Quick update again from GCaptain
So to do some quick and dirty analysis. For context this is a brand new ship. If you were to categorize this ship its a top of the line container ship. As in top tier. If this ship can't get enough cargo then you have to wonder about how the lower, older tier ships are doing.
Again, perhaps a one off, but it would seem to indicate the level of demand destruction that shippers are seeing from the China export market.
I think it's a trifecta. Covid issues - well the Chinese government policies are reducing the ability of industry to export. Water supply drought issues adding to that, onshoring and finding other places to produce things vice China. And to add a fourth a shift in spending from goods to services in the west as for the most part covid in in the rear view mirror and people are getting out.
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I've noticed some interesting news in the Maritime realm. What do I mean by maritime. I mean Civilian (for the most part) shipping.
See for most people out there they do not understand how much a barometer shipping is for the world wide economy. Simply put, generally shipping rates and routes are the canary in the coal mine for a number of good or not so good things. And lot depends on where you sit and where you stand.
I just saw this piece in GCaptain
Let me put the headline in context. Boxship = Container Ship. Blankings = Canceled port visit on a normally scheduled route. Freight erosion = Reduced demand for Containers. East West sailings = Asia to the United States. Idle = excess capacity.
It is important to remember that decreased demand for shipping of materials does not necessarily equate to decreased demand for those materials. Although generally that is the case. The situation that shipping finds itself in can generally fit into several categories. And these are oversimplifications. And to make it simpler we will just focus on the China to American market
1. American companies are sitting on too much inventory or have previously overstocked to avoid possible supply chain issues. In both cases these companies may have no urgent need to replace inventory so are ordering less. Less orders from Chinese factories equals less demand to ship materials to America.
This would be slightly unusual as for the last several decades most supply chains have been essentially just in time inventory. However, the last several years of supply chain issues may have prompted many companies to essentially hoard materials. This is not too worrisome, as eventually those material stocks will have to be replaced and shipping demand might come back to a pre-pandemic level of normal.
Notice I said pre-pandemic. As there is already evidence that American consumers have shifted spending back to services rather than goods. In this scenario some ship owners/ operators are going to have a rough time of it.
The glory days of getting 20,000$ USD for a 20 foot container (TEU) are probably over. I'm guessing it will settle back into the 1,500 to 2000$ range for a bit. This could go lower. Especially if they purchased a number of ships expecting the increased demand for goods that occurred in the pandemic to be the new normal.
This is probably the best possibility as it is just the cyclical nature of shipping. There will be winners and losers in the shipping market. But it is not a substantive shift in the model or the world economy.
2. Another possibility is that demand for materials produced in China has cratered. Here there are basically two possibilities. One is that actual demand for materials produced in China has been reduced as the customers of American companies are either no longer buying at the same rate or are forecast to no buy these materials as the same rate
This is probably the next best scenario. It would seem to indicate that there are adverse economic conditions in the Americas that are leading the end users of materials to have insufficient money to purchase these materials.
In short, a recession. While not good, this would also be a cyclical issue. And not represent a fundamental change to supply chains. Again, this will hurt a numbers of ship owners/operators. But eventually the business will come back.
3. There is the possibility that for whatever reason supply chains have fundamentally changed. American companies having been burned by supply chain issues and the massive shipping costs incurred to ship Chinese produced materials to America during the pandemic. And then to get these materials from ports in America to the last mile have changed that calculus.
In short, the cheap production costs in China are outweighed by the costs to ship and delays in shipping materials produced there to end customers in the Americas. If this is the case, it would be a fundamental and likely permanent shift in the China to Americas shipping market. It would also represent a economic blow to China which is still heavily reliant on manufacturing for employment of its people.
This would have a significant impact on those shipping owners/operators whom are reliant on cargoes heading from China to the Americas.
This might indicate that American companies will have onshored production in order to have materials quicker and with lower risk. This is bad for China and good for the new material producers.
