Friday, September 9, 2016

The Hanjin bankruptcy: No one is too big not to fail

The (anticipated) collapse of the world’s seventh biggest carrier has undoubtedly created tsunami-class waves that continue to ripple throughout the supply chain: from shippers and forwarders, to ports, terminals and creditors. Still, this is just a temporary inconvenience and the Government of Korea, together with the Korean Development Bank, are only to be complimented for their tough stance. Had the same thing happened with the bankruptcies of 2009, the liner shipping industry would be in a much better state today than it actually is.

The issue here has to do with the important aspect of moral hazard; i.e. exercising lesser due diligence, or assuming a higher investment risk than what would normally be warranted, just because you know that if things turn out badly, there will always be a helping hand stepping forward to your rescue.

If carriers know that this is no longer the case, and “out is out”, they would be much more prudent before ordering new tonnage. Supply would thus correspond more closely to demand, rates would as a result be more sustainable, and the financial performance of the industry would be less of a roller-coaster.

A “no one is too big not to fail” approach in shipping is therefore just as good for the taxpayer as it is for the carrier himself.  HH 

Tuesday, August 30, 2016

Public financing of private ports?

After years of debating, I must admit I am quite happy that the European Commission appears to converge to my views on the subject, repeatedly expressed for more than 20 years now.

As ports are increasingly adopting an ‘enterprise’ model through the award of concessions to private port operators, the public financing of port infrastructure and operations assumes a very different dimension, even for ports that are under full State of municipal control.

For instance, what happens if a public intervention, intended to promote the ‘general economic interest’, instead favors only one concessioner, or group of concessioners, against some others located in the same port, neighboring ports, or neighboring countries? What are, finally, those ‘infamous’ sovereign state responsibilities, often taking the form of Public Service Obligations, that allow governments to pour public money into clearly private port infrastructure?

Dredging is a good case in point I have often used with my students. Providing and maintaining access to a port could be rightfully considered as a public good serving the general economic interest. But when the access channel is dredged down to 16 meters, surely this public good is not meant for my little fishing boat, but for a containership of 20,000 TEU. Once identified, it should therefore be the user of the good who should pay for the costs of its production and not the general taxpayer. In other words, port access is no longer a public good and, among other things, the taxpayer should be informed on how his money is being spent by public port authorities.

Last mile investments is another good example. Connecting the port with the national motorway system is in principle a public good, serving the general economic interest (I would happily take my bike and go to the shore for some birdwatching!). But what happens if this ‘connection’ favors just one terminal operator against many others? Clearly, this ‘last mile’ investment is a private rather than a public good and the terminal operator should pay; participate in the development costs; or pay for the use of the road, once completed. Finally, the absence of such a connection should be clearly discussed in the concession agreement: More often than not, concessions are awarded, with the concessioner quickly reverting back to the awarding authority to ask for more infrastructure and connections because, allegedly,  he cannot do his job as efficiently as he would like to. The awarding authority is often ‘obliged’ to accommodate such requests and this cannot continue.

As said, I am quite content with the policy orientations of Competition Commissioner Vestager  in terms of focusing on the real issues facing our ports. HH

Monday, July 18, 2016

OBOR Networks & Maritime Geopolitics: The Century of Eurasia


OBOR is a US$ 1 trillion plan with an estimated economic multiplier of 2.5. Since the plan was announced three years ago, only 5% of this budget has been spent. There are as many plans as interested countries and China is talking to all of them. 10,000 articles have been written on the subject, but NDRC has retained only 100! Nothing is decided yet, and may analysts tend to see OBOR as a geopolitical “carrot and stick”, something similar to “Marshall Plan”.

China is not investing only in African infrastructure but it transfers manufacturing activity there. By the end of 2015: 128 industrial projects in Nigeria, 80 in Ethiopia, 77 in South Africa, 48 in Tanzania and 44 in Ghana. It seems developing Africa is much easier than developing China’s own northwestern territories.

