases.  Berlian Laju, for example, just months after a massive debt restructuring with US$ 200 million in new funds and repeated earlier high cost lease deals ended in debt default just months later, illustrating the risks involved in this strategy.

Whether the present FED policies will ultimately reflate the world economy depends on future real demand for goods and services that generates cargoes for these vessels, pushes freight rates up and then vessel values increase geometrically on the future earning expectations. Until and when this happens, this speculative money is actually generating more over capacity and prolonging any market recovery in the shipping industry.

Meanwhile, we have increasing zombification of many shipping companies like General Maritime now reorganized along with TORM and Eitzen Chemical now renamed Jason, OSG/ BLT are in purgatory with their ultimate fate still in limbo.  Excel Maritime recently moved into a hopefully pre-packed Chapter 11 reorganization.  Genco and others like Eagle are tottering in the brink. The recent Baltic Trading follow on capital raise seems a back door doubling up for Genco - see my recent piece: "Peter Georgiopoulos tries to regain his lost credibility" http://amaliatank.blogspot.gr/2013/06/peter-georgiopoulos-tries-to-regain-his.html.

Their Bankers are desperately trying to keep the dead alive. In turn, speculative capital like Oaktree and others, are buying up distressed debt to keep the banks themselves alive with an increasing number of zombie banks around.  Warehousing of bad assets has become the fashion.  Commerzbank - basically a zombie institution - recently issued a statement that it does expect to sell any shipping assets because they expect the market will bring the prices up...  So why worry about any 'book' losses at current mark to market price levels, capital (in) adequacy, etc.?

Oaktree seems to have a rather chaotic investment approach with different parts putting shipping assets on their books in a rather haphazard way. After all, did it make sense or show good analysis to invest in General Maritime only months from declaring Chapter 11 and needing even more money in a second round?

Normally, investments are supposed to yield value and then second round financing is done to invest in another leg up in the private equity world.  Here Oaktree was doubling down on a bad position, which is not normally good trading practice.  The normal practice would be to lighten up and reduce exposure.  In the current 'pretend and extend' world that we live in, however, everyone is trying hard to avoid cutting losses and many actively practice 'doubling down'. 

Did Genmar ever really have much intrinsic enterprise value as a shipping company beyond its physical assets to warrant the Oaktree "investment" in recapitalization??? I would say no!

Peter Georgiopoulos  never really thought of Genmar as an enterprise - at least in the sense of a logistics transport business serving customers in carriage of cargo.  Peter G. was and is foremost an asset speculator.  He ignored strategic positioning for Genmar to gain market share, improve earnings margins and generate growth through retained earnings. Employment was just a means of holding his assets rather than serving and building a customer base. His biggest sin was ignoring trends in the tanker market and new growth areas. His mindset was on trading assets.  Others like TK Shipping and his nemesis 'Big John" Fredriksen handily outperformed him and provided superior performance to their investors.

In the case of Petros Pappas, the Oaktree approach is to fund Pappas like a bond trader. Pappas has a successful record in asset trading. Oaktree has Pappas like a stock picker in different vessel classes. Pappas trades largely on his own instincts with his own money on a 50-50% basis with Oaktree. His own skin in the game satisfies Oaktree for the moral hazard. Neither Pappas nor Oaktree are looking to build businesses or really have any business plans at all beyond the asset trading.

A recent Tradewinds interview with Lazard’s Head of Shipping, Peter Stokes, sheds a lot of light on this matter. In fact, I am amazed and somewhat gratified to see someone like Stokes, thinking and saying publicly, many of the same things that I have been saying privately and publically when I was recently a keynote speaker at the Hong Kong shipping forum.

Stokes sees two basic scenarios ahead (see "Bungled QE exit could 'burn out' ship values" http://www.tradewindsnews.com/weekly/w2013-06-21/article319083.ece5)):

• Scenario A: - conventional wisdom ‘muddle-through’ recovery in the next few years that is likely to be subpar in quality, partly because of so many trying to ride the coat tails of same scenario.  If everyone is arbitraging, then each is cancelling out the other in any meaningful price action.  Further this self-defeating over time in creating over supply with a new wave of speculative ordering that will grow with any upwards price movement.  There is too much speculative money and too much yard overcapacity.
• Scenario B - complete collapse with another leg down, where investment firms like Oaktree, shipping banks, etc. experience painful and unavoidable losses. The zombie shipping companies finally die. Assets are written down to true values and finally there is a proper shipping recovery based on an industry shake up where only the fit survive: much dreaded Joseph Schumpeter’s ‘creative destruction’. 

