Still on the Brink

Those who watched Tuesday night’s State of the Union Address might think that the U.S. and the global economy are finally out of the doldrums they have been in since the financial crisis of 2008-2009 and headed for rosier times.

There has been some good economic news of late with fourth quarter sales and profits up slightly from last year and unemployment rates receding slightly in the U.S.  The U.S. stock market is up significantly in January despite a flat December, and global equity markets are mostly in positive territory for the first few weeks of the year.

However, despite this modestly good news, on Tuesday, as President Obama was preparing to describe the “State of the Union”, the International Monetary Fund (IMF) issued a strong warning that the global economy is slowing rapidly and is at risk of falling back into recession.  Further, the IMF said that Europe’s ongoing sovereign debt crisis is creating “fertile ground” for a potential catastrophic financial collapse.      

In three important studies released this week,  the IMF characterized global trade and investment as on the decline and suggested that the world financial system was possibly severe jolt away from a major collapse.  The IMF, which although headquartered in Washington, DC, generally maintains a euro-centric outlook and clearly views the euro zone to be the center of current global financial risk.  In Europe governments and political forces are clearly losing patience for continuing calls to prop up weak governments and financial institutions.  The threat of “self-perpetuating pessimism” in Europe might undermine a eurozone recovery according to the IMF.

Olivier Blanchard, a senior IMF economic counselor said, “The world recovery, which was weak in the first place, is in danger of stalling.”

The Fund’s most recent forecasts suggest that the global economic slowdown will soon be upon us.  Projections for global economic growth in 2012 were adjusted to 3.25 percent, down from the 4 percent rate forecast in September. The economies of People’s Republic of China and India, each of which experienced double-digit annual economic growth for the past decade, are now predicted to slow to growth rates of 8.2 percent and 7 percent, respectively. The IMF reserved its harshest judgement for that the economies of Europe suggesting the eurozone will fall into recession and actually shrink by about 0.5 percent this year. The IMF pegs the U.S. economy’s projected growth rate as holding steady at 1.8 percent.

The IMF warning tells the nations Europe that they should prepare for the worst.  Additionally, it has strongly suggested that beyond Greece’s current financial crisis, euro-zone nations should prepare to commit hundreds of billions of euros to potential future bailouts of Italy and Spain.  The IMF is asking world governments to fund an increase of $500 billion to bolster the Fund’s ability to bring bailout dollars to bear to stabilize markets in an emergency.  The questions some are asking are:  “Does the IMF think it will really raise that much bailout money in this environment?”, and, “Even if it does, will $500 billion be enough?”  

Corps to Spend Emergency Funds to Dredge Mississippi River System

Within the last week the U.S. Army Corps of Engineers (USACE) has received $55 million in emergency funding to dredge heavily shoaled portions of the lower Mississippi River. 

Of principal concern are the dredging needs at the mouth of the Mississippi River: the Southwest Pass.  Current restrictions allow passage of vessels with a 42 foot or less draft at the Southwest Pass. Dredging operations will expand the shipping channel to 45 feet deep and 750 feet wide. Widespread flooding during 2011 deposited sediments and decreased channel depths and widths, increasing the need for dredging. In 2011, the Mississippi River handled 61 percent of all corn exports, 55 percent of all soybean exports, and 15 percent of all wheat exports.

The emergency funds will take care of the immediate problems being experienced on the Lower Mississippi, but the Corps of Engineers is clearly no closer to a solution to its long or even intermediate-term funding problems. 

The Obama Administration and congressional Democrats and Republicans seem unlikely to agree on additional funding for any agency that depends on monies from the part of the federal budget categorized as domestic discretionary spending.

The Mississippi River system consumes the lion's share of federal dredging funds and U.S. coastal ports also consume considerable amounts of the Corps dredging budget.  The Great Lakes-Seaway System has seen its dredging crisis get worse and worse each year for more than a decade with little help in sight.  Great Lakes-St. Lawrence Seaway maritime industry leaders hope that the federal government won't wait until a navigation emergency or accident occurs before the Great Lakes dredging crisis is addressed.       

Dry Bulk Freight Rates Continue Long Losing Streak

The Baltic Dry Index (BDI), an index of global freight rates for shipping dry-bulk commodities such as iron ore, coal and grain, has now lost ground for 26 consecutive trading days as of today’s close. The BDI touched down at 784 today, some 1128 points lower than the December 14 level of 1912 points, reflecting a drop-off of roughly 59 percent in a little more than a month.  

