John N. Faraclas’ November 11 2010 presentation.
Ladies and Gentlemen, thank you for being here and please note I am not here to defend my past accurate prediction of the Market Collapse in 2008 in this very room on the 23rd of October 2008. I am here to tell you, and I hope you and others not present this time, listen to my fortune telling and avoid losses which affects us all! I am indebted to RINA and IMarEST and in particular to Jonathan Morley for agreeing in having this debate exactly two years later. I am not happy that I have predicted the fall of the market, which was included in my assessment about the total collapse of the World’s Economy in my reporting articles as a Journalist for 13 years. I did gave the figures/level, between which the Market will be in the sort/medium term and yes, contrary to what people thought when they’ve heard them and when the Fairplay magazine printed same, they are absolutely above my expectations; even if I say so myself, to use this lovely English expression! Ladies and Gentlemen, we are living in interesting times, this is the beginning of the hard times ahead and only remedy-wise I will try to say a few things to save the day! Now as said here is the quote from Anja Carl the then Markets Editor of Fairplay, issue 6th of November 2010: she wrote: …“ the Baltic Dry Index might recover towards 3, 000 points in the medium term, but will not regain May’s high of 11, 793 points” opined John Faraclas….”; of well then! Moreover Ladies and Gentlemen I’ve got a Copy from SHIPPING’s July 2008 issue (5th of July 2008) explaining in my column “Recap” of what is to come in September 2008 not only for Shipping, but for the world economy at large. And this come true too! There was also an indication I’ve made back in the Athens in April 2008 at the UK Club’s Grand Bretagne reception.
Shipping is different, Shipping needs special institutions and ideas (and I will come to these issues at the second part of my speech) and predicting its future…oh well this is a very delicate task! I am coming straight to the first issue, that of the Market: The Market? Still unsustainable in this “globalised” world. As mainstream economists attempt to tackle the causes and impacts of globalization, international transport is re-entering the debate on trade models and obviously development theories. Transport undoubtedly belongs to the most complicated and therewith fascinating economic sectors!
The Shipping Markets in my view, can be divided in four sectors or periods if you like: The 1870’s – 1940’s being the longest period of conformity with the then reality, the struggle of the Empires to dominate the World producing TWO World Wars, the 1940’s to 1970’s where the product of the II World War was the long period TC’s of the 50’s, and the 60’s to rebuilt the World, the 1970’s to 2000’s where there was a forced political trade and transport change due to the closure of the Suez Canal and major advancement to shipping technology of all kinds, and finally the 2000’s to 2030’s where the entry of new kids in the block and the possible change of guards, vis-à-vis which country will be the superpower, these 30 years case will, as you can understand be influence or influenced (whichever word you prefer) by many changes in technology, enormous economic pressures including of course monumental changes in commercial practices, environmental pressures, cultural changes, not to mention continued changes in political attempts to regulate and control the shipping industry including the human resources factor, security changes particularly the effect of September 11 2001, and, wearing my shipbroker’s hat, I must confess that the most important ingredient, the most important issue affecting this period of the market, is that of the economic life of a vessel, the vessel – the means of today’s transport! The vessel and its values. I mention values, as with the high volatility over the last five to seven years, in the space of few months, the market value of a ship can change by million of dollars!
Now the Shipping Cycles do match more or less these four sectors, I mean periods as said previously: The 1869 to 1914, the 1919 to 1938, the 1945 to 1975 and the 1975 to day and as said until 2030. The Structure theory say of ships values follow from the difference in the remaining economic life of a ship and I strongly believe to the fact that we have to assess the length of this remaining active life of a ship. Obviously that includes both the chance and change of technological obsoleteness, political decisions that may render the ship obsolete and gaining knowledge on what influences decisions on when to scrap her as she approaches the end of her economic life! Another issue is the real and auxiliary markets where ships in my view became a speculative tool and assisted by the banks, err sources of money, and have now, as we speak, detrimental effects!
Now did I hear you say Cycle? Ladies and Gentlemen, please delete this form of expression from your Shipping business lexicon! A cycle “was”, I mean “is” an interval of time during which one sequence of a regularly recurring sequence of events is completed. The norm of a cycle is defined by its Amplitude which is the distance from peak to trough, and its Frequency which is the distance between two peaks or troughs as we say in the cycle. See the latest Indices from the Baltic Exchange and you can clearly see what I mean.
