Ghost fleets, trade peril & China vs. Mexico - Shipping in a recession: Part 1

By Ryan Skinner (email)

To the public, shipping is global trade's handmaid. Both may come damaged from a recession. 

The shipping community's recession nightmares are summed up in one photo, brought to us by the UK's Daily Mail. Here it is (under the headline "Ghost Fleet"):

The fleet of laid-up ships east of Singapore pictured is described as bigger than the US and British navies combined, with "no crew, no cargo and no destination". This is the shipping equivalent of a Florida neighborhood with the obligatory mortgage-crisis foreclosure signs on every other lawn.

Another article by Elliot Wave, a leading market forecasting firm, strews salt on the sore by giving this picture macroeconomic ballast. In essence, the writer says that the slow-down in shipping will, despite the occasional upward blip, persist for a while to come. I quote:

Frankly, the export economies remain threatened; we can see the evidence in [the depressed] export-related prices and demand for ships, as well as in increasing trade friction. There’s no sign of an export led recovery at this time.

Fortunately, the ghost fleet off of Singapore is invisible to the vast majority of us (at least when the Daily Mail isn't dispatching correspondents to document it). If invisibility is often the bane of shipping, it may here be a blessing. And the Elliot Wave forecast's doom-saying is effectively negated amidst the general triumphalism of rebound, which the media is clinging to like a life raft. When Ben Bernanke says things are better, who's going to say boo?

Thus, the average citizen consumer is not likely to feel any collapse in global shipping in the near future. All of the electronic products on the box-store shelf will say "Made in PRC", or "Made in Taiwan", and their produce from Ecuador, New Zealand and Florida will still be on the grocery store shelf.

If anything, our average citizen consumer will feel a desire to punish global trade further, as the outsourcing bogeyman gets uglier and uglier as unemployment rises. Obama's recent tire tarriffs (discriminating low-cost Chinese tires) and failure to sign up to free trade agreements with friends like Colombia and South Korea are only two examples of a major Western leader pandering to protectionists.

Scarier to the shipping industry than any tire tarriff or coffee duties is the potential for a failure of the east-west price gap that has driven so much traffic over great blue distances. A recent article, citing a BusinessWeek story, again citing an AlixPartners study, indicates that the fundamentals driving Chinese exports to America (cheaper than closer suppliers) may be endangered. America's new China might be Mexico, or Guatemala.

Again, if we look through the eyes of the average consumer, we see advantages. If it's cheaper to source goods from near rather than far, why not do that? An American would probably prefer to give his brother south of the border a job than a brother around the globe, no? And it sounds more environmentally friendly when things don't have to be moved so far.

For the shipping community, I believe the short-term perils of layed-up fleets and low freight rates pale in comparison to the long-term risk of losing the industry's argument to the general public - namely - that global trade flows and a planet-spanning supply chain are a universal good. This recession will put the value of that proposition to the test, in the eyes of the public and their servants in politics.