Global Shipping Drops to New Lows
The first quarter of 2016 has been a rough period for many investors and business people. Most people who follow the financial news are aware that oil stocks are low, but the global shipping industry is also suffering. While oil and shipping are separate industries, oil prices can have major effects on the revenues of shipping firms.
Low Demand Collapsing Global Shipping.
Most economists agree that the shipping industry is experiencing major losses due to the fact that the demand for raw materials is being outpaced by supply. Like other issues with the global economy, this problem of low demand and high supply is related to the actions of the Chinese government.
How is China Affecting the Global Shipping Industry?
Through a series of government policies, China has attempted to transform its manufacturing-based economy into a service-based economy. Since service industries use a small fraction of the raw materials that are required by manufacturing industries, this transition has caused aggregate demand for numerous goods to drop. Oil, copper, and other factors of production are among some of the goods that have been impacted by China’s economic decisions. These raw materials are traditionally transported across the globe via cargo ships, so the global shipping industry has also experienced massive losses from China’s low demand. Unfortunately, the price for raw materials is also being pushed far below the equilibrium by a supply glut. This ensures that shipping companies seldom earn profits.
How is the Rest of the World Contributing to the Slowdown in International Trade?
The low demand for oil and raw materials has had negative effects on OPEC, Russia, and the European Union. Since investment opportunities are poor in those areas, trade has reached very low levels. Europe and Asia are not the only areas of the globe that are trading less; many Latin American companies have also retreated from global trading opportunities due to reduced profits. Brazil and other countries that trade with China have also been forced to reduce their trading volumes since the Chinese economy weakened in August 2015.
What does Moody’s Reveal about the Global Shipping Industry?
Moody’s, the reputable corporate finance and risk management company, has offered some interesting insights about the falling global shipping industry. Moody’s Baltic Dry Index shows that the global shipping industry is at its lowest point in over three decades. The Baltic Dry Index is used to measure changes in sea transportation costs for various raw materials, including oil and copper. Since the global shipping industry did not experience a situation like this during the 2008 Financial Crisis or the turbulent 1980s, the future will likely be bleak for shipping companies.
Due to pessimistic expectations, low demand, and excess supply, short-run improvements for the global shipping industry are unlikely. Unfortunately, many economists are also doubtful that the shipping industry will improve over the long-run. Countries that earn revenue from global shipping services and the exportation of raw materials may be at risk of entering a recession in the near future.
Is there Hope for a Strong Global Shipping Industry in the Future?
While the current global economy does not show many opportunities for profits from global shipping services, the future may be lucrative for companies that transport oil and other raw materials. This entire issue stems from China’s reduced demand for foreign goods, but developing and transitioning countries could offset this low demand by building infrastructure. In short, these countries need to modernize their economies to increase demand for raw materials and shipping services. This situation is not likely, but it remains a possibility for many countries in Africa and Eastern Europe.
If the price of crude oil stays low during the long-run, it is likely that investors and entrepreneurs will move into other industries to find lucrative opportunities. The green energy industries would be one of the most favorable options in the event that the oil industry falls. Since the global shipping industry depends on the prices of oil and other resources, this increased interest in alternative energy industries would be the final nail in the coffin for global shipping.
For more information about economic trends that affect the global shipping industry, go to Personal Money Store.