A  preview of scenario B is the recent reportage in Tradewinds about an apparently unsuccessful attempt by Wilbur Ross, First Reserve, etc. to float an IPO in the Oslo capital markets for their Diamond S venture that was built on a huge block purchase of product tankers from Cido a few years.  My previous two pieces on the Diamond S venture make interesting reading in retrospect: 

• "Does the CIDO deal mean tanker values are on the upside?" - http://amaliatank.blogspot.gr/2011/08/does-cido-deal-mean-tanker-values-are.html.

• "Diamond S. a new business model for shipping?" - http://amaliatank.blogspot.gr/2011/08/diamond-s-new-business-model-for.html.

Obviously, the latter Scenario B would be a devastating setback for governments (especially the European Union political elite) and many financial institutions.  Such an outcome might ruin their careers and threaten the integrity of their institutions. On the other hand, they are slowly running out of resources for the constant backstopping. “Pretend and extend” credit policies with the massive socialization of losses is far more costly than they are representing to their voters.  So far little of this has proved helpful to an economic recovery. Only the US has had some relative success, but their boost in energy resources may be a more substantive driver in this tepid recovery than FED financial engineering pulling on strings.

The two key elements ahead that may affect shipping asset prices are the US and its tapering to wind down the FED asset purchases and the Chinese restructuring, given that the Chinese marginal rate of investment is unsustainable and the losses are corrupting their banking system. The US and Chinese both realize that this needs to be done and it is unavoidable, unlike their EU counterparts with their “muddle through” theories, eternal dissention and dream-world mentality resembling Mann’s Magic Mountain novel.

Admittedly, I am strongly influenced by my friend Michael Pettis in China. I believe Chinese growth will ultimately disappoint.  The volatility concerned that Pettis expresses about the very large Chinese speculative position in commodities worries me given the potentially negative impact on shipping markets. So I would not be surprised about Stoke’s concern about further drop in shipping asset prices, driven by lower replacement cost in steel, etc. All this shipping investment is predicated on Chinese growth reflating the markets again – lots of very concentrated risk if this does not pan out.

See "Crunch Time: Why low growth is China's new normal" http://www.foreignpolicy.com/articles/2013/06/27/credit_crunch_time_china_low_growth_new_normal

On the other hand, the politicians, particularly the EU elite – our PM Samaras with his never ending Greek success story being the success story of the Eurozone – and Oaktree Capital are really betting the house that the worst is over and there will be happy days again with a robust recovery in just a few months.

Former colleagues of mine like the present Head of National Bank of Greece, Alex Tourkolias, saying that a shipping recovery will lead Greece out of its crisis and John Platsidakis of Intercargo, saying that two years from now the Greek debt crisis will seem like a bad dream gone away are lately exhibiting lots of boosterism.

In Hong Kong, by contrast, the shipping circles were subdued and cautious about a quick recovery in the markets.  Some companies like Pacific Basin have been aggressingly buying newer second-hand units, but these purchases are to renew their fleet and backed against a substantial cargo book, not the kind of overt and open speculation mentioned above by the likes of Oaktree.

So who knows? Stokes and I could be incorrigible pessimists and totally wrong. All I can say is that I still see a lot of tail risk around in shipping and elsewhere.

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.

QE2: Dampening shipping sector expectations from the Chinese Eldorado?

Nearly all the shipping investments made this year have been predicated on continuation of double digit Chinese growth ahead to maintain demand and soak up new tonnage coming into the market from the large orderbook overhang. Should Chinese growth rates slow to lower levels, this risks retarding market recovery and the effects of tonnage overcapacity may continue to impact the shipping markets longer than the smart money was counting on.

China reported an October trade surplus of US$ 27 billion Wednesday. This is a very big number. It will be very hard for China to credibly argue that it is trying to contribute to global growth while pulling in more and more foreign demand.

In his latest piece on the impact of QE2 on China, Michael Pettis is projecting growth rates over the next few years in the order of 5-7% if all goes well. He believes that major growth driver in the Chinese development model is low interest rates. He feels that the influx of dollar capital inflows from QE will really test the Chinese capacity to continue to keep their US Dollar peg and keep down domestic interest rates.

The Chinese appear to have thrown the gauntlet to Tim Geithner’s proposal on restricting current account imbalances directly by caps on exports as percentage of GDP, setting the stage for a potential G20 showdown. China is very dependent for its growth on widening trade surplus, and if the surplus was cut by a third in the next year or two, which is what it would take to bring it to under 4% of GDP, it would cause a several percentage point slowdown in Chinese growth, which could only be reversed by another surge in bank-driven investment.

