I enjoyed your post ‘The shipping industry appears to be in trouble, environmentally and financially’ and despite having lots of actual work to do, kept thinking of comments I wanted to add. A couple of commutes later and I came up with the following, which I accept may or may not be of interest to you and your readers.
First, let’s be clear: you are not alone in basing your shipping knowledge on ‘The Wire’ Season 2, though many also add Captain Phillips or Pirates of the Caribbean to their list of generalisations.
There are some pretty good reasons why the public perception of shipping is as poor as it is. One is that the part of the industry that wants a better profile can’t agree on how to do it, but a much larger part just wants to be left alone to make money in peace.
Consumer products, those shipped in containers, are often the ones that get what profile is going, because the public can relate to sneakers or televisions moving from Asia to Europe or the US. They have a harder time picturing hundreds of thousands of tonnes of oil and oil products, iron ore, coal, grain, cement, steel products and countless minor bulks as they slip quietly around the world, keeping the building blocks of globalisation in place.
It’s probably good that the public doesn’t obsess about thousands of tonnes of raw materials but for some of us, it’s a topic we can’t avoid. The containerisation revolution is as old as the Cuban one by now but it certainly changed the business of moving goods (rather than raw materials) around.
The transport cost of shipping a T-shirt or a TV is these days not really the issue. What the lines lack is the means to come up with anything else as revolutionary as containerisation and still create a sustainable financial business model. Hence the casting around for new ideas which normally result in the building of more, bigger ships and the forming of alliances to cut out some costs.
I’m not sure why anyone, least of all Rose George, would want to ‘eliminate’ shipping – unless you are the kind of person who thinks that globalisation is a bad idea. There may be many, but sadly I think that ship has sailed. It’s certainly true that without shipping half the world would starve and the other freeze – what is less often admitted is that the hidden ‘half’ of that equation gets a shitty deal from globalisation. That isn’t shipping’s fault of course.
Shipping is in a financial mess and has been for seven years. It is highly cyclical and tied to economic cycles, which it either leads or trails depending on your point of view. In the years before 2008 shipping was so wildly profitable that some owners are still spending their money now, on more ships, naturally. What happened in 2008 was ultimately a flat line market where no-one could make money. By 2013 that had been replaced by a more traditional, volatile market that could support profitability if you know what you were doing.
For the container lines the situation is all but catastrophic, since they massively over-ordered into a slump that they have no way out of except scrapping perfectly good ships they haven’t fully paid for yet. And despite the fact that their results are a sea of red ink, the feeling is that the problems aren’t so bad as to order a general abandon ship.
But don’t confuse inefficiency with unprofitability. Yes if you’re a container line that fact that you can’t actually do the only thing your customers want (turn up on time with the right box, undamaged) is a little embarrassing. In other sectors, the inefficiency and opacity of shipping are advantages to be exploited, so there’s a lot to be said for it.
But yes, the financials, especially of the container lines are an issue. It’s hard to envisage another industry in which shareholders would be so prepared to put up with such poor performance. This is in part because many but not all lines retain family ownership alongside a public equity market portion.
The problem is that many are still thinking in pre-2008 terms. Instead of recognising that there is a liquid, volatile spot market, they prefer to contract for cargo at a loss then try to impose surcharges or even bounce unprofitable cargo that they have already booked if the market improves even slightly. Given that all lines do broadly the same thing, the logical move would be to accept that they are price takers rather than setters and focus on improving service.
Instead they are doing the opposite, building ships capable of hauling 18,000 boxes, some of them profitably, while cascading smaller tonnage into other trade lanes and slowing the average ship speed to maintains schedules. These guys aren’t stupid, they just play with a limited deck.
Alliances only take away some of the pain, as bulk pool operators will also tell you but it’s incorrect to say profitability is being affected by environmental regulation. The cost of clean fuel regulation is steep but owners can afford it and in some cases will either pass the cost on or get the charterer to pay. Technological fixes are growing too as are options for cleaner, future fuels.
I must also take issue with the idea that the 16 largest ships in the world create as much pollution as all the cars. To paraphrase Frank Zappa talking about censorship, there’s a word for that where I come from. As Ms George has pointed out many times, shipping carries 90% of everything. It does that for a share of the global carbon budget less than 4%. Cars don’t carry cargo, at least not enough to do anything useful with.
So yes, we ‘clearly need shipping’ but we probably don’t need to worry too much about the marginal cost of delivered goods. Supply and demand would suggest that, as consumers we play a role in determining whether a shipping company is doing its job right. The fact that there are too many of them should be a wake-up call to shipowners, their bankers and backers.
In terms of future sustainability, shipping as ever is at the mercy of global financial and fiscal policy as much as it is changes to standards of living. Does the US sell all the shale gas as fast as it can produce it or does it take a sustainable long term view? Does it start exporting crude oil which would require a change in the law? Does its economy remain strong enough to support sustained consumer demand? Does any of that matter compared to what will happen in Asia over the rest of this century?
The re-shoring phenomenon began in Asia before 2008 as shipping costs rose beyond what some cargo owners wanted to pay. That was a fairly temporary effect but the longer term one is the search for even lower cost base manufacturing than now ‘expensive’ China; into South East Asia for example. In future this will probably be Africa. though eventually that will become expensive too.
As long as the markets are distant from the manufacturing base, there will be a shipping market but it will continue to change shape just as it always has. The short term issue is whether the industry really is ‘financially shot’.
Yes profitability is very patchy depending on which sector you are in, as well as being at the mercy of a fragile global economic recovery, but there are also vast amounts of (often US-controlled) money washing around the industry. This PE and investment fund money has come in to take the place of traditional bank lending but the question is why? Not because of the poor state of the container market, but rather because shipping is one of the last pure markets where it’s possible to profit in bad times and good. Oh and don’t worry too much for the master of that big boxship in the bay. He’s in such demand his salary has never been higher and it’s also tax-free.
Shipping is sustainable in the sense that it has grown over thousands of years into a massive and (in cargo-carrying terms) highly efficient industry for redistributing goods from one place to another. No, shipping will never disappear, nor should it. But a little more consolidation, transparency and accountability probably wouldn’t hurt. I’m not holding my breath on any of those counts.
Perhaps the question we really should be asking, since we are in the blogosphere rather than the real world, is how sustainable it can be to continue to extract finite resources and either make them into something near to where they lie or move them around to do that. Consider that issue and we might get some insight into how much the true cost of shipped goods is being paid by civil society, rather than simply by shippers, charterers, end users and consumers.