Falling Fal of global trade | FT Alphaville

Falling Fal of global trade

The river Fal in Cornwall is one of South England’s great beauty spots. Normally.

Fal estuary ship

Because of its depth and close links to major Atlantic shipping lanes, in times of economic crisis, the Fal estuary is also a cheap place to park massive container ships: they can be mothballed in the mouth of the Fal far cheaper than they can be held up in port; awaiting shipments that might never materialise.Right now, the Fal is full of them. And indeed, a glance at the Baltic Dry Index – the barometer of dry shipping rates – tells why:

Baltic dry index

At the beginning of this year, the Baltic Dry was down 92 per cent on its May 2008 high of 11,793 points.  Any signs of a recovery have been sluggish.Little wonder with, as the FT reported earlier today, Chinese exports down 22.6 per cent year-on-year, according to the latest figures. As far as global trade is concerned, there are, quite definitively, no green shoots to be seen.That isn’t discouraging everyone, though.  As the Telegraph reported last week:

Morgan Stanley is to set up an opportunity fund to take advantage of the global downturn in shipping by investing up to $400m (£267m) in dry bulk and container ships.  The bank is working with two Greek shipping organisations to create the debt fund which will target distressed investments in shipping.

The idea is that the funds will buy debt – at distressed prices (as much as a 60 per cent discount, according to reports) – previously issued by shipping organisations to commission new ships.  There is plenty of such distressed debt around. Not least because all through 2007, and indeed, early 2008, shipping was still booming: commissioning new ships still seemed like a money-spinner amid all that quite genuine talk of an endless demand for natural resources from the seemingly rapacious Chinese economy. Right up until this time last year (May) grade A copper was trading at around £9,000 on the LME.

JPM is also in the distressed shipping market. Reports Reuters:

JP Morgan Asset Management is launching a maritime strategy this year which will invest in the distressed shipping market, a senior manager at the firm said on Thursday.

“The shipping business is in worse shape than real estate,” said Joe Azelby, chief executive officer of JP Morgan Asset Management’s $50 billion (34 billion pound) global real assets group. “In some cases ship values are down between 60 and 80 percent.”

…shipping owners are in need of third party funding at a time when pricing is at an historic low. Azelby sees continued downward pressure on pricing over the next 12 to 24 months and an opportunity to capitalise on this gap.

JP Morgan is currently in fund-raising mode for the strategy, seeking some $500 million to $750 million initially  

But, there is a significant caveat. As Hellasious at Sudden Debt asks: “what if this is, in fact, The Great Reset?”

Consider just this: Americans are the world’s biggest consumers. With just 5% of the population they go through 25-30% of it’s resources, from crude oil to copper.. and autos, sneakers, t-shirts and La-Z-Boy recliners. They have lately started saving again, reversing a three decade decline in the personal saving rate .


An increase in saving means a decline in consumption and results in a much bigger backlash for shipping today than any other time in history, since so much US and EU manufacturing has been off-shored to China.

All of which, perhaps, makes the recent rally in all things natural-resource look a bit pre-emptive. The fundamentals of the market – all the leading indicators from OECD countries – are still showing declines. Recovery is not here yet.

Where this leaves funds looking to invest in shipping right now, who knows. Those container ships could be despoiling the view in the Fal for some time yet.

More broadly, what this means for the shipping industry itself, hasn’t really been addressed either. Even if a recovery is coming – in, say,  12 months –  will most shipping giants be able to survive the wait?And what of huge natural resource banks like Glencore? (Who also, by the by, were just one of those organisations who in 2008 invested heavily in brand new container ships).

Related links:
How not to (mis)read the Baltic Dry
– FT Alphaville
The Baltic Dry marches on (for now)
– FT Alphaville