Low interest rates (along with their cousin, socialized credit risk) are the main causes of capital misallocation and excess capacity in China, and are probably also the main forces pushing down household income and household consumption as a share of GDP.

China is very worried about the double impact of a contraction in the trade surplus and the impact of the Fed’s quantitative easing. If the former occurs, it will be almost impossible for Beijing to reduce the impact of the latter without causing a sharp slowdown in growth.

QE2 is fairly explicitly the US countermove in the great global game of beggar-thy-neighbor. It risks creating excessive monetary expansion in China because the PBoC will insist on purchasing all dollar inflows at the exchange rate set by the PBoC and monetizing them. China and other countries are right to claim that QE2 is likely to lead to asset bubbles outside the US, but only, as the US points out, in countries that intervene to prevent dollar depreciation, something the US authorities want to punish and end.

China already is experiencing a liquidity-driven investment boom, and would have already raised interest rates if it weren’t so difficult to do so (many borrowers can barely service debt even at such low interest rates). If the US continues to pursue quantitative easing, it could spell the last stage of China’s great growth spurt followed by the beginning of the big adjustment.

Shipping market expectations started with somewhat of a bang in the first half of the year with the new IPO's and renewal of large block deals. Even the container markets started to turn around with the slow steaming and renewed export volume from head haul routes. Dry bulk took the first hit in the summer with an abrupt fall in rates, for which there has been a fall recovery. Tankers have been dismal and underperformed since last winter with so far a disappointing 4th quarter.

Nearly all shipping investments at present asset price levels have very mediocre investment returns and depend on future reversion to median freight rate levels for satisfactory returns  to woo investor money. Everyone in shipping is counting on a gradual recovery in 2011 and they are all citing the China growth story in their investment thesis as a prime demand driver.

Two Chinas for growth in steel demand?

Many dry bulk owners invested in Panamax and Capesize tonnage seem to expect that China will follow a path similar to Japan or Korea in terms of steel consumption per capita. The critical question to ask is whether it makes sense to look at China as an undifferentiated entity in this matter. The per capital steel consumption in the coastal regions on a standalone basis already surpasses Germany! It may be less growth potential than most observers are forecasting.

Danish Ship Funds, Christopher Rex, divides China into an urban and a rural economic zone.  He notes that approximately 650 million people, of the Chinese population of 1.3 billion people, live in the urban region. The remainder lives in rural China, where food expenditures account for a relativity large share of the disposable income. In rural China approximately 150-200 million people living are living in poverty (using the internationally accepted 1 US$ per day guideline), There is still a long way to go before these individuals increase their steel intensity to a level close to that of the urban regions.

Rex deems it unlikely that the rural regions will develop their steel intensity extensively as long as food expenditure represents a considerable share of their income. The current food inflation exacerbates the situation and suggests that it will be a long time before the rural provinces increase their steel intensity per capita.

The future potential for Chinese iron ore demand is highly sensitive to this issue. Assuming that the Chinese population, in terms of steel consumers, does not consist of 1.3 billion people but rather the 650 million people living in the urban region, this change would obviously double the Chinese steel consumption per capita from its current level of 320 kg per capita (the same as the US) to 650 kg per capita (larger than Germany).

If Chinese steel consumption per capita is 650 kg, few will expect a massive surge in Chinese iron ore imports.

The only saving grace to this situation has been the financial crisis that has limited capital and increased the cost of bank finance for owners to complete their CAPEX needs. Last year roughly 60% of the drybulk new building orderbook was deferred and there may be similar results this year.

A Chinese rebalancing agreement with its trading partners that results in a 20% currency depreciation over a several years would bring market conditions similar to the early 2000's (when China did something similar with its currency) with considerably dampened freight rates. Despite the sharp drop earlier this year in spot Capesize rates, present rate levels remain profitable for dry bulk operators and they remain in a more comfortable position than their tanker owner peers.

China bubble ahead or beginning of a new economic boom cycle?

Optimism on China and other emerging markets is a major driver in shipping markets this year in all classes of tonnage as well as resumption of new building orders. WTO's Pascal Lamy revealed global trade is now expected to grow 13.5% this year. The future depends on successful trade rebalancing, a highly complex and political issue. China watchers like Michael Pettis and Andy Xie do not believe in the sustainability of the growth model.

