#beltandroadinitiative

China’s bullying is a blessing in disguise

We should view China’s recent bullying as a blessing in disguise. Our government should resist quickly bending to its will for we would only embolden Beijing by such a rapid display of weakness.

China’s true colours are on display. Barley tariffs, meat bans and now minerals are up for debate. All because we wish to have an inquiry into the beginnings of the virus.

We are not blameless. Our universities squeezed the Chinese student lemon until the pips squeaked. These educational institutions never built in contingencies. They are culpable for such pathetic risk management processes. Our property market has benefited from Chinese investment. Our primary industries rode the back of this panda and now fear they could end up inside.

However China is welcome to source its coal from Indonesia if it so chooses. We have globally competitive cost curves which would be welcomed in other nations.

Of course there will be short term disruptions but the entire global supply chain is being rewritten. That can only be in our favour. We aren’t playing aggressor while covering up a pandemic. This isn’t lost on most of the world, even if governments might tiptoe around the subject.

We should be revitalizing our relationship with Japan. At least we know when we sign a contract, the Japanese will stick to it rather than the Chinese style of starting negotiations after a deal is inked.

Why would we move away from our relationship with America? Much more opportunities in partnering with the US and India as well.

Chinese military aggression is self evident. Its investment in defence and space is exponential. While a fraction of US military spending the Chinese power projections in the South China Sea as well as the Paracels, Spratly and Senkaku Islands should raise concerns. Man made military island bases in the Pacific as well as ‘trading’ ports around the world which would welcome Chinese naval vessels.

Don’t take our word for it. Japan revealed in its 2019 Defense White Paper just how much China has been toying with it. Look at the trend of Japanese Air Self Defense Force jet scrambles to intercept Chinese military aircraft approaching its shores. Less than 100 a decade ago to over 600 in 2018.

The map at the top of this post shows how many times PLA Navy ships have sailed through Japanese territorial waters in what would be our equivalent of the Indonesian Navy sailing through the Bass Strait between Victoria and Tasmania without warning.

China’s true colours should make the rest of the world sit up and take notice. While China has trapped many countries in debt turning them into financial colonies, this pandemic will create a world that wants to rely less on China. The Middle Kingdom might be a formidable trading bloc but its domestic economy is challenged and the louder the external rhetoric, the more we know how much it is hurting inside.

We needn’t fold at the prospect of threats. Best forge new all weather friendships. China will quickly learn how fast the world that is not in debt slavery to it will ignore the Forbidden City. We can forget pandering to the Paris Accord which China ignores while we are at it.

That sinking feeling?

Clarksons.png

We are often told how robust the world economy is. Global trade tends to be a good indicator. Looking at the latest Clarkson’s December 2018 annual review, we can see that the number of shipyards that make the vessels (20,000dwt+) that look after global trade has slid from a peak of 306 in 2009 to 127. Newbuild orders have slid from 2,909 vessels to 708. Wärtsilä is anticipating a gradual recovery in contract new builds as high as 1,200 ships by 2022. Wishful thinking?

According to Clarksons, the global fleet of all types of commercial shipping is 50% larger than it was before the GFC despite the World Trade Organization saying growth in global trade for 2019 is expected to fall 2.9%. The WTO has fingers crossed for 2020. The charts in this WTO report show the sharp slowdown in freight in Q4 2018 and Jan 2019.

Germany’s five leading ship financiers reported outstanding ship-related loans of 59 billion euros at the end of 2016 with an average problem loan ratio of 37%. In recent years they have been busy reducing or selling off shipping portfolios. HSH Nordbank required a 10 billion euro bailout by its 85% owners, federal states Hamburg and Schleswig-Holstein. It ended up being swallowed by private equity and renamed Hamburg Commercial Bank. Nord LB was looking to bail in Bremer LB beyond the 54.8% it already owns. Bremer LB had to write off  €400m of its shipping portfolio.

China has been aggressive, filling the void left by the Germans with high leverage financing to support the longer-term objectives of the Belt & Road Initiative. One wonders whether China plans to spoil the market by squeezing a damaged sector further. It wasn’t so long ago that South Korea’s  Hanjin Shipping went bust.

BTIG reported that ship scrapping in Q1 2019 was up 35% to 107,000dwt. Ship owners tend to scrap ships if the cost of idling or operating them exceeds this. Note Capesize shipping rates have fallen to around $9,000/day well below the $25,000 breakeven rate. The bellwether Baltic Dry Index is 27% down year on year and 85% below the peak levels seen in 2009.

The shipping industry has been sick for a decade. The majors have been busy merging, cutting debt and right sizing. Unfortunately it is  still in a pickle. A global slowdown will only exacerbate the issues in the industry.

The one area that looks interesting is the scrubber makers (eg Alfa Laval, Valmet, Fuji Electric). There has been a sharp uptick in growth for retro-fitting pollution equipment to existing ships instead of buying new equipment. Sometimes the best investments come when industries that require massive consolidation hit breaking point.