The Emperor’s New Clothes

Emperor_500If you’re worrying about COP21, then you can stop. Shipping isn’t likely to cause that level of pollution by 2050. But there’s a reason for that. It’s called the new Seaconomics. And it’s something you probably should worry about.

COP21 is still reverberating. If you’re worrying about it then I’ve got excellent news for you. You can stop right now. Just take a chill-pill, bunker-up with the thickest sludge you can lay your hands on and steam off into the sunset.

Impressive though the accounting sleight-of-hand employed by the ICS in order to make everyone believe that shipping’s emissions were falling was, it wasn’t necessary. It doesn’t matter what shipping’s emissions are at the moment. What matters is the measure everyone’s using to work out what they’ll be in the future.

The IMO GHG report was created by Dr Tristan Smith, whom I know personally, and also like, respect and admire in equal measure. His probity and accuracy I do not question for one moment. But he’s wrong on this. And for a very simple reason, not of his making. Coincidentally, it’s the same reason underlying the quiet equilibrium in most of shipping, the companies which supply them, the banks which finance them and the individual investors who buy shares around the world in their publicly-listed companies.

When you dig right down, way down into the detail of where and how shipping’s share of global emissions are going to grow to 6-14 per cent by 2050, it’s dependent upon one small fact. That shipping volumes will continue to grow at a rate a percentage point or so above global GDP. Except it isn’t a fact. It isn’t even a strong hypothesis any longer. It’s just plain wrong.

That link is in the process of decoupling. As I write today the multiplier has dropped at least to parity, and it’s still falling. Considering the monumental implications of climate change and the angst around suggestions that shipping may be included in the final COP21 wording it seems almost inconceivable that no one in IMO or the ICS picked this up. It’s the equivalent of a ‘Get out of jail free’ card, and no one’s played it.

The detonation of this apparently small and unremarkable article of faith, which everyone seems to have forgotten they’ve built all their projections around, represents a chillingly alternative near-future for shipping.

Why? Well, it’s possible that these powerful representative bodies genuinely haven’t realised that the age-old multiplier on which everything from COP21 to shipping loans are calculated isn’t fit for purpose any longer. But what’s more likely is that even if they did, well, everything from COP21 to shipping loans are calculated on this multiplier. And if it isn’t fit for purpose any longer, the implications for the industry go way, way beyond emissions targets or legislation.

Well, it isn’t. And they do. And there are people who know that. Remember last year when I told you you weren’t going to like what I said about the culture and cognitive diversity of the industry? Well, that may have upset you—I’m afraid I remain unrepentant—but if that was upsetting, what I’m about to outline may just act as the greatest laxative known to man. Because the detonation of this apparently small and unremarkable little article of faith, which everyone seems to have forgotten they’ve built all their projections around, represents a chillingly alternative near-future for the shipping industry. So it’s no wonder those in the know are keeping very quiet about it indeed.

The impact of this decoupling on the underlying projections for shipping’s future growth could be—at least for some overextended operators or suppliers—terminal. But this is about more than projections, although that’s a part of it. The reason the decoupling is happening is the really important part. The shift from the global consumer economics which have held sway for the best part of a century, to something radically different. Something which will usher in a new era for shipping—what I call the new Seaconomics.

Projections have always been problematic things. We have to have them in order to function, but their accuracy is always open to question. We’ve come up with some incredibly sophisticated models to help us, and in the pre-digital age where linear growth was the norm, they worked fairly well. But not any longer.

GMooreThe prefix for everything digital tends to be ‘e’, and that’s generally taken to mean ‘electronic’. But in this new digital world ‘e’ stands for exponential. Understanding the difference between the linear growth we’re used to and the exponential growth we’re experiencing now is at the heart of the speed and scale of the change we’re seeing.

You already know about exponential growth, Gordon Moore of Intel encapsulated it in the eponymous Moore’s Law—namely that the power of computing will roughly double every 12-18 months. But as the world becomes digital, as industries, sectors and technologies become powered by information flows their price and/or performance also begin to double approximately annually. And it seems that once that doubling starts, it doesn’t stop.

Dubbed the Law of Accelerating Returns this exponential growth means that forecasting the way we’re used to—using past experience to extrapolate future performance—doesn’t work any longer. In fact it makes predicting growth and change incredibly challenging, for a very simple reason. As David Frigstad, CEO of research firm Frost & Sullivan once said, “Predicting a technology when it’s doubling is inherently tricky. If you miss one step you’re off by 50 per cent.”

