Equal and opposite reaction to depressed imports

Backhaul.

One of the reasons given for the unspeakably high freight rates people on Guam have to pay is that there is no backhaul for the ships carrying freight here. The explanation given is that the one-way trade has to pay the two-way transit.

That may be what is also happening on US West Coast ports at the moment.

Guambat's reader may recall a few posts back at the end of 2009 about the dearth of imports to the US, and the signal that sent up that the consumer was becoming distressed. US consumers were trimming their requirements for trade from Asia.

Now, according to Guambat's reading between the lines of the following WSJ article, the backhaul effect may be restraining US exports to Asia.

Export Revival Threatened By Shipping Bottlenecks

The U.S. finally is enjoying some strength in exports, thanks to economic recovery in Asia and a generally weak dollar. But just as U.S. goods find demand abroad, there's a problem getting them there.

It's the opposite of what one might expect. Carriers have a surplus of ships. And since the U.S. still imports more than it exports, freighters arrive in America looking for export cargo to take back, so they don't have to go home empty.

Yet American producers of everything from hazelnuts to cardboard are complaining they can't get their goods shipped in timely fashion.

The constraints arise from the unusual economics of transport businesses such as ports and container shipping. U.S. ports, thanks to the huge appetite Americans have developed for goods made abroad, are oriented more to the import than the export trade. So are the big foreign ship companies, which gear their schedules and their routes to American imports, not to exports.

The ship glut, instead of providing more vessels, perversely is helping make fewer available. That's because the glut, in combination with a fall in trade during the recession, cut shipping rates below the cost of operation for some routes. Carriers responded by idling many ships and reducing their trips to the U.S., to save money and try to force shipping rates higher.

When ships carrying imports call less frequently at U.S. ports, or even skip some ports they once went to, exporters have to wait longer or look harder to find a ride for the goods they want to ship abroad.

Efficient market feces

OCTOBER 28, 2009, Asian Shares End Lower; Shipping Stocks Take Big Hit (WSJ)

Most Asian share markets ended lower Wednesday as shipping stocks and shipbuilders fell on worries about the strength of the global economic recovery.

Shipping stocks and shipbuilders were sharply lower, amid recent downbeat earnings for the sector, which has taken a hammering from the global downturn. The Baltic Dry Index, a measure of the demand for dry bulk goods, fell 1% Tuesday.

Sunday, October 18, 2009 Ships arriving high in the water

October 9, 2009 Shipwrecks, then and now

Wednesday, September 30, 2009 October in the Baltics

Tuesday, September 15, 2009 Santa's sleigh sighted off Singapore

Thursday, October 16, 2008 This is not helping to give October a better name

Ships arriving high in the water

Guambat was amused at the "cause du jour" cited last week by newsbites to "explain" the purely technical drive to the 10k round number (see chart here). On that occasion, Oct 14th, the newsbite was that, while consumer spending was still speeding to a stop, it was speeding slower than expected, therefore time to buy, buy, buy. E.g.:

WRAPUP 2-U.S. retail sales hint consumer demand improving

Sales at U.S. retailers fell in September as car-buying incentives expired, but excluding autos they were up a second straight month, raising cautious optimism consumer spending could support economic recovery.

Retail sales fell 1.5 percent last month, the biggest decline since December, after surging by a revised 2.2 percent in August, the Commerce Department said.

Sales excluding motor vehicles rose by a bigger-than-expected 0.5 percent, building on a 1 percent increase in August and beating economists' expectations for a 0.2 percent gain.

The increase cemented the view that consumer spending recovered and the economy started growing in the third quarter after the worst U.S. recession since the 1930s.

'There's solidity, or new strength, in all discretionary spending categories,' said Pierre Ellis, senior economist at Decision Economics in New York. 'We evidently have hit the bedrock level of consumer spending and can even see a little bit of normalcy going forward.'

Yadda, yadda, etc., and so on.

The consumer was also being resuscitated by falling energy costs, according to some cheerleaders:

Lower Energy Costs Point to U.S. Consumer Rebound: Chart of Day Oct. 14 (Bloomberg) -- Falling energy costs may trigger a U.S. consumer-spending revival that’s faster and stronger than most people anticipate, according to James W. Paulsen, chief investment strategist at Wells Capital Management.

The ratio [percentage of disposable income spent on energy] dropped to 4.4 percent in this year’s second quarter from a peak of 6.3 percent in the third quarter of 2008. The latter reading was the highest since 1985....

Of course, in 1985 the unemployment rate was almost 3 points lower, at 7% and trending downward from its decade high of 10.8% in 1982. (Look at this "misery" index chart of unemployment for the last six decades.) With unemployment trending up, it is hard to get excited about a fall in energy costs as a boost to consumer spending.

A more sober assessment of the state of the consumer was presented by briefing.com, albeit a few days before that "unexpected" -- and questionable -- slowing of decline in spending:

The U.S. trade balance deficit tightened by $1.2 billion to $30.7 billion in August. The drop in the deficit was unexpected as the consensus forecast the deficit to rise to $33.0 billion.

The drop in the deficit was not necessarily good news for the U.S. economy as it shows the U.S. consumer is still holding back on increasing their spending.

The depreciation of the dollar against all major currencies was expected to help U.S. export growth. We saw evidence confirming that a low dollar value would boost exports in 2007 Q4 and 2008 Q2.

Unfortunately, global demand for U.S. goods remains extremely weak and the relative price gain for U.S. importers was not enough to spur an increase in purchases.

As a result, exports remained virtually flat in August. The entire tightening in the trade balance was due to a decline in import demand.

The drop in imports was unexpected.

Corroborating the drop in imports is the high-riding movement of the goods transporters on the high seas, a sea-faring theme Guambat has alluded to frequently in recent weeks.