How this impacts China long term will be interesting. And it is doubtful that all material production could be onshored. So, shipping would be impacted long term, but there would still be a East West shipping market but perhaps reduced.
4. The most worrisome possibility is that China for some reason lacks the will or ability to produce materials for the American market although demand is still high. I've been known to make crying wolf predictions in the past and been proved wrong.
Unfortunately, I think this 4th possibility is likely the most likely one. And the one we are starting to see now.
I think that a combination of factors in China has either temporarily or mid term reduced the ability of China to manufacture and deliver materials to ports to be shipped to the Americas.
I am going to explore this 4th possibility below
And I think that the primary factor is water, or lack thereof currently in China. Many industrial processes require water. To start off with China does not have a lot of water, and what it has is in the wrong place.
For whatever reason China located most of its industrial capacity in the North. Which already has adverse water supplies. And the north was already drought prone.
While it has not made headlines in the west, China is in a severe drought. If you look you will find reports. Such as here. But with upcoming midterms and adverse ecconomic headwinds in the Americas, I just think its not really on the radar as much as it should be.
Water issues causes real problems for China as many of its industries rely on water for both material production, cooling and electrical production supporting both.
Water scarcity has a couple major impacts for China. Like many industrializing countries, China built many factories by the water. Why? it's a cheap source of energy. The United States did the same in the northern states.
Cities like Lowell, Massachusetts were able to harness the power of water to power huge looms that turned southern cotton and other materials into finished products.
However, if there is no water to power the factories, that cheap source of energy is gone. Perhaps temporally. A lot depends on the weather patterns.
But until the rain and water return essentially you have to figure out a way to power very expensive factories that are not really moveable.
This means re-routing - if possible - energy from other sectors and locations that are deemed less important. In China's case this means the cities and its residents. There are already reports of skylines in China going dark to conserve electricity. And Chinese stuck in these high rises with no electricity or not enough.
Another option is to install or use generators for factories. This is an expensive band aid, as remember, if you used to use fairly not cost hydro-electric then now you have to pay for fuel.
Solar and wind might be an option for long term. But again, that would require investment and is not going to solve the short term problem. And that investment is perhaps long term going to be cheaper than installing generators, but a lot more expensive then hydro.
Also there could be an effort to try and do massive desalination. But that is not going to fix rivers.
Oh, one more thing. If you choose the generator fuel solution, you need to get the fuel to the generators. Like in many countries, the river systems are not just used for cheap energy, they are also vital transportation routes.
When the rivers are low or almost dried up due to draught, using cheap barge and tow may no longer an be a viable option and now you need to truck it in.
That is of course unless you have pipelines and associated distribution networks in place. From what I have read, China does not have any type of distribution networks configured for this.
So they are stuck with inefficient transport via road if the rivers are not navigable.
I briefly mentioned rivers as transportation nodes. Well, even if you were to solve the electrical generation issues you still have a major transportation issue.
See those factories need inputs. As in raw material and goods to create finished materials or near finished materials. Without rivers, this becomes once again a problem. As you now have to truck in your raw materials to the factory, or use different, smaller marine transportation that is less efficient.
Then you have the same problem with getting your finished materials out.
See many of these factories are not located near major ports. They are located on rivers far away from the ports where huge containerships can load them. It is essentially a hub and spoke maritime transportation model. Your hubs are the big ports. These big ports are fed by smaller regional harbors and ports that rely on smaller "feeder" ships and barges to deliver to the hubs. Yes there is some rail and truck. But feeder barges and ships are much more effecient.
This means that these containerships are reliant on another mode of transportation to feed them. If the rivers are either not navigable or less capable this is going to drive up costs to get the finished materials to the port to be loaded on a containership
Then we have the covid issue. Not going to get into politics here. But China has decided on a zero covid policy. Well, what does that really mean? One case can lock down a whole city town or venue
They actually recently did this recently to Disneyland China and literally locked down the entire park after several people tested positive. Being stuck in a concert or a park is definitely not fun but it would not negatively impact your economy.
