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A Bang And A Whimper (Macro Macchiato)

November 11, 2019


2019 looks like it may go out with a bang and a whimper. Around the world significant political events are afoot, giving us the bang. Many of these political events are depressing shipping demand, giving us the whimper. 


Starting with the US is a no-brainer. As the Democrat-controlled House is developing its case for impeachment, those elements of the media opposed to Trump clothe each new revelation in neon indignation. But when Trump’s ambassador to the EU about-turned and agreed last week to testify at the impeachment hearing, a sharp intake of breath could be allowed. Trump himself had praised Ambassador Sondland when he had earlier declined to testify. On Friday, Sondland remembered discussions in which aid to Ukraine “would likely not occur until Ukraine provided the public anti-corruption statement that we have been discussing for many weeks.” That bland statement has been interpreted as an admission that the Trump administration sought political gain from US foreign policy. Trump distanced himself from his former donor, saying “I hardly know the gentleman” – his standard defence against turncoat former associates. 

 

The relevant issue here is that the US president could become a lame duck before the end of his first term.  Any foreign government involved in negotiations with the US – China, Japan, Canada, Mexico, the UK, the EU, Russia, Ukraine – faces a shrunken State Department and a President who is preoccupied with circling the wagons against Elizabeth “Pocahontas” Warren and her braves in Washington DC.  This far into Trump’s first term, it makes sense to delay closing negotiations until after the 2020 US Presidential elections because who knows what American signature will be on the bill that concludes any negotiations? Interlocutors would be well advised to be like the Chinese and take the long view. Trump himself said on Friday that he has not approved any tariff-rollbacks, a precondition for further talks according to Chinese negotiators, which looks like stalling tactics to me. It’s a case of move along, nothing to see here. 

 

China meanwhile has more urgent business to attend to in Hong Kong, where this morning police shot an unarmed protestor three times at point-blank range while hundreds of people filmed the event on their smartphones. This is a serious escalation. The Chinese government may view Hong Kong as a purely internal affair but the “Special Administrative Region” remains an international trading centre and entrepot for South China. International firms with offices in Hong Kong must be reappraising their physical and political risks on a daily basis.

 

Other nominally more liberal governments have to grapple continuously with trying to find a workable policy for trading with China while feeling uncomfortable with its social credit system, its policy towards Xinjiang, and its approach to Hong Kong. These are all connected. The US Treasury Department blacklisted some of China's most valuable artificial-intelligence start-ups last month over their role in surveilling Uighurs in Xinjiang. One of them, Megvii, filed for an IPO in Hong Kong in August. This morning’s shooting suggests that Hong Kong is not going to calm down, but that the situation will worsen.

 

Nearly 20 Million TEU pass through Hong Jong each year. Disruption is already impacting its container trade. Hong Kong port volumes for Jan-Sep 2019 were 13.68 Mn TEU, down 6.5% year on year following a 5.6% fall last year to full-year throughput of 19.6 Mn TEU. The four major terminal operators in Hong Kong now co-operate to defend their position. “We share revenue, we share cost, and we share profit” says Peter Levesque, CEO of Modern Terminals. Attempts to reverse the decline in throughput could be hampered by the ongoing trade war with the US, the situation in Hong Kong and other political risks. HPH, in a recent note, says, “Global trade remains sluggish due to intensifying trade tensions and slowing manufacturing and business activities…Elevated geopolitical and economic risks and uncertainties, including a no-deal Brexit and potential for the escalation of tension in the Middle East stymie the global economic growth.” 

 

Indeed, Brexit, the Middle East, the situation across Latin America, instability in North Africa – all can stymie global economic growth and thus depress demand for shipping in what remains a chronically oversupplied market for all the major cargo types – dry bulk, oil, gas and containers. 

 

THE TAKE AWAY 

 

 

The ship finance magazine Marine Money reported last week that "Shipping and offshore took in just $6.2 billion in capital market proceeds during the first three quarters of 2019. Simply put, this figure is less than half of the next lowest total of the last 10 years.” While ship owners may be grateful that oversupply is being held in check, the lack of investment points to a wider caution.  A lack of successful IPOs globally, including Aramco’s on-off sale, add up to what Forbes magazine calls “the year of listing dangerously.” Shipping relies on global economic activity which is created and sustained by new investment. While the political situation in many countries may be explosive, investors’ gunpowder is decidedly damp. That could lead to an underwhelming end to the year. 

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