Pettis and Xie feel that this system is resulting in increasing asset misallocation. The growth model is based on easy money from domestic financial repression that the government invests in infrastructure projects, SOE's and real estate. China keeps its currency pegged with the US Dollar at advantageous rates to promote exports by massive purchasing of US dollar assets rather than importing their trade surpluses domestically. Internal saving rates are held at very low levels.

Xie has argued that there is no rational pricing mechanism for real estate swapped by local government entities. Pettis is worried about future non-performing loans. He cannot see how the Chinese authorities can boost consumer growth from loss-making infrastructure projects:

"But governments do not cover losses. They channel money from households to cover losses. In other words if the Chinese railroad system turns out to be economically non-viable (i.e. the true economic cost of building it exceeds the economic benefits), households will be forced pay for the net reduction in national wealth. This of course reduces future household income and consumption – the surging of which is supposed to make all these infrastructure projects viable."

Xi Li, a Consultant at State Street Global Advisors, focused in a recent article on the real exchange rate (RER), which is nominal exchange rate (NER) adjusted for inflation rate and is more important in determining a country’s current account balance with another country. China's NER, largely fixed with the U.S. in the last few years, is provoking very high internal inflation. Bubbly housing prices are due to a combination of negative real interest rates, few investment options, and extremely low carry costs in terms of maintenance fees and zero property taxes.

This viewpoint dovetails with Andy Xie's observation that the global economy is like fried ice cream, where China and other emerging markets are swallowing the US stimulus. Fed easy money policies are putting them on fire with inflation. Li feels that these dynamics will eventually put China in a very precarious position. China will become even more dependent on investments and a current account surplus to grow its economy. It is increasingly cornering itself by reducing the RER of Yuan.

Given the fixation of the current debate on adjusting the NER between Yuan and USD, one day, the continuously exploding trade deficit, coupled with the likely persistent high unemployment rate in the U.S., means that the only outcome will be the threat of trade war, or trade war itself. The U.S., controlling final demand, may finally realize that this control gives it much stronger bargaining power, may end up as the relative winner. If China has trouble, the most commodity driven economies. None of this would be good for commodity shipping.

Pettis recently wrote a lengthy piece on the politics of Chinese adjustment. He notes four ways of boosting the household income share of national income and made a list of winners and losers as follows:

Winners and losers

1.) Raise the renminbi:

Winners:

Households as consumers, especially middle and lower middle classes

Service industries

Exporters

PBoC

Losers:

Exporters

PBoC

2.) Raise interest rates

Winners:

Households as savers, especially the middle and upper-middle classes

Service industries

Labor-intensive industries

Small and medium enterprises

Capital intensive industries

Real estate developers

Banks

Local governments

Speculators

PBoC

Losers:

Capital intensive industries

Real estate developers

Banks

Local governments

Speculators

PBoC

3.) Raise wages:

Winners:

Households as workers, especially lower middle classes and urban workers

Consumer and retail businesses

Capital intensive industries with domestic customers

Employers, especially low-income labor intensive companies

Losers:

Employers, especially low-income labor intensive companies

3.)Transfer state assets:

Winners:

Households, with the distribution depending on the form of privatization

Government, especially local officials

Losers:

Government, especially local officials

He notes that the trick for any of the first three adjustment measures (which are the necessary ones for a sustainable adjustment) is to adjust just fast enough so that the employment created by the rise in household consumption offsets the unemployment created by financial distress among the relevant losers. He stresses that Chinese adjustment must be slow because in the short term the negative consequences for employment can overwhelm the positive consequences.

Pettis feels that the pace of China’s adjustment will in large part depend on the pace of the external adjustment. Its trade surplus depends on the ability and willingness mainly of the US and trade-deficit Europe to absorb them. He does not think that the rest of the world is able (especially in the case of trade-deficit Europe) or willing to wait long enough to allow China a relatively easy adjustment.

Accordingly, Pettis interprets the China optimism of commentators like the Sydney Morning Herald's Michael Pascoe and the Financial Times's David Stevenson as the final stages of a bubble. Both Pascoe and Stevenson see a huge rising consumer market in China in the coming years as a major driver in world growth.

The shipping community seems to believe strongly in the robust growth school with Peter G's block vessel acquisition deals earlier this year, Navios's foray into tankers and Evergreen's new order of post-Panamax tonnage. From 10% of the world container vessel fleet in layup in 2009, pundits are now concerned about a future shortage of boxships in view of this massive new growth ahead. All this is all based on continued robust demand growth in China and other emerging markets.