The problem comes when workers at factories test positive and these factories or regions containing the factories are shut down. No one or few people in or out. For a period of time. Again, lets keep it simple. Suppose you are running a factory that runs three shifts of 10 people 24 hours a day. A member of one of those shifts' tests positive for Covid.
The factory is now sealed for say 7 days until no one is positive anymore. The shift stuck in the factory can likely do some production, assuming they are not all sick. But for the most part production is going to halt. That means after say day 2 you lose 18 shifts worth of production. Also, when the lockdown is lifted its going to take a while to get everything back up and running. So back of the hand math says that one case at a factory sidelines that factory for 10 to 14 days.
And it gets worse if your workers leave. As getting them back in place is going to be difficult.
And if you were scheduled to deliver something to a hub at a certain time to meet the schedule of a large boxship. Well thats not happening. So the ultimate end user now has to wait a minium of another 10 days to get materials in the Americas. And it just snowballs from there. Because that end user might require input materials to manufacture of build something in the Americas that relies on a China based input.
So shutting down one facgtory is not that bad if we are talking one factory. But we are not. Covid is going to Covid. That means this type of event is likely happening all over China. And not just in factories. Also, among those loading ships, those unloading ships. You get the point.
If I was an American company reliant on Chinese production I would be very concerned right now. One the ongoing drought and the implications of reduced reliability of a supply chain based in China to deliver materials for me to sell of further manufacture based on water scarcity. Two, ongoing and random Covid lockdowns adding insult to injury. And the inevitable increasing costs of these materials. And then the delay in receiving materials.
So, if I was a company in the Americas, I think I would seriously reconsider basing my supply chains overseas or in China. While it might cost me a bit more to do it in the Americas at least material production (when possible) would be closer and more reliable.
Again, this is a guess, but it may be the case that demand has not cratered, nor has onshoring taken a bite. China simply put cannot build or transport materials to market.
Based on water.
Now there is a bit of a silver lining for China. That silver lining is timing. In about a month or two many Chinese factories are going to shut down or go to limited operations due to Chinese holidays. So perhaps that might buy China some time to mitigate issues.
The bad news is that the rainy season wasn't and temperatures are still above average as I am writting this.
I think that there is a possibility that drought, combined with China zero Covid policy, has taken a significant chunk out of China's industrial capability. And also a signifigant portion out of its electric generation capacity. That bodes ill for China and anyone whom depends on it for its supply chain.
The political impact is a whole different story for someone else to write. But I would put it into the not good category.
Which means the amount of material needing to be shipped has dropped and will continues to . Since there is less material to be shipped there is less demand for full containers to be shipped.
Less demand for containers to be shipped equates directly to container rates and the rates of leasing container ships to ship said containers. This means less money for container ship owner/operators. That means losses as demand has dropped
One way to try and fight this is for a container ship owner / operator to reduce the number of ships that are actively carrying cargo. This is not really a good option as you still have maintenance costs, loans and if you stop sailing completely well someone else will take your business. And when demand comes back well someone else may have stepped in.
This is the rough equivalent of say a rock band reserving a large stadium, expecting a sell out. Then realizing lots less people are coming and reducing the number of seats and tickets for sale to ensure that ticket income is not drastically reduced. In short decrease supply.
Another way to fight back is to reduce the number of stops on a planned route. In essence this turns the routing of a ship from a local train to an express train. Rather than making all the stops, you make some of the stops. In short if you were servicing several hubs you now service say one. Here the hope is that yes some of the smaller stations (hubs) will not be serviced, but passengers (material/cargo) can still be routed on land to the larger stations (hubs). But this also upsets the supply flow. As now the smaller hubs have to adjust to ship to larger hubs.
So only time will tell if reduction of rates and the reduction of material shipments is a result of decreased demand due to recession, supply chain changes, climate/drought or Covid.
But as the magic 8 ball sometimes says. If you're an American company reliant on China - Outlook not so good.
