Tom Foremski: IMHO

The Global Shipping Halt: Is The Great Unwind Disrupting The Freight Market?

By DK Matai

Freight shipping prices for transporting dry raw materials have collapsed in November 2008. The Great Unwind is like a Tsunami that is engulfing and halting the shipping world at an accelerating rate. The Baltic Dry Index sounds like a weather report, but what it really does is track the price of shipping bulk cargo — such as coal, iron ore, cotton and grain. Recently, the Baltic Dry Index has fallen through the floor. It has slumped by nearly 95% over the past five months. In real dollar terms, at the peak of the market in June, a 170,000-tonne Capesize bulk carrier cost USD 233,988 to rent. Recently, it was available for USD 4,793 - that is a crash of 98% and is below the cost of paying for crew, insurance, maintenance and lubricants. Why?

1. Of the USD 13.6 trillion of goods and materials traded worldwide per annum, 90% rely on letters of credit or related forms of financing and guarantees such as trade credit insurance. International shipping works on “letters of credit.” These financial guarantees are issued to buyers of bulk cargo by their banks. This system has greased the wheels of global trade for the last 400 years by transferring payments internationally from buyer to seller once shipments have been delivered. With the collapse of the credit market - and banks now sitting on their hands, refusing to lend - the fast-moving wheels of global shipping have come close to halt.

2. There is a collapsing demand for credit driven expensive product purchases like cars and as a consequence, the transport of associated raw materials and sub-assemblies. Auto sales are falling in double digit percentages across most of the G7, ie, the US, Japan, Germany, UK, France, Italy and Canada. The pace of car sales growth is slowing down across most of the remaining G20 nations as well, including China and India.

This is a massive disruption in the freight market with asymmetric consequences for world trade, which poses systemic risk for many nation states. Liquidity has to return because if there is insufficient money to provide standard finance, world trade is being sharply cut back and economic growth is not only stalling but likely to implode. If cargo trade stops, a whole lot of supply chain disruptions start. For example, if the iron ore does not go to the refinery, there is no plate steel. If the plate steel does not get shipped, there is nothing to fabricate into components. If there are no components, there is nothing to assemble in the factory. If the factory closes the assembly line, there are no finished goods. If there are no finished goods, there is nothing to restock the shelves of the shops. If there is nothing in the shops, the consumers cannot buy. If the consumers cannot buy, there can be no sales!

On a more sobering note, if bulk shippers cannot buy cargoes, then a lot of US and world grain could end up rotting in warehouses while big portions of the world go hungry. For example, the Saudis are the biggest importers of food in the Middle East. They probably have the money to pay cash for their food shipments and may not therefore need letters of credit. But for the approximately 2.7 billion people in the world who spend 80% of their income on food, a disruption in the global shipping trade could mean the difference between quiet poverty and going hungry day-in, day-out. That will not last for long before there is social disorder on a massive scale.

The Baltic Exchange based in London is the world’s leading maritime marketplace. Their dry index, a measure of shipping costs across different ship sizes, hit a record high of 11,793 points in May but has since fallen by 93% to 815 points last week. The UN Conference on Trade and Development (UNCTAD) has said that the financial crisis had begun to affect international trade, noting sharp falls to key shipping indices. Much lower shipping costs mean national markets are more contestable by foreigners, which should limit the ability of domestic firms to raise prices and therefore this should reduce the possibility of inflation. We can safely conclude that the majority of The Great Unwind’s forces moving through the markets now seem to be deflationary, and not inflationary.

The ravaged worldwide demand for cargo ships is due to the chronic global financial crisis affecting credit availability, an unprecedented synchronised economic downturn across most of the major national economies in the world caused by massive demand destruction, and the resultant collapse in commodity prices. At the same time, container rates in the Asia-Europe routes have plummeted by around 75% this year and a price war between companies seems to be driving rates lower and lower, destroying the profitability of container shipping and placing huge stresses on companies struggling to meet their commitments. A significant component of the dramatic decline in shipping indices has been due to the difficulty in arranging trade finance during the credit crunch. Demand has been slashed because the global credit squeeze has made it very difficult for buyers to attract funding. At the same time, perceived counter-party risk in the physical markets has slowed trading to a trickle, exacerbating the freight slide. Many big players involved in the shipping of dry commodities and goods cargo are unwilling to trade with some parties fearful of their financial footing. There are big chains of owners of the chartered ships in the supply chain, so if someone goes bankrupt half way through the chain, it has a knock-on domino effect for everybody else. Another problem is that there are quite a significant number of players walking away from cargoes at present. So anyone who has taken cargoes to hedge the vessels they have chartered is now finding themselves with the ship without the cargo to carry.