1, 2, and 3 slides/graphics: (The BDI 1985 to day, the BDTI and the BCTI of 2000 to 2010 and finally the BDI 23/10/2008 to day). Volatility as you can see is once again the name of the game!
There are no cycles as such any more as same are being influenced by intervening issues, particularly politics. Politics and politicians brought the world to a standstill as you may think in 2007 today. No, I am sorry, but the tough times begin now. There is no remedy to stop the social upturn on a world wide basis; this, coupled with the religious aspect and the lost of social cohesion will create havoc! I can assure you that not even in your wildest dreams you have ever imagined what is yet to come! Let me give you an actual account of what is happening, and bear in mind I am an optimist:*
1) How many of us have ever thought the linkage between International Trade and Poverty Reduction? International Trade can play a major positive role in reducing poverty in the Least Developed Countries. However Ladies and Gentlemen this is not happening in many of them. In some this is due to a weak trade performance. But most of the LDC’s achieved much higher rates of export growth in the 1990’s than in 1980’s. The failure of trade expansion to lead to poverty reduction has been related to weaker linkages between trade and economic growth than in the more advanced developing countries. Moreover there is a tendency for export expansion in very poor economies with mass poverty and few surplus financial resources to be associated with an exclusionary rather than inclusive form of economic growth. Civil conflicts in some of the LDC’s have been associated with immiserizing trade. A report compiled by UNCTAND showed that most LDC’s undertook deep trade liberalization in the 90’s. They also received some degree of preferential market asses from developed and developing nations. But trade liberalization plus enhanced market access does not necessarily equal poverty reduction. I guess that these LDC’s are in the paradoxical situ that they are the ones needing the multilateral trading system the most, but they find it hardest to derive benefits from the application of its central systemic principals: liberalization and equal treatment for all its members. If we do not look after these 50 nations, their troubles will spiral and spill over to their neighbors, and given the synergy effect the spillage will affect developed countries in their periphery and the world at large! There will be shortly 100 LDC’s, back to square one!
2) Today we have a total of US$ 200 trillion of financial assets, an unthinkable figure
3) The world GDP is around US$ 60-65 trillion, yet we are bankrupt.
4) The Credit card debt is around US$ 8-10 trillion ….. the real time bomb of the world economy and it could be even higher. I guess that we must create a two-tier banking system services: that of the affluent and that of the masses. Otherwise I am sorry, the armies of the poor and displaced people will break down everything.
5) The Superpower’s national debt is US$15 trillion and it could be as much as US$ 100 trillion based on unfunded liabilities. So Ireland, Greece, and other countries in reality are fine. There are many countries already bankrupt!
6) I have estimated that the World fleet delivered and order book are about US$ 2 trillion. Who regulates the shipbuilding industry? Who took the industry to the Far East and why? Conversely, who wants Europe to suffer as well as other shipbuilding nations?
7) Climate change and the environment will cost about US$ 10 trillion (first phase).
8 ) ASE (Alternative Sources of Energy) will become a necessity.
9) China is predictably unpredictable. Bravo to the Chinese, they know the way. China is not on any count a paper tiger like most economies in the Far East.
10) Piracy and Terrorism 10a) The New Panama Canal
11) Once again I believe that all chartering transactions should be through the Baltic Exchange – in this way a better, a full picture of the market will be available. Correct me if I am wrong!
World Shipping Politics
As mentioned in the beginning of my speech, I said that Shipping needs special institutions and ideas! Above all it needs to have the right person in the right position, be it a simple citizen or a minister!
1) I reiterate my view that in Europe we must have one class and one registry! Why say we have the directives? Why we had the famous infamous 7th European Directive on the Shipbuilding? Why not have one class that will ease the competition amongst Class Societies or even in P and I Clubs and enhance safety? Why some people speak about a cartel in Class Societies? Are they wrong? Can you imagine if Greeks opt for the Hellenic Register of Shipping and given their 22 centum stake in Shipping, if 5 percent of their Greek owned fleet goes to Hellenic Register? Or a Hellenic P and I Club!
2) We need all nations to have the same title in the respective ministries, a much needed structure. Let’s start in Europe. This is another must! Avoiding same will continue to create chaos!