With investments in Australia (Darwin) and a continuing interest in the Nicaraguan canal, China will soon be looking at the Pacific Ocean, expanding OBOR to a global, “around-the-world” network, in competition to TPP. What are the prospects of the Panama Canal, in view also of competition from the Suez Canal? To my view, not very promising.

Russia is squeezed from both sides: USA/NATO from the west / China-Eurasia-OBOR from the east. Russia’s response: its own ‘OBOR’: The North-South Transport Corridor.

Both Russia and China intend to develop their own currencies into reserve, clearing ones, away from the dollar and a crisis-prone, risky and overburdened western financial system. China in particular has created a currency clearing house in Qatar while Russia has an “oil for goods” deal with Iran. The latter country too has recently entered into a “rail for oil” barter deal with Turkey.


-The 21st century is the century of Eurasia.

-Eurasian Infrastructure investment plans amount to 8 trillion dollars.

-“Accessibility” (and not ports) is the bottleneck to trade.

-Investors (WB, EBRD, AIIB, etc.) abound, but attention and coordination are required.
(Lack of ‘discussion’ and coordination (e.g. within AIIB) are India’s objections to OBOR).

-Infrastructure investments have long gestation periods, while short-term debts accumulate dangerously.

-OECD forecasts show that the supply of infrastructure outstrips trade demand.

-Infrastructure investments should not be the outcome of geopolitical and security games.

-The debt of the developing world is a cause for concern.

-China’s NPLs correspond to 25% of the country’s GDP.

-Western banking is still precarious.

-A new economic ‘meltdown’ is not out of the question; this needs to be avoided at all costs.

Tuesday, June 28, 2016


The ramifications of BREXIT for global security could be much more important than its economic effects. After all, the UK economy represents less than 4% of the global economy. A weaker pound  -and a possible recession as a result- should not, in my view, have the grave effects many economic analysts predict.

But Britain is a protagonist in the defense theatre: the country is NATO’s staunchest ally, the "defense bridge" between US and EU, and the latter’s biggest contributor (both in money and means) in all EU-led operations. Would this stay the same after Brexit? Or would Britain move closer to NATO? And if this happens, what would be the impact on EU’s new defense policy orientation, and on the German-French idea of a true “defense union”? Would this be possible without Britain?

One shouldn’t forget that the Americans, for some time now, are becoming increasingly fed up of having to spend so much on Europe’s defense; their priorities are clearly elsewhere, including China’s incursions in the South China Sea.  In this regard, Americans see rather favorably Germany’s push for closer cooperation and coordination of defense budgets which, according to some, should be raised to 2% of GDP amongst all EU member states.

One thing is certain: the geopolitical chessboard has changed and exit negotiations aren’t going to be easy. Certainly, the process will take much longer than the envisaged two years, unless something else happens in the meantime. HH 

Wednesday, June 8, 2016

Panama and Suez canals on head-to-head price war

[Lloyd’s List, 8 June 2016: “Suez Canal offers up to 65% discount for Asia-North America east coast carriers”]
A few weeks ago I was commenting on the MoU Suez and Panama were signing, surprisingly with the blessing of the United States. I was saying that we should keep an eye on this development, for, although the MoU was described -as it is common in this type of agreements- as a “technical cooperation and information exchange agreement", its intentions could be quite different (i.e. collusion). Apparently "the plan" didn't quite work and the result, as was to be expected, is outright head-to-head price war.

Panama is again engaging  in new demand forecasting studies. In these, Panama should keep in mind that, in servicing the US East Coast, the role of Suez and of the Mediterranean hubs (Malta-Algeciras-but particularly Tangiers) is increasing. This is so, not so much in order to save on fuel costs, but mostly because carriers are able to feeder, from these hubs, the increasing trade of West Africa.

