Dear Readers,
As you no doubt have noticed, there has been a big debate over the $600 billion for Ben Bernanke's "long-term treasury purchases". Here is a quick recap of the debate to date:
On the 3rd of November 2010 the Federal Reserve announced Round 2 of Quantitative Easing, purchasing $600 billion of long-term Treasury securities through the second quarter of 2011, forking out $75 billion per month through next June. A group of economists launched an "attack" on the Federal Reserve with an open letter to Fed Chairman Ben Bernanke (published in the Wall Street Journal and the New York Times), saying that this will "risk currency debasement and inflation". This decision has also raised some concerns with some of the U.S. trading partners, including China, Germany and Brazil, some of which are already battling inflation problems. The Fed's response was that the "plan" will always be amenable to change, depending on the effects it has on world markets.
So, the question for which you are all here: "What does this mean for shipping?"
$600 billion is a large amount by anybody's standard. It is highly likely that this huge influx of cash will devalue the U.S. dollar to some degree. This, of course, will affect anybody holding U.S. dollars, be they shipping companies "sitting" on cash for good purchase opportunities, or governments like China. As a broker friend of mine said "inflation is the enemy of idle or risk-averse money". Could this mean that shipowners will try and make use of that money before it loses value? Could we see a move for more vessel purchases while "their money is good"? On the flip-side, could we see the shipowner sellers holding out in order not to receive U.S. dollars before its devaluation? Many brokers are expecting vessel prices to finally come down and reflect the existing market. Could a combination of these 2 factors come to play, and we see an unchanged market, reflecting even more uncertainty?
This influx will also affect other sectors of the market, like Breakers and Shipyards. To use shipyards as an example, they are paid in U.S. dollars, but they pay their workers and suppliers in their local currency. A devaluation of the U.S. dollar will mean a decrease in their profit margins, since their expenses will remain the same. In order to keep their margins constant, they will likely raise the U.S. dollar price making the vessel more expensive to the shipowner "sitting" on cash. Could this mean that we will see more newbuilding deals in order to capitalise on the current value of their dollar? Even if they decide to ask for payment in their local currency, the effective increase in price will be the same to the buying shipowner.
Bernanke wanted to "move the economy" with this money. Both sides of the argument have valid points and only time will show the victor of the argument. However, will "rush" purchases be a good thing (i.e."Buy now before I lose my money!!!")?
I hope that this won't cause decision makers to make hasty decisions, because "he who hurries, stumbles".
Best Regards,
Theo Scholiadis - S&P Broker
Main articles used (list not exhaustive):
- Bernanke's Fed Sets Sail With $600 Billion QE2
[Site: Forbes.com] [Date: 03/11/2010]
- Fed's Bond-Buying Plan Faces New Assault By Critics
[Site: Los Angeles Times - Business] [Date: 14/11/2010]
- Open Letter to Ben Bernanke
[Site: Real Time Economics] [Date: 15/11/2010]
Dear Theo,
ReplyDeleteI think in a general sense, a weak dollar correlates with good shipping markets and at a very high level, I see the Quantititive Easing as a positive for shipping if in fact it weakens the dollar (maybe yes, maybe no) and it contributes to commodity price inflation. High commodity prices correlate with stronger shipping markets also.
We are already seeing a boomlet, it seems, in newbuilds for energy exploration (Seadrill has ordered 4 units, with further options) in the past week. So, viva le QE !!!!
Barry Parker
Maritime Business Expert and Writer on Maritime Industry
Dear Barry,
ReplyDeleteI don't disagree that it might be positive. I'm just pointing out that this might cause owners to "rush" to newbuildings when there is already an overcapacity problem. Whether or not they go towards "energy" vessels only time will tell, although a lot of LPG owners are struggling as it is. Could LNG be the new "boomlet", as you say?
As for "High commodity prices correlate with stronger shipping markets"; I don't want to jump to comclusions, but don't high prices mean less trading (unless it's a "necessity" product) and thus will correlated to lower markets? I mean, if China finds thermal coal cheaper from India, won't they stop importing it from South Africa? The increase in trade of one route won't necessarily balance out the decrease in the other.
It would be interesting to see how the owners will react to this influx.
Best Regards,
Theo Scholiadis - S&P Broker
Dear Theo,
ReplyDeleteIn the US, the Federal Reserve has been increasingly politicized which means that the QE2, as they are calling it, could be the subject of greater pushback. So, it's not a done deal yet.
But, one way or another, some or all of the QE2 will go forward. In my remarks, I was not looking for specific "causalities" of shipping related events. Rather I was just saying generally that the weak dollar has correlated with happier times for shipping folks. As far as newbuildings, whether they are wise, or not, that could be a whole other discussion board, which maybe Maritime Executive might want to start.
But- since you asked- I don't see much impact of the currency exchange rate exactly on shipbuilding orders anyway. I think Korea pegs in a band around the dollar (not sure about that), China is slowly allowing their currency to drift upward to a true value, and Japan already has a strong currency. But the Japanese owners can keep the Japanese yard busy and the rest of the world can order as they wish (including at Japanese owned yards in the Philippines and maybe elsewhere). Irrespective of all this, most newbuild contracts I see reported (not Japan) are priced in dollars due to someone swapping out curencies.
Barry Parker
Maritime Business Expert and Writer on Maritime Industry
Dear Barry,
ReplyDeleteYou are correct. So far, there haven't been any drastic changes in the ForEx market, and there might never be any. However we must not forget that one of the biggest importers of far-eastern products is the U.S., so even with their strong currency (the far-easterns'), they will suffer. In fact, I had read that the Japanese minister of Finance did not want to strengthen their currency too much so that their exports are not too affected.
As for the quoting of the prices of shipyards, whether they are quoted in U.S. dollars or their local currency, the exchange will need to be made at some point, effectively affecting the owner sitting on U.S. dollars.
Best Regards,
Theo Scholiadis - S&P Broker