3) We need to have the same procedures in the Ports and Terminals saga, i.e. on Acquisition, Privatization etc etc. Same applies for the Marinas!
4) We need the lifting of any cabotage-style measures worldwide.
5) We need to have a financial body as an instrument to control lending, in particular in Shipping Finance. If an owner defaults the banks take over the vessel. If a bank defaults what is happening??? What is the position for the shareholders? What risk assessment was there to safeguard the banks and their shareholders? The major mistake to allow banks finance en mass ships at high prices is one of the reasons of the state of the market. Speculation should have been curved. Competition, bad speculative competition brought the banks in this state!
6) Over regulation not so much needed. ON THE OTHER HAND…
7) Need to improve Maritime Education and Training, Mentorship. We need funds to poor in this field! If we need to raise the image of Shipping, its profile, we start from this as well as the pensioners! Special taxation for the seafarers. Shipping is the attainment of Money and Seafarers. IMO’s year of the Seafarer 2010!
8 ) Obviously we need to end the Piracy Saga. No excuses, these acts of specialist business to take place in 2010? This is no Piracy, this is commercial counter attack of deeper causes! Somalia’s 80 centum of income come from fishing. War zone yes, but not arm ships. “Pirates” have nothing to lose and will challenge the guards onboard!
9) Nationalism is ante portas and over-regulation will lead to fewer owners, bigger public companies, listed or not and national fleets, just wait and see!
10) Criminalization and Liability. Two more issues affecting the Industry. Why criminalize the seafarers? Unionism is another issue affecting the markets! And shipping politics too!
11) Terrorism too. If we let the graffiti glitterati paint our trains in the depos, or in the tube without being arrested when entering these depos, don’t be surprised if the terrorists blow us up! And finally,
12) Discipline in all aspects of life and in particular in sea-life! Does the word “shipshape” rings the bell!
Thank you and I am open for any questions you want. If I have left any matter out of my speech, that’s on purpose and you are more than welcome to raise same; I will reply! Today by the way it’s the liberation of my Island of Chios in 1912 from the Turkish yoke. This was merely done via Shipping, as well as the Greek Revolution of 1821, thanks to Masters of the Industry!
Note for readers of this site: The Audience clap as they thought I ha finished, I said “thanks” and then I said: “No, I haven’t finished, I have to tell you a few words on two issues, the one is that whilst I was speaking in the very beginning of my speech, I said that I am an optimist and some of you wondered, well, indeed I am on optimist, my third wife is present here and she can tell you how optimist I am, after all a third marriage is the triumph of hope over experience (Note: the audience clap in appreciation and some say wooow, and other friendly comments) and secondly, briefly I want to tell you of how biased is the press. Most of them are ignorant of how the industry works! Most of them and their political masters will saw you sea-birds covered with oil at the coast say of Spain from the Prestige fiasco, a very set up case!!! Where was the port of refuge? Why saw all this with the Spanish King attending? I said to King Constantine to advise King Juan Carlos to avoid all these nonsense! Do the press saw you dead bodies of seafarers when an accident happens? No, they don’t!
Thank you once again, thank you all yet again for the opportunity to reply to your questions!
Note: There were questions on:
a) Where will the index will go? and I replied that there is not a matter of where the index will go but a matter who will survive. Those who will survive will be those with capable shipbrokers who will fix the well placed owners’ tonnage
b) What I think of the LNG as a means of propulsion replacing fuel etc. I said it will soon be another issue which will affect the markets and yes I agree, it’s more environmental friendly and efficient.
c) Can the economy come back to a better level? I said so long as politics dictates the economy and scandals are around and scandals looming in the background, I do not see an early exit from the catastrophe that begins.
d) Will the index, the Baltic Dry Index go below the 663 points as in December 2008? Well, temperatures not only drop below zero, but can “break” the thermometer…. I am sure you guess what I mean
e) Will the world economy get better? I said, we have entered – over the last four years, World War Three, an economic war, and so take cover. The 1929 – 1933 collapse in the US will be repeated in a worse form, and people will take to the streets; I said it, there will be social upturns, just wait and see.
* This presentation took place at the auditorium of Lloyd’s Register of Shipping organised by RINA and ImarEST London Branches.