Consider these facts:

  • 90% of world trade is transported by sea,
  • The world will ship by sea 2.5 times more iron ore per year in 2018 than in 1998,
  • Transporting a pair of jeans from Asia to the US costs less than the taxi ride to go and buy them.

So, what would happen if the traditional investors in maritime financing downsized their commitment to funding the construction or secondary sale and purchase of the ships that the global economy relies on for international trade? It could be reality, if the current apathy towards the industry continues and alternatives are not sought. In this article we explore the possibilities, including the role alternative finance may play.

Unprecedented Forces of Change Are Afoot

We all acknowledge that the business cycle faces periods of growth, followed by adjustment phases correcting misallocations, usually caused by credit-fueled expansion. The 2002-08 maritime asset investment boom was no exception, but was also driven by China’s 2001 ascendancy to the WTO. The reality is that eight years on, we are still faced with a large dislocation between supply, demand and asset prices that are outside of traditional trend levels. In a broad sense this is actual (in dry bulk ships particularly), but in some other sub-sectors it is perceived (container feeder).
These perceived dislocations are building more immediate upside risk into the asset class, which is a positive that has been missed by many. In areas of actual overcapacity, with asset life averaging 20-25 years, the industry is fast approaching the halfway period of much of tonnage deployed around the time of the credit crisis. With ongoing low levels of profitability, there is a strong likelihood of accelerated scrapping of older or less well maintained vessels.

Adding to the pressures on financing for the maritime industry is the debate around the global trade fundamentals that drove much of demand, specifically whether the reliance on export-oriented strategies and the associated trade imbalances are correct. This is not helped by the collapse of asset inflation, the decline in debt-based consumer consumption, and new banking rules surrounding the financing of risk-weighted assets. This controversy will not be solved overnight. Therefore, no matter who the maritime tonnage owners are, they are going to have to change their approach towards finance in order to survive.

If you are a subscriber click here to login and read the complete article.  For more information about the JSFB click here  or contact us to learn more about Cornerstone’s research and service offering.