ArcelorMittal, the world’s biggest steelmaker, on November 5th said its global output will decline by more than 30 percent. Cia Vale do Rio Doce, the world’s biggest iron-ore producer, said last month that it will cut production.The fall in demand for many raw materials, which began at the beginning of June, first squeezed the profit margins of producers since they faced fixed high raw material costs and falling prices for their finished products. This was followed shortly by a squeeze of freight costs as they tried to pass the pressure from the profit margins to the freight market. One could be forgiven for not noticing what the world has experienced in recent years by way of an unprecedented growth in shipping and shipbuilding, fuelled by cheap imports from Asia and the seemingly unstoppable rise of economies such as China and India with their insatiable demand for raw materials. For some time charter rates went through the roof and reached a zenith in May/June this year and demand for new ships out-stripped supply. A different picture is now emerging. Companies are starting to struggle with too many ships chasing ever decreasing rates.

This slump not only means a fall in revenues but also less revenues to service debts. In turn, the current ‘credit crunch’ means extreme difficulties for struggling shipping companies seeking to raise capital. UNCTAD revealed in its annual maritime transport review that the world’s merchant fleet had expanded to a record 1.12 billion deadweight tons, with the order book for new vessels reaching a peak of 10,053 ships in 2008. However, from mid-2008, companies were cancelling new ships on order, even when they were losing their 10% deposit in tens of millions of dollars. Mitsui OSK Lines (MOL), Japan’s largest bulk shipping company is said to be considering laying-up and even scrapping vessels as revenues collapse. MOL may mothball some of its largest vessels. The company is considering scrapping seven of its Capesize dry bulk ships from its fleet of a 100 vessels. This suggests that MOL may be getting ready for a protracted down turn lasting several years. Reports are already filtering through of companies seeking sheltered waters to lay up their giant vessels to weather the financial storm. Just as in the days following the oil crisis in 1973, we could see the same happening with the great lumbering bulkers and container vessels, which now seem less and less attractive as they ply the waters with their great bellies less than full. In the space of less than half a year we have seen the shipping world ride the crest of a massive globalisation expansionary wave and then plunge into a financial storm that could sweep most vessels off our oceans, and with them, companies who cannot weather the crisis caused by The Great Unwind.

We welcome your thoughts, observations and views. To reflect further on this, please respond within Facebook’s ATCA Open discussion board.

Best wishes

DK Matai

Chairman, ATCA Open

– ATCA, The Philanthropia, mi2g, HQR –

This is an “ATCA Open and Philanthropia Socratic Dialogue.”

The “ATCA Open” network on Facebook is for professionals interested in ATCA’s original global aims, working with ATCA step-by-step across the world, or developing tools supporting ATCA’s objectives to build a better world.

What Yahoo needs, say management recruiters and analysts, is someone with the profile of Hewlett-Packard (HPQ) CEO Mark V. Hurd. A low-key operating wizard from the relative tech backwater of NCR (NCR), Hurd has managed to turn around HP in the three short years since he joined. In fact, one source close to the search says Yahoo isn’t ruling out an executive outside the Internet realm. “You need someone who doesn’t have the ego of a rock star,” says Dona Roche-Tarry, a partner at executive search firm CTPartners. “But the new person would need the strength of character to stand up to Yang and the board.”

Global Humanitarian Recipient 2008

Dr. Muhammad Yunus For more information Global Humanitarian View 2008 Global Humanitarian Press Release

Professor Muhammad Yunus, pioneer of microcredit and founder of Grameen Bank, is the recipient of the 2008 James C. Morgan Global Humanitarian Award. Dr. Yunus will accept this distinguished honor during The Tech Awards Gala on November 12, 2008 where he and 25 innovators from around the world will be celebrated for applying technology to solve the most urgent issues facing humanity.

“For more than three decades, Muhammad Yunus’ broad vision, creativity and leadership have improved the lives of millions through innovative, micro-financing practices,” said Mike Splinter, president and chief executive officer of Applied Materials. “We are pleased to honor Muhammad Yunus, whose selfless mission and ability to inspire others to take action exemplifies the spirit of The Tech Awards.”

