Download D-3205 FINANCIAL AND ECONOMIC CRISIS

European Community Shipowners' Associations
D. 3205/08
SF 1.320
FINANCIAL AND ECONOMIC CRISIS
Background
The financial crisis that originally started in the US has had through globalization of
the financial markets and the economy consequences never seen before. This
unavoidably had a strong negative influence on global economy and on trade
exchanges. It is evident that shipping – being the main transporter of global trade –
could not escape this strong slow down. Also shipping was carrying its own potential
difficulties and risks (over ordering).
The financial and economic press as well as the specialized shipping press have –at
least recently– paid a lot of attention to the situation. The shipping business leaders
and individuals also came up with some key points on the effects of the crisis on the
shipping industry and services. Some - very few indeed, the Chairman being one of
them - had also pulled the alarm quite some time ago, especially on the excessive
level of both ship orders and optimism. Some of the key points are listed below as
background.
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Decline in trade exchanges resulting in overcapacity
Cargo owners/shippers not getting letters of credit
Delay in payments by shippers/forwarders, with maybe worse to come
The dramatic decline in the charter market resulting in a reduction of book
value of ships.
Ships chartered in at booming market rates and now facing the dramatic
decline of charter rates as income.
Shipping companies in difficulties resulting in more mergers and consolidation.
The role of banks and the difficulties with ship financing by banks, in terms of
availability of finance, conditions, loan to value
Cancellation of building orders
Speculation on the market.
Paper market/derivates, a market of its own, not any more only a hedging tool
Psychological effects on the market
State intervention and possible threat of protectionism
Impact on the intended action on climate change?
Etc.
Against this background an open exchange of views could take place on the wrongs
and the rights and how the European shipping industry should react versus the
situation itself, but also in terms of communication versus the press and the general
public, politicians and authorities.
The following key points could be the basis for an exchange of views.
Speculation and purely financial strategy in shipping
Shipping has seen the last 5 years a boom period in many sectors with extremely
good performance which lasted for an unusual long time. This has led to speculation
with investments in ships and shipping not taking into account the cyclical character
European Community Shipowners' Associations
of shipping. This often resulted in investments and financing not taking into account
the basic task of the shipping profession i.e. offering services whilst making money
with it. This is based on a long term philosophy.
Questions
Will the consequences of the present economic and financial crisis make the role of
shipping business clear to investors and financial institutions (back to the basis) and
avoid speculation in shipping for the future?
Will banks and financial institutions in the future concentrate on genuine
shipping/transport projects brought forward by genuine and reliable shipowners?
Overcapacity
Speculation in a booming market, lack of appropriate projections, mismanagement
and eventually bad luck have lead to the ordering of ships at high prices due to full
order books at shipyards and booming prices of steel.
Due to the slow down of the economy and of steel requirements all over and
particularly in China prices negotiated for ships may not be relevant anymore today.
There are also cases where banks and financial institutions are not prepared to
finance orders that have been placed. All this may result in the cancellation of orders
Questions
Will the crisis allow our markets to avoid the building of ships for which there is no
economic purpose?
Will this to some extent avoid the feared overcapacity?
Is the overcapacity short or medium term?
Will many ships be laid up?
Will there be more scrapping of existing older ships?
Derivatives/Paper market
This market can be seen as a time bomb.
From the hedging tool it was created to be, it has become now a market of its own
where speculation and “trading culture” have overshadowed the original goals.
Questions
Should these derivatives markets be better organised and controlled? And how?
The long term health of the shipping industry
As a backbone of European, global and intra European trade shipping is there to
stay. The present slow down in the economy will of course have its effects on the
capacity of the services needed. Some companies may get into serious financial
difficulties. More mergers and consolidation may take place. However, the economy
will take up and at that time shipping should be there with the capacity needed.
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Hence investments have to be made to maintain the capacity and the know how
available.
Questions
Will reliable and long established shipowners survive the crisis and have the
necessary capacity and maritime know how available when the economy revives?
Will the profits made in the boom period be invested?
Will mergers or more consolidation improve the position of European shipping in the
long term?
Are measures necessary to maintain the global lead position of European shipping?
The effect of the financial and economic crisis of the Climate change
programme
The financial and economic crisis has resulted in some voices wondering whether
the programme on climate change should be maintained. Some even suggested to
review it or stall it.
This is a global issue of a very sensitive character.
Questions
Will politicians stick to their guns on climate change?
Will the climate change policy and the crisis result in more local production requiring
less overseas transport?
Will the consumer paying end line for measures on climate change be prepared to
do so when faced with a lower buying power?
What will be the influence of the energy/oil price?
The psychological effects on the market
The crisis no doubt resulted in reactions from banks, financial institutions, shippers
and consumers (general public) that are not always relevant. Such reactions often
result in the opposite of what one would have expected from it and do certainly not
contribute to solving the crisis.
Non provision of money from banks and financial institutions for sound business
projects occurs. Banks have become very cautious in opening letters of credit. Export
guarantees are questioned.
Questions
Is there a bigger role for the European Central Bank and the European Investment
Bank to improve the climate for investments and business?
Can the shipping industry do something to change the negative psychological trend
and to restore confidence?
Should European Shipping come out with a declaration of trust?
The press has very much contributed to create the above mentioned negative
psychological trend. Some shipowners went already public with statements to restore
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confidence by advising that their business has always been cyclical with good and
bad periods which they have taken into account in their strategic plans and
investments. They also declared to be ready for the future/long term when enhanced
services will be requested from them
On the other hand, denying the reality and seriousness of the present situation is not
the most efficient way towards a solution.
Question
Should the Board of ECSA send a message in this respect?
Should the responsibility of ECSA be to communicate realistically and responsibly,
i.e. half way between the two approaches?
18.11.08
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