If to the above one would add: a) the new generation of containerships (too large for the Panama Canal); b) the interest of China in Port Said and in the Nicaragua canal; c) China’s grandiose, US$ 1 trillion “One Belt One Road” network and, in this context, China’s interest in the Mediterranean ports (Venice, Piraeus), East African ports (Mombasa, Djibouti), and Gulf ports (Oman, Qatar), the future prospects of the Panama Canal do not look, at least to me, as promising as one might like them to be. 

HE Haralambides

Monday, April 25, 2016

Chinese cruise ships? Thanks but no thanks

Shipbuilding is an economic activity that has in substance left Europe long ago. With one exception: Cruise ships. There is a reason for this. Cruise tourism, and carriers, are inextricably linked with the concept of quality; and quality is a ‘way of life’, a philosophy, difficult to copy. 

In spite of the global economic crisis of 2009, cruise tourism has been growing steadily. Carriers are working to near capacity and so do European yards in Germany, France and Finland. Orderbooks are full, without counting newbuilding options. Shipbuilding berths will be the bottleneck in the further growth of the sector going forward.

Aspiring volunteers, such as China, do of course exist, and European builders, such as Fincantieri of Italy, are already considering joint ventures. To my view, this would be the wrong thing to do. A JV entails transfer of technology and as such it is the surest way of offering the knife that will eventually stab you in the back. We have seen this happening in every other European industry and we should be learning from our mistakes.   

It will therefore be quite some time before China enters seriously into the cruise shipbuilding market. No doubt this will eventually happen. But in the meantime, a carrier should think twice before assigning an order to a yard which does not have the experience, suppliers and logistics to carry out the work as expected, and he would be fast to stealthily advertise, negatively, competitors’ decisions to do so. At a consumer level, personally I would think twice before boarding a cruise ship made in China…  

The result of all this will undoubtedly be an increase in the price of cruise tourism products which, we must admit, has dropped to ridiculously low levels due to competition among carriers. Time will tell. HH 

Wednesday, April 20, 2016

Container shipping: In short, you have a ghastly mess

Containerization has gradually led to the commoditization of the ocean liner service and thus to higher competition among carriers. In an effort to differentiate their service, as well as better control the supply chain, in the 1990s carriers started to invest in the other components of the supply chain, such as container terminals, distribution centers, road, rail and air transport, and in a miscellany of other logistics services, such as bar-coding, assembly, documentation, etc.  Investment in logistics services and related infrastructure, rather than in ships, -which, incidentally, could be chartered-in from private equity investors (e.g. KG funds in Germany)- allowed the carrier to become more asset light, thus more agile in coping with the vagaries of the business cycle.  In addition to service differentiation, vertical integration also serves in increasing both the complexity of operations and the sunk costs of aspiring new competitors (carriers) , particularly if shippers are convinced, through effective marketing, that an integrated service is the only way to better serve their requirements.

This situation has started to change. Carriers appear to be returning back to core business, shedding the idea of vertical integration in favor of better horizontal integration (alliances) and dominance in the sector (shipping) where they have the comparative advantage. Partly, this return to roots has been the result of the weakening or banning of liner conferences, and the low freight rates and service unreliability that have ensued. Presently, you can bring a container from Hong Kong to Rotterdam with $300; far below break-even point. Laid up container tonnage is 5% of the total fleet (over one million slots) and, interestingly, it is often the largest and newest ships, such as MSC Oscar, which are laid up. To no avail, consignees are desperately looking for someone to talk to on the phone. In complex ports like Los Angeles, the terminal of arrival is often unknown until the last minute. At the other end, in Asia, to be filled, a mega ship would call at far more ports than what its size would warrant; something creating a stowage nightmare at the receiving ports. In short, you have a ghastly mess,[1]  brought about by the shippers themselves. HH 

[1] Lyrics from “The life I Lead” (Mary Poppins) […] A British bank is run with precision. A British home requires nothing less. Tradition, discipline and rules must be the tools; without them: disorder, catastrophe, anarchy, in short you have a ghastly mess. 

Tuesday, April 12, 2016

Export logistics: the culprit of sluggish trade growth

Years back, a friend of mine at Stanford was making headlines for months by claiming that trade agreements were a bad thing for international trade. 