Often referred to as “the world’s banker to the poor,” Yunus developed a benchmark microcredit application through his Grameen Bank which allows the rural poor access to micro-loans for entrepreneurial enterprises such as purchasing livestock and procuring weaving materials. Yunus’ vision of a world without poverty has been the inspiration for his life’s work. Yunus and Grameen Bank were awarded the 2006 Nobel Peace Prize for their significant contributions in the field of microcredit.

In 1976, Yunus determined that a mere $27 loan could transform the lives of many of the poorest villagers in Chittagong, Bangladesh. Since then, under Yunus’ leadership his bank has provided more than $6.8 billion in small loans to would-be entrepreneurs who conventionally would not qualify for such loans from traditional banks, the majority of whom are women in businesses such as street vending and farming. Today, Grameen Bank operates 2,499 branches in more than 81,000 villages throughout rural Bangladesh.

2008 Prize Laureates

Laureates 2008

Intel Environment Award Laureates

Accenture Economic Development Award Laureates

Microsoft Education Award Laureates

Katherine M. Swanson Award Laureates

The Health Award Laureates

The Tech Awards: Technology Benefiting Humanity, presented by Applied Materials, Inc., is one of the premier annual humanitarian awards programs in the world, recognizing technical solutions that benefit humanity and address the most critical issues facing our planet and its people. Each year, the program honors 25 global innovators (Laureates) who are applying technology to benefit humanity in five universal categories: Education, Equality, Environment, Economic Development, and Health. Although The Tech Awards program is year-round, it culminates each November in a black-tie Gala event, where five of the 25 Laureates—one in each category—will receive a $50,000 cash prize. The 2008 Gala is on November 12 at San Jose’s McEnery Convention Center.
In addition to the 25 Laureates, The Tech Awards also honors one individual each year with the James C. Morgan Global Humanitarian Award, sponsored by Applied Materials. This individual must be someone whose broad vision and leadership are helping to address humanity’s greatest challenges. The 2008 recipient of this award is 2006 Nobel Peace Prize winner and micro-lending pioneer, Muhammad Yunus.
For more information on the Gala or The Tech Awards program, or to nominate someone for the 2009 program, visit www.techawards.org.

My own job security (4%)
Laying off employees/poor morale (34%)
Missing the sales forecast (43%)
Running out of cash (67%)
Competition (15%)
Nothing, I sleep like a baby (14%)
Other (16%)

Which of these concerns you the most

My own job security (7%)
Laying off employees/poor morale (10%)
Missing the sales forecast (18%)
Running out of cash (56%)
Competition (4%)
Other (5%)

The Eight Bubbles: What are the Numbers suggesting?

There is a rising myth of the single bubble which suggests that The Great Unwind — manifest as the global credit crunch — is essentially about subprime mortgage default, a USD 1.5 trillion challenge. The truth is that there are as many as eight bubbles at play which are in the process of bursting, taking the form of deleverage on an unprecedented scale. Even 1929 pales in comparison. At a recent ATCA roundtable we posed the following questions for Socratic dialogue:

I. If the Dow Jones Industrial Average has fallen from above 14,000 to below 9,000 as a result of the subprime mortgage bubble collapse, ie a 5,000+ points drop or 33% decline, where will the equities market reach by 2010 as other larger bubbles burst?

II. If the world government bond market is around USD 30 trillion, how can governments rescue the eight bubbles bursting step by step with an ever larger quantum and momentum? What ought to be the focus at Bretton Woods II starting November 15th?

There are at least eight bubbles in play worldwide and their approximate scale is as follows:

1. Subprime Mortgage linked Loans and other Assets (USD 1.5 trillion);

2. China, India, Eastern Europe and other Emerging Market Loans (USD 5 trillion);

3. Commodities (Commodity Derivatives at about USD 9 trillion);

4. Corporate bonds (USD 15 trillion);

5. Commercial (USD 25 trillion) and Residential property (USD 50 trillion);

6. Credit Cards Outstanding Debt (USD 2.5 trillion);

7. Currencies (Foreign Exchange Derivatives at about USD 56 trillion); and

8. Credit Default Swaps (USD 58 trillion) as a subset of all Derivatives (USD 1,144 Trillion).

In the ATCA briefing, “The Invisible One Quadrillion Dollar Equation” we discussed the main categories of the USD 1.144 Quadrillion derivatives market as quoted by the Bank for International Settlements in Basel, Switzerland:

1. Listed credit derivatives stood at USD 548 trillion;

2. The Over-The-Counter (OTC) derivatives stood in notional or face value at USD 596 trillion and included:

a. Interest Rate Derivatives at about USD 393+ trillion;

b. Credit Default Swaps at about USD 58+ trillion;

c. Foreign Exchange Derivatives at about USD 56+ trillion;

d. Commodity Derivatives at about USD 9 trillion;

e. Equity Linked Derivatives at about USD 8.5 trillion; and

f. Unallocated Derivatives at about USD 71+ trillion.

The relative scale of the world’s financial engine is as follows:

1. The entire GDP of the US is about USD 14 trillion.

2. The entire US money supply is also about USD 15 trillion.

3. The GDP of the entire world is USD 50 trillion. USD 1,144 trillion is 22 times the GDP of the whole world.

4. The real estate of the entire world is valued at about USD 75 trillion.

5. The world stock and bond markets are valued at about USD 100 trillion.

6. The big banks alone own about USD 140 trillion in derivatives.

7. The population of the whole planet is about 6 billion people. So the derivatives market alone represents about USD 190,000 per person on the planet.

Assuming a 10% conservative default or decline in asset value, this could be a USD 100 trillion challenge on the base of a Quadrillion. What are the likely outcomes? We are keen to receive your answers and solutions. Please note that the numbers quoted are a rough guide.

We welcome your thoughts, observations and views. To reflect further on this, please respond within Facebook’s ATCA Open discussion board.

The “ATCA Open” network on Facebook is for professionals interested in ATCA’s original global aims, working with ATCA step-by-step across the world, or developing tools supporting ATCA’s objectives to build a better world.

The original ATCA — Asymmetric Threats Contingency Alliance — is a philanthropic expert initiative founded in 2001 to resolve complex global challenges through collective Socratic dialogue and joint executive action to build a wisdom based global economy. Adhering to the doctrine of non-violence, ATCA addresses asymmetric threats and social opportunities arising from climate chaos and the environment; radical poverty and microfinance; geo-politics and energy; organised crime & extremism; advanced technologies — bio, info, nano, robo & AI; demographic skews and resource shortages; pandemics; financial systems and systemic risk; as well as transhumanism and ethics. Present membership of the original ATCA network is by invitation only and has over 5,000 distinguished members from over 120 countries: including 1,000 Parliamentarians; 1,500 Chairmen and CEOs of corporations; 1,000 Heads of NGOs; 750 Directors at Academic Centres of Excellence; 500 Inventors and Original thinkers; as well as 250 Editors-in-Chief of major media.

The Philanthropia, founded in 2005, brings together over 1,000 leading individual and private philanthropists, family offices, foundations, private banks, non-governmental organisations and specialist advisors to address complex global challenges such as countering climate chaos, reducing radical poverty and developing global leadership for the younger generation through the appliance of science and technology, leveraging acumen and finance, as well as encouraging collaboration with a strong commitment to ethics. Philanthropia emphasises multi-faith spiritual values: introspection, healthy living and ecology. Philanthropia Targets: Countering climate chaos and carbon neutrality; Eliminating radical poverty — through micro-credit schemes, empowerment of women and more responsible capitalism; Leadership for the Younger Generation; and Corporate and social responsibility.

A recent report by the UN has claimed that all the parties involved in the local civil war have been involved in the mining and sale of Coltan. One report suggested that the neighboring Rwandan army made US$250 million from selling Coltan in less than 18 months, despite there being no Coltan in Rwanda to mine. The military forces of Uganda and Burundi are also implicated in smuggling Coltan out of Congo for resale in Belgium.

. . .The main area where Coltan is mined, also contains the Kahuzi Biega National Park, home of the Mountain Gorilla. In Kahuzi Biega National Park the gorilla population has been cut nearly in half, from 258 to 130 as the ground is cleared to make mining easier.

. . .American-based Kemet, the world’s largest maker of tantalum capacitors, has asked its suppliers to certify that their coltan ore does not come from Dem. Rep. of Congo or from neighboring countries. Such moves could lead to “Gorilla Safe ” cellphones being marketed, much in the same way that Tuna meat is now sold as “Dolphin Safe”.