The last time the index was this low was three years ago, during the depths of the international credit crisis that led to the major global recession whose effects are still being felt.

As regular readers of Great Lakes-Seaway News will know, this publication filed stories on the current freight rate turmoil in its January 3, January 5 and January 14 editions.  We have been doing our best to both chronicle the steep and steady drop-off and to pose a reasonable analysis of the reasons for the decline given the state of supply and demand considerations in the global dry-bulk freight market.   

Now, at long last, it seems we are being joined by our friends in the old media. No less a publication than Canada’s newspaper of record, The Globe and Mail, finally published a story on Monday which brought the BDI’s recent deep swoon to the attention of its readers.  To its credit, The Globe and Mail’s editorial staff is still far ahead of the writers at The New York Times and The Wall Street Journal when it comes to following interesting, perhaps even alarming, shipping news.  

Interestingly enough, however, The Globe and Mail piece on Monday referred to the Baltic Dry Index as a, “quirky canary-in-the-coal-mine indicator for global economic activity” and indicated that the index was in “freefall”.  Still, nobody at the The Globe and Mail thought to tell anybody else about the “canary-in-the-coal-mine” until it had been very sick for more than a month.  

Part of the reason for their reticence to report a story with possibly profound economic implications for a nation whose economy relies heavily on the transport of raw materials to international markets, might be found within the tardy story itself.  The Globe and Mail article averred, “market experts can’t agree on whether it’s [the BDI decline] a sign of danger or an accident of recent history on the high seas.”

To make this easier for our friends who still rely on printing presses, we will help clarify.  It is both.

By this we mean the recent precipitous drop in dry-bulk freight rates is the result of a supply-demand equation that is desperately seeking balance.  Dry-bulk ship capacity, in the form of new ships, is being delivered from the shipyards of China, Korea and Japan at a very high rate.  Ship demolitions are up, but because of relatively soft steel prices and other factors, old ship breaking is not keeping pace with new ship building.   

At the same time, dry-bulk shipping demand is still somewhat soft.  The economy of the People’s Republic of China is not growing at 12-14 percent per year anymore.  Growth there this year will likely be closer to five percent than ten.  The European economy is pre-occupied with its sovereign debt crisis and the EU is in a slow-growth mode for the foreseeable future.  The economic forecast for the largest economy in the world, that of the United States, is being revised downward for the first half of 2012.  Steel demand and thus the demand for iron ore, other steel making minerals and coal are soft.

All this suggests that demand for dry-bulk ocean vessel freight will not grow as fast as the increase in the supply of available freight capacity will for this year and the freight market is looking for a new equilibrium that reflects these supply and demand factors.  The market may even be over-correcting a bit.

The steep drop in dry-bulk ocean vessel freight rates is likely to bottom out soon as the market approaches a new, lower equilibrium. It may take a little more time for the market pendulum to come to rest and swing the other way, but dry-bulk shipping will be a bargain for some months to come.  If you want to find out about that development when it happens and not a month later, continue reading Great Lakes-Seaway News.

Study Highlights Marine Security Issues for Canadian Government

A recent study commissioned for Defence Research and Development Canada warns that public safety, the economy and trade with the United States are all at potential risk unless Canada embraces a number of advanced surveillance technologies and a unified operational structure to overhaul a labyrinth of police and government bureaucracies now responsible for marine security.

Marine security officials say their greatest concern is the threat of small, harmless-looking boats attacking nuclear plants, international bridges, chemical factories and other vital infrastructure along the Canada-U.S. border.  That concern is foremost in a series of findings in a new report that concludes that Canada lacks strategy for dealing with the growing national security threat posed by small boats in high-traffic border regions.

The report bases much of its information on comments made by police, military officials, port authorities and government officials.  The reports says that most of those interviewed, “do not feel that the current surveillance capabilities are sufficient to counter the small vessel threat and that a change is needed.”

The report goes on to say that the Canadian government has had on marine security issues, “limited success due to a paucity of understanding of this complex issue at all levels of government coupled with limited resources. In all of this activity there appears to be no coherent strategy or approach.”

The report notes, for example, how tens of millions of federal dollars have been spent upgrading port security since the September 11, 2001 attacks against the United States.

While Transport Canada is responsible for marine security policies and regulations, there is no single federal entity in Canada charged with security planning, co-ordination and execution.

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