At the same time, I was claiming that it was the abysmal state of logistics in large countries such as India and China that was holding back container penetration and thus international trade growth. 

The World Bank seems to agree to this. In addition to the usual culprits of trade destruction, such as product standards in importing countries and other non-tariff barriers to trade, the WB now finds that, since the 2009 economic meltdown, the size of exporting firms in developing countries has gone down. 

Apparently, as I had been claiming, the smaller the size of producers, and the larger the size of the country, the more difficult it is to organize export logistics in a system based on containerization and hub-and-spoke consolidation and distribution.  HH 

Sunday, April 3, 2016

A business model for Amazon’s Containerships

Just a few posts below, we had predicted that, after entering aviation, it would be a matter of time before Jeff Bezos enters also into ocean transportation. And this time has been quite short.

Amazon has announced its intention to invest in containerships. Its business model is still being thought out, but here is how I foresee a possible scenario:

The company will not be running liner services, being itself both the carrier and the shipper. She will load in Asia with all sorts of container cargo, from all sorts of possible ports, until the ship is full. Assuming a sufficient number of ships is engaged to serve this model, time should not be of essence, for there wouldn’t be a specific consignee requiring the goods at the other end. Amazon would be just warehousing at sea. In this sense, economic slow-steaming would be the preferred option, rather than express services, as Bezos seems to be considering too.

Once the ship arrives, she could be conveniently anchored offshore, sufficiently close to dense consumption centers, such as Los Angeles or Hamburg (close shoring). Goods would be delivered directly to the consumer by drones, thus bypassing ports, tracking, and land-warehousing. A truly green supply chain! The same, hopefully, on the way back to Asia.

The choice of ship would be Amazon’s biggest challenge, and here your guess is as good as mine. Constraints in this regard are: stowage planning; required onboard gear; sufficient deck space for container stripping operations; and sufficient and suitable below-deck space for safe and weatherproof storage of unpackaged goods. With these in mind, and at such a preliminary state of affairs, a “box-shaped” multipurpose vessel (Figure) of about 2000 TEU jumps immediately to mind, and this might not be such a bad idea after all.

Futuristic? Yes. Could it be done? I believe so. When there is a will there is a way. Jeff Bezos is known not only for his innovations but also for his determination to see them through. Time will tell. HH 

Tuesday, March 29, 2016

Could capitalism work better? (also in shipping, transport and logistics?)

In general, it is not in the interest of big business to show large profits, as this may potentially attract competition from newcomers. In the last twenty years, however, American profits have soared but new entry, domestic or inward FDI, has been scarce. Company size (cf. M&As) and consolidation on the one hand, and transaction costs (cf. regulatory lobbying by potent incumbents) on the other, pose significant barriers to entry that could explain all this.

In addition, and contrary to what was the tendency 15 years ago, i.e. un-commoditization of service (ocean transportation) and investment in complimentary sectors (logistics), so as to differentiate and thus command a premium price from the willing shipper, companies are again today reverting to core business, shedding ‘peripheral activity’ and aiming at greater market share in core business (transportation), through mergers and the strengthening of strategic alliances.

The Economist’s figure above shows that, in the past 20 years, companies have become more focused (and industries less fragmented), while, at the same time, the market share of the top 4 companies (CR4), in the 900-odd US sectors examined, has increased from 26% in 1997, to 32% today. The lack of entry, noted above, refutes William Baumol’s theory of contestable markets and, apparently, in the absence of effective regulation, concentration does lead to market power. For example, concentration in railroad transport in the USA has led to a 40% increase in profits, and a doubling of return on capital (RoC), in the last 10 years.

In conclusion, two thirds of the Americans believe that their markets are rigged. Maybe they have a point there, and this point is central in Hilary Clinton’s electoral campaign. If she is serious about this, i.e. on taking on concerted business practices, she most definitely deserves half a chance; just for this, if nothing else. HH