Globalization Keeps Future Bright for Shipping

Monday, March 24, 2008

 

By Rich DeSimone

 

 

The economic storm signals are all around us: the wild swings in stock markets globally, the contraction of credit availability worldwide and the frequent use of the dreaded “R” word. Is the United States headed for a deep recession? Is a recession already under way? Will the slowing U.S. economy drag the rest of the world’s countries into recession as well?

It’s enough to make those of us either in or aligned with the maritime industry wonder what the future holds. Should we batten down the hatches, yet proceed full speed ahead to ride out what may be a temporary squall? Or should we be looking for the shelter of a safe harbor until the worst of the storm passes?

In the insurance industry, we have confidence about what lies ahead for the shipping industry. That’s largely because we’re used to assessing risk and taking a long perspective that smooths the bumps of short-term disruptions. One large trend (globalization) and two sets of statistics (U.S. exports and shipbuilding rates) are enough to give us optimism about the maritime industry overall, and shipping in particular.

 

The Force of Globalization

Let’s look at the very large trend first.

Globalization is an evolutionary growth of trade among countries that is beneficial to those with raw materials, those with manufacturing capabilities and those with consumer markets – in other words, every country, in one way or another. As communication and exchange of goods have become easier through modern advances in technology and transportation, old trading patterns have slowly – and sometimes not so slowly – been modified.

Where once our major trading partners in the United States were Canada and Northern Europe, today the rise of China, India and other Asia Pacific trading countries are changing the face of worldwide commerce. As globalization becomes more pervasive, there sometimes is a backlash of momentary protectionism in different countries or different industries. But the experts seem to agree that – at least on the macro level – globalization is an all-but-unstoppable force that expands the economic pie rather than simply shifting who gets the largest piece. 

Although globalization is bemoaned sometimes in the United States as a negative force that is sucking jobs away from the economy, there are upside benefits here at home that are often overlooked. For example, as the dollar has weakened in the past few years, there has been a steady growth in U.S. exports as our finished goods have become cheaper for those overseas to purchase. In fact, the federal Bureau of Economic Analysis reported in January that the latest statistics show that exports grew $0.6 billion in one month alone, pushing the total to $142.3 billion in November 2007.

These healthy, growing export figures are expected to play an important role in counterbalancing any decline in consumer spending at home that may result from an actual or perceived recession. The Financial Times recently estimated that U.S. exports will contribute up to half a point in growth to the American economy, which will “provide a buttress at a time when domestic demand is very weak.”

In addition, the fast-paced growth of the Chinese and Indian economies over an extended number of years is creating new demand for goods and services in their own countries. Voice of America recently reported that the Chinese economy grew 11.4 percent in 2007, the fifth year in a row of double-digit growth and the fastest pace in 13 years. In addition, India’s annual rate of growth is near 10 percent. These two leading manufacturing and service countries, as well as many other developing countries, are driving economic expansion even as the current turmoil in stock and credit markets raise concerns about a possible slowdown.

 

The Shipbuilding Indicators

As a result of globalization, most economists are continuing to predict continuous and steady growth in world trade despite the recessionary signs in the U.S. That’s a plus for the shipping industry – and another set of statistics reflects that the industry is already aware of and reacting to the growing demand for shipping capacity. Commercial shipbuilding is undergoing the biggest boom that experts can remember, driven by the worldwide increase in trade. In 2005, orders were received by shipyards for about $100 billion worth of vessels. By 2007, the value of orders on the books had reached about $264 billion, according to an article in Der Spiegel magazine. About 5,300 new ships were expected to be launched by early 2010.

The increased demand for capacity spans all sorts of vessels: container ships, tankers to transport oil and liquid gas, and ore ships. In fact, leading shipbroker Clarkson has reported that tankers are being built at the fastest rate since that company began keeping records in 1852. The oil tanker fleet expanded 3.8 percent in 2007, and is expected to grow 32 percent during the next five years, according to Lloyd’s Register-Fairplay.

 

Looking Ahead

No one wants to underplay the short-term, often-localized economic pain that typically accompanies a recession. This is especially true if workers are losing their jobs and having to scramble to find other employment.

But in insurance, we try to take the long view. And in this case, we feel justified in having a strong sense of optimism about the future for our customers in the maritime industry. It is important to remember that economic slowdowns are cyclical, and that demand worldwide continues to drive economic expansion.

The shipping industry has sound fundamentals and should see continued growth opportunities in the months and years ahead. Those of us who partner with you through insurance coverage know that the world can be a risky, dangerous place for shippers – but for now, the forecast tells us to persevere through the choppy economic waters and prepare for smooth sailing on the rising demand of globalization.

 

Rich DeSimone is president of Travelers Ocean Marine.  He can be reached at rich.desimone@travelers.com

 

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