Using linear models to predict technologies and industries growing exponentially led McKinsey to advise AT&T not to enter the mobile phone business. Its models predicted that by 2000 there wouldn’t be 1 million mobile phones in use worldwide. And there weren’t. There were 100 million. McKinsey’s prediction was off by 99 per cent, and it meant AT&T passed on one of the most lucrative business opportunities of modern times.

But this isn’t an isolated example, and it isn’t the same as the guy who turned down signing The Beatles. What we’re seeing isn’t incompetence or poor data. It’s the fact that the rules have changed. You can have excellent data and clever people, but if you insist on applying linear growth models to exponential technologies you are going to end up looking stupid.

But there’s another problem with these breakthrough technologies. They aren’t sitting nicely in their boxes on their respective shelves. They’re playing with each other, inserting bits of themselves into other technologies and giving birth to newer technologies and disruptive scenarios.

The combinatorial effects are creating disruption on an unprecedented scale. And it’s happening everywhere. Right now modelling what the future is going to look like is probably one of the most challenging jobs on the planet. Believe me. And the technology is only one part of it.

Global businesses are about to integrate their operations into a seamless, digital whole—a process called Industry 4.0, or the fourth industrial revolution—and that’s disruptive enough. But that shift is running up against, and in some cases combining with, a range of powerful megatrends which are busily reshaping the global economy.

Between 1970 and 2015 seaborne trade volumes increased by an average of around 3-4 per cent per annum, driven by a demographic ‘sweet spot’. Between 1970 until around 1990 the global population expanded fast, with the working-age element increasing significantly. The addition of Eastern Europe and China to the world economy in the 1990s and 2000s supercharged everything, accounting for most of the expansion of world trade volumes.

But that’s over now. What we’re facing is a period where demographic growth is going to slow significantly. Between 2015 and 2030 population growth is expected to account for only a quarter of global consumption growth.

The world’s population is ageing—average global life expectancy was 71.4 years in 2015—fertility is dropping and the population decline which we’ve already seen in Japan and Russia is now spreading to Germany and other European countries and even to China where it’s already forced a re-think of the ‘one child’ policy.

MobilesThe implications of all this are massive. We have ageing populations in developed economies and a digital industrial revolution delivering productivity and efficiency via technology and automation, but not creating jobs for the huge young populations in India and Africa that will pull them up the economic ladder.

But the impacts aren’t limited to the young in the developing world, they’re already hitting the developed economies. Using data from a range of surveys carried out over decades one study examined the disposable incomes and wages of young families in eight of the 15 largest developed economies in the world which together made up 43 per cent of the world’s GDP in 2014.

It found that in the US, France, Germany, Italy and Canada the average disposable income of people in their early 20s is more than 20 per cent below national averages. In France, for the first time the recently-retired generated more disposable income than families where the head of the household was under 50.

The average under 35-year-old in Italy was poorer than the average pensioner under 80. Looking at the US data, it found that in 2013 the under 30-year-olds had less income than those aged 65-79. That’s the first time that’s ever happened, at least as far back as there’s data to analyse.

Why is this important? Because older people don’t spend the way younger ones do. Their money goes on tourism and healthcare, but not on commuting, kids toys and houses. Tourism and healthcare doesn’t translate into seaborne trade volumes, and the people whose spending traditionally does, are watching their economic clout evaporate.

A recent report by the Resolution Foundation in the UK found that the Millennial cohort, or Gen Y, spent their twenties earning on average £8,000 less than their parents’ generation did. Many can’t afford to buy houses any longer—the traditional British rite of passage. Many have struggled to get jobs at all.

Is it then so surprising that this generation has markedly different concerns and expectations. The desire for access over ownership isn’t just a response to the altruistic concerns around sustainability you could argue is an inevitable result of a generation growing up with the threat of climate change hanging over it. It’s also a pragmatic response to the fact that owning things isn’t as easy or as cheap as it used to be. Unless they’re digital. Or, increasingly, created by digital means.

Global businesses are about to integrate their operations into a seamless, digital whole, and that shift is running up against, and in some cases combining with, a range of powerful megatrends which are busily reshaping the global economy.

I had a conversation with a futurist the other day who said he could see no way in which 3D printing was a more sustainable choice for a Millennial mindset. But it is, on many levels. Not only does 3D printing enable a level of personalisation which can make an item more valuable and useful, and lead to it having a far longer life-span, it also enables individuals to maintain items and equipment which in the previous paradigm were simply uneconomic to fix.

How many of us have chucked out an otherwise perfectly serviceable item because something simple like the handle broke off? Now the opportunity exists for that handle to be printed on demand, on your high street or in your back-bedroom, not in batches of 5,000 in Asia and shipped halfway across the world.

