Being the Senior Talent Producer for CNBC’s Squawk Box, I am lucky enough to speak with some of the greatest minds in business. Now more than ever the relaitonship between politics and business and the impact it can have on the global economy is enormous. Shipping is a leading indicator into this relationship because based on the amount of product being transported from port to port you can gauge the health of the economy the products are going to. If the economy is bad, so goes shipping. Volumes go down which means the money these shipping companies receive go down. Remember the shipowners get paid on the volume they carry. They want a robust economy.
One of the key players in this circle of economics is the banking industry. They too would like a health client becuase they need to pay their loans. One of the shipping bankers I spoke with was Dagfinn Lunde, head of shipping finance operations for DVB Bank (Frankfurt:DVB) and a Member of its Board of Managing Directors.
With the changing landscape of sovereign debt and the headwinds facing shipowners, the number of commercial banks lending to the industry has decreased by more than 40 percent since 2007. In response to this decline, “the importance of export credit agencies supporting the yards from each country has increased tremendously since mid-2008,” Lunde explained. “Driving this are the strict capital requirements the banks are under. They have had some bad experiences in shipping for a while, so that has discouraged them, while governments support the shipyards by export credit.”
The tightening in the shipping industry is somewhat similar to what happened in the residential real estate market after the recent financial meltdown. But, unlike residential home ownership, where a bank lends a wide variety of loans to buyers of apartments, multi-family units, traditional homes and commercial properties, Lunde said shipping banks will move from overall maritime transport lending to a more specialized model.
“What I see happening is more banks becoming specialized institutions,” he said. “Maritime bankers are trying now to be the bridge between the people who need vessel financing and the people who want to invest their money.”
To profit in this new economy, Lunde said banks like DVB are trying to be more of an investment bank. “Serving investment groups like pension funds and life insurance funds will grow in today’s new economy,” he said. “They have come off of all these disasters from different investment areas, and they have come to realize that investing in real assets is much better and much safer.”
Below is an excerpt of Dagfinn’s chapter which is under copyright of Marine Money
Free Trade Agreements
One of the greatest economic drivers in the world is the opening of free trade. Shipping is an integral part of this growth triangle. For example, between the U.S. and the 27 countries of the E.U., two-way trade created €490 billion in 2011, and investment by U.S. and European companies in each other’s economies totaled about €2 trillion.
Free trade “is enormously important for the flow of cargo and for satisfying fueling demand,” Lunde said. “You are seeing all these different free-trade agreements being created, from the Asian economy to the North American Free Trade Agreement. All of these agreements are extremely important for the development of trade. When new markets open up and you have lower barriers, you see trade flow increasing.”
Specialized Shipping Improves Efficiency
As free trade creates new and expanded trade routes, there is increased demand for faster, more efficient ships. This is where specialization comes in. Refrigerated ships navigate these longer trade routes more efficiently, protecting precious cargo. “It is much more efficient to have a refrigerated container box for cargo,” Lunde explained. “You can have a load of bananas in a refrigerated container from Ecuador go to Germany or Russia and head straight to the shop. The refrigerated container keeps the product from spoiling, and it can travel a further distance.”
Even the way dry cargo is shipped has changed. “Before, you had bags and pallets of product being transported on ships and, once it arrived at the port, you had to sort it and then get it ready for its final destination. Today, you put it in containers and you don’t have to do that,” explained Lunde. “You avoid a lot of transloading and waste.” In fact, Lunde noted, “because of this change in container transportation, it is one of the biggest parts of the industry today.”
These advancements in shipping have made the industry extremely competitive in the transportation world and on September 18th, 2012, shipping’s impact on the package distribution sector made headlines when Fred Smith, Chairman and CEO of the world’s largest air package shipper FedEx, explained on the company’s 2013 first quarter conference call that their customers are choosing cheaper ocean shipping or truck options instead of using planes.
This trend has eaten into the volume of FedEx’s transport of consumer electronics, auto parts and other goods. “The world economy has absorbed an incredible increase in the price of fuel. And that has had very big implications on the way people think about supply chains on their decisions to move by ocean or whether they move things by air,” Smith said.
Banking on Innovation
When considering growth opportunities in the shipping industry, Lunde gets the most excited about niches with fantastic demand development. Niche vessels fit Lunde’s criteria, and the more specialized, the better. “The more specialized and high tech a vessel is, the more attractive it is, because there are very few yards that might have one, and demand will then drive up prices.” This is true for stainless steel chemical vessels and LPG carriers.
Innovation is the greatest gift an entrepreneur possesses. Thinking outside the box and developing new ways of doing things create new opportunities, and sometimes a mistake can lead to opportunity. Lunde told a great story about how Knut Utstein Kloster, founder of Norwegian Caribbean Line, was stuck on a vessel and thought to himself: “Why don’t we use this potential capacity to transport people?” At that moment, the cruise industry was born.
The shipping industry differs from many other industries, given that the majority of companies are privately owned. Private shipowners dominate the marketplace by a whopping 60 to 70 percent.
Talk of consolidation has intensified since the financial crisis, when capital dried up and the supply/demand curve took a hit, but Lunde does not buy into the speculation.
“I see very, very little consolidation in terms of ownership. Instead, you will see more and more owners joining marketing pools in an effort to get more market power,” he explained. “So what they will do is join forces. That is the development I can see.”
Family ownership also limits consolidation. “Blood is thicker than water” might be the mantra of first-generation shipowners. There is no such thing as joint ownership between a Greek and a Norwegian owner, because “finding ways to share things between two families is always impossible,” Lunde said.
However, that “old school” point of view may not have a place in the future of shipping. “As we move forward, we will very often see the opposite happening with second- and third-generation shipowners. When the company breaks up, they split it among the people inheriting the company and, because it is impossible to run a company with, say, five different people, they want their money and they will sell their stake.”