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Pulling Rabbits from Hats

Kung Hei Fat Choi! It's the Year of the Rabbit, and China in particular could do with some leporine energy given the recent news about its demographics. A fall of 840,000 souls in 2022 is part of long-term demographic trends but also an effect of the pandemic resulting not just in more deaths but also in a lower birth rate as uncertain young folk wait to start a family. The Covid baby crunch is a global phenomenon, repeating reductions in the birth rate recorded during the 1918 flu epidemic, the Great Depression of the 1930s, and the Global Financial Crisis of 2008-09. China's Covid death rate will probably peak this year as the nation has, like developed countries in 2021 and 2022, decided to opt for opening up and economic growth rather than perpetual and pointless lockdown.

China's Covid Timeline. Source: Worldometers

China's GPD growth of 3.5% for 2022 looks like a suspiciously convenient number and I suspect that growth was lower, though I and other sceptics have no way of proving that. The government has announced a raft of policies to support the construction and real estate industries in particular in 2023. China's four-decade long process of urbanisation may be maturing - the country no longer moving a million people to the cities every six weeks as it has for years. This isn't however the end for city building. Focus will now move to infrastructure like railways, mass transit systems, airports, hospitals, and the like, joining all the new urban locations together into clusters often called megacities. I expect GDP to recover to something like 5% this year.

China Urban Population as % of Total. Source: Statista

If 5% GDP growth feels toppy to you, then consider news from the International Monetary Fund which said on 31 January that global growth has proven to be "surprisingly resilient." The IMF has increased its growth estimates for 2023 and has suggested that the global economy may be about to turn a corner into a period of stronger growth - all apart from Brexit Britain, where the ex-Finance Minister was found to be fiddling his taxes to save millions of pounds and 60% of respondents to a recent survey wanted to re-join the EU. The government will have to perform magic tricks to claim any benefit if economy should move into growth. Short of policy rabbits to pull from hats, they could always just lie, as they have become quite good at that.

The global economy, says the IMF, will grow at 3.2% in 2023, which is pretty much back to the long-term trend and a sizeabel upgrade on its last forecast of 2.9%. The causes are said to be the improvement in European economic prospects as energy prices fall and the reopening of China. The US meanwhile continues to defy growth expectations and its labour market remains strong. There are good jobs available to support consumer spending, which will support containerised trade across the Pacific, while higher growth in the EU could support demand on the headhaul Asia-Europe container trades. Perhaps that’s already showing up in freight market data; the Freightos Global Container Index increased 2% in the last week to $2,214. That small increase has halted the dizzying fall from the September 2021 peak of $11,109 and it’s still ahead of the long-term average of around $1,400.

Container Freight Rate Slide has Halted. Source: Freightos

Growth in demand for Asian manufactures is probably good news for bulk commodity and energy imports into China in 2023, though I think that the effect could be muted in the first half of the year as the Covid caseload peak coincides with the Lunar New Year holiday. A reduction in worked days due to illness will hold back any recovery, perhaps until the second quarter, and possibly until the second half of the year. The chatter at Marine Money in London last week suggested that many owners in in the dry cargo market believe that earnings will have to rise, if only to redress the imbalance between ship values and income. The ratio between the two has widened considerably as bulker freight markets have corrected but prices have remained high. Older ships' values are supported to some extent by high scrap prices while younger ships' values are supported by high newbuilding prices.

If you want to order a bulker you won't see it in all likelihood until Christmas 2025, making it probably one of the last generation of ships with traditional fuel oil engines and a full 25 year lifespan before the IMO's emission abatement ambitions move to net zero around 2050. Investment in alternatively fuelled ships – and the low-carbon fuels to power them - is going to have to increase soon, or the IMO's ambitions will be busted decades before their deadline, simply due to a lack of global shipbuilding capacity, and a lack of the low-carbon and zero carbon fuels. That's why I'm working with companies like Carbon Neutral Petrol Ltd which has a patented process for synthesising methanol, diesel and other fuels by capturing CO2 and combining it with hydrogen. Synthetic fuels don't require us to rebuild the entire global fuel infrastructure - we can use the oil and gas infrastructure currently in place. If you want to know more, check out the Carbon Neutral Petrol Ltd website or contact me.

All in all, the year has started on a satisfactory macro-economic note. Shipping markets might not be brilliant but they are acceptable for most owners, while very firm newbuilding prices (A $125 million VLCC anyone?) may deter speculators and keep fleet growth in check (except for container ships!). All we need now is a cessation of fighting between Ukraine and Russia and we can breathe a collective sigh of relief and get on with some longer-term planning. While we wait for that, let me wish you a healthy and prosperous Year of the Rabbit. Xin Nian Kuai Le!.

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