Imports dive at ports of Los Angeles and Long Beach

In another sign of how deep the global recession has become, the ports of Los Angeles and Long Beach on Friday [Oct. 16th] reported their worst combined import statistics for September in nine years.

September is often the busiest month at the nation's biggest port complex, making it one of the best barometers of the health of the economy and international trade.

The port of Los Angeles received 309,078 containers packed with imported goods in September, representing a decline of 16% from the same month last year and 27% from September 2006, L.A.'s best month ever for imports. Long Beach received 224,924 import containers in September, a drop of 19% from a year earlier and 32% from September 2007, the port's best September ever.

For the first nine months of the year, imports, exports and empty containers through the port of Los Angeles were down 16% at just under 5 million containers while the Long Beach port saw a decline of nearly 25% at just under 3.7 million containers, compared with the same period last year.

As dismal as those figures are for the two ports, which rank first and second in the U.S. in container volume and together rank fifth in the world, a greater worry goes beyond the immediate and substantial loss of local trade-related jobs: Some of the ports' most important tenants were so poorly positioned for the downturn that they might sink completely in a sea of billions of dollars of red ink, experts say.

"Without a doubt, the Southern California ports should be worried," said Neil Dekker, an analyst at Drewry Shipping Consultants in London who produces container industry forecasts. "Companies will go bust; freight rates may take years to recover."

The rest of the story is just as, if not more, gloomy as the part excerpted.

Anyone looking to a Santa sleigh recovery this year is sledding on thin ice.

Shipwrecks, then and now

The WSJ has a couple of stories today about shipwrecks.

First, is a story about efforts being taken to try to prevent further damage to the archaeologically significant old wrecks in the English Channel: Saving the Wrecks of the Channel

The second, along a theme Guambat has mentioned before, talks about the economically significant new wrecks in the container ship market: Rough Seas Slow to Calm for Container Shippers

Rates have risen for other kinds of shipping, such as tankers, but are expected to stay depressed for container-shipping companies for at least the next year.

Container-shipping rates even dropped to zero in January on the Asia-to-Europe route as brokers waived fees and charged only for fuel costs.

That crimps the companies' ability to make payments on ships they ordered when shipping rates were high. At the same time, the value of the ships they already own has fallen.

Both factors make it harder for companies such as CMA CGM and Hapag-Lloyd AG to keep debt covenants with banks. Last week, CMA CGM, the world's third-largest container-shipping company by capacity, said it was in talks to restructure its $5.2 billion in debt. The German government has extended €1.2 billion ($1.76 billion) in state-loan guarantees to Hapag-Lloyd.

October in the Baltics

Last October 2008, Guambat noted that one of the landmark indicators of the then rapidly sinking market was a significant drop in the market prices of shipping companies. Not everyone, however, was so pessimistic:

Despite the recent slowdown, analysts in general believe in the secular China growth story. Cantor's Boyden says at current prices the stocks represent a "phenomenal buying opportunity," adding, "Right now I think they have been ridiculously oversold."

Guambat wonders how that worked out.

Last month, September 2009, Guambat noted the huge mothballed fleet of ships off Singapore and the death dive of the Baltic Dry Index. In particular, Guambat questioned the impact this may have on the steel producers, and wrung his paws over the bearishly divergent chart comparing the Baltic Index to the S&P500.

The story continues to compound, and Guambat holds fast to his sinking feeling.

China, Korea ‘Good Fight’ for Shipyards May Hit Rates (Update1)

The world’s two largest shipbuilding nations [China and Korea] have taken steps this year to aid shipyards and safeguard jobs as customers delay or scrap orders amid tumbling world trade. That support will likely ensure more vessels enter service, even as lines mothball and scrap existing ships because of a lack of cargo.

China’s bid to become the largest shipbuilding nation by 2015 may also worsen the glut as it competes for market share, said Matthias Umlauf, senior economist at HSH Nordbank AG. China has “the chance to become the world’s largest shipbuilding nation and they will not let this chance go,” said Umlauf. “They will support their national champions and that will definitely add to the overcapacity situation.”

State support may ensure that many of these vessels are delivered even if banks won’t finance them, said C.K. Ong, president of U-Ming Marine Transport Corp. Ong estimated that shipowners will likely need to raise as much as $90 billion to help fund the roughly $165 billion of dry-bulk vessels on order worldwide because of dropping asset values.

China State Shipbuilding Corp. and China Shipbuilding Industry Corp., which construct more than 70 percent of dry-bulk vessels, are both state-owned.

“What worries me is whether the Chinese or Korean governments will sit still and let the shipyards get into financial trouble because of the non-delivery of ships,” Ong said.

State support for struggling shipyards may prevent a rationalization of overcapacity, driving down vessel prices and profits across the industry. The aggregate capacity at the world’s 55 biggest shipyards is already as much as 40 percent bigger than demand, according to Morgan Stanley.

hat oversupply may help cause prices for new vessels to fall by as much as 20 percent by the end of next year, according to the bank. Prices for newly constructed container vessels fell 31 percent in the first half on the capacity glut, according to Morgan Stanley. Bulk-ship prices dropped 26 percent and tanker prices declined 25 percent.

China in June announced a two-year plan to help shipbuilders, including funding for cash-strapped producers and moves to encourage mergers and acquisitions. In April, South Korea unveiled an 11.5 trillion won ($9.6 billion) financing package to help shipowners pay for new and existing orders.

Perhaps this is just an Asian way of throwing a TARP over a TBTF industry. Even so, Guambat reckons the excess capacity will sink in a sea of tears.

And, how is that divergence in the Baltic Dry Index and S&P500 coming along? Well, it's widening, as the S&P has rallied to a rarely seen huge quarterly increase, while the BDI has continued to bail:

Source: Investmenttools.com