At the most fundamental level one has to understand that 3D printing goes by another, far more instructive name, for a reason. It’s also called additive manufacturing. Traditional manufacturing takes a chunk of material, often scarce, virgin material, and chips away at it until it gets what it wants. Additive manufacturing as the name suggests takes the opposite approach. The item is built up using only what’s necessary. Little or no waste.

GenYWhat we’re observing is the combinatorial interplay of technology, demographics and mindsets, and it’s all moving exponentially. This is something every citizen of the world should be focussed on. But the shipping industry should be all over it like a cheap suit.

“Most long term outlooks are anchored in the historical relationship between population growth, urbanisation and increasing seaborne demand. The emergence of the fourth industrial revolution redefines the recipe for economic growth by opening the gates for long term gains in efficiency and productivity. The outlook for the shipping industry is deteriorating accordingly.”

That’s a quote from the most recent Shipping Market Review by Christopher Rex and his team, Mette Andersen and Ninna Møller Kristensen, at Danish Ship Finance. What they are eloquently and powerfully outlining in that simple paragraph is the emergence of the new Seaconomics. If you want more detail then I can’t recommend highly enough that you subscribe to their free reports. Because there are still far too many people who don’t.

Here’s another quote, this time from the Greek Minister of Shipping and Island Policy, Theodore Dritsas, when he visited Posidonia last month.
“The shipping sector has faced great challenges over the past years, which are related to the excess tonnage, combined with short term reduction in the demand side for transported cargo volumes, lack of funding from bank institutions, sharp decline in vessel values, uncertainty in oil prices and acute competition,” said Mr Dritsas. “The gradual recovery of the world economy will certainly lead to the reduction and hopefully the elimination of those phenomena.” Dritsas added.

Oh dear. That’s not it at all. Which reminds me, talking of oil prices, did I mention that the cost of solar and other renewables is plummeting? The cost of solar power has fallen from $30 per KWh in 1984 to under $0.15 per Kwh. That’s a scale of 200 times in 20 years. Another little ‘amuse-bouche’ for the shipping folk who are gaily trumpeting the tanker segment at the moment.

Except none of this is funny. At all. Because this is an industry with an awful lot of people and money depending on it. And there are at least some who are beginning to get jittery.
“You see a real nervousness about the reliability of the industry and the sustainability of the business model,” said Joost Sitskoorn, Special Envoy for the Global Shipper’s Council. “The predictability of cargo flows is becoming more and more difficult,” said Robert van Trooijen, Chief Executive North Asia for Maersk Line. “As an industry we are reacting to trends we did not see coming.”

Nowhere was that more evident than a place where you might have reasonably expected to hear some serious and measured discussion of just how the hell we’re planning to deal with what’s on its way. You might have done. But you would have been disappointed.

That place was the 5th Capital Link Analyst and Investor Forum, also held at Posidonia. “The majority of owners reiterated the importance of taking advantage of second hand ship prices and their optimism for better markets to come,” Capital Link reported. “During the event, shipowners vocalized their interest in India and Africa as the new markets of opportunity and advised on a bullish view of traditional shipping values, advocating a countercyclical investment play into the secondhand market. While others differ in opinion, the overall sentiment was warm in the dry bulk and tanker sector.”

Yes, you read that correctly. Let’s have a listen in on what those ‘traditional shipping values’ are shall we? This is from Lloyd’s List describing one panel discussion about whether it was time to buy second hand tonnage. “Hamish Norton, president of Star Bulk Carriers, tended to agree. He said he was, last night, on a boat of a “very wise man”, who “is much more motivated at this point in the cycle by greed”. “It was a very big boat,” he responded when asked how to justify the man as “wise”.

“Ignore the analysts, buy anything that floats that is cheap,” said George Procopiou, the Chairman of Dynagas LNG. “The market will come back on any ship type and you must be there.“

Holth_DBBut that doesn’t appear to be the mood music coming from the banks, who are kicking each other’s legs out trying to get to the top performing loans, whilst jettisoning operators who just a few years ago were solid prospects and are now struggling to get any debt finance at all.

And what about the capital markets? “Investors are looking to invest in sustainable companies,” according to Christa Volpicelli, Managing Director of Citi Investment Banking. And do shipping have those? According to Christa, no, it don’t.

Perhaps most depressing was the assertion by Kristin Holth, Global Head of Shipping, Offshore & Logistics, DNB. “Maybe shipping will never be an investment grade industry like others,” she said. And she’s probably correct. Not as long as traditional shipping values are apparently centred around greed and wilful disregard of market analysis, anyway. So the message appears to be that we need to all shut up and leave it to ship owners to place their bets as they see fit. Because that’s actually what the industry is all about.

“People say that shipping is a volatile business. That’s not the case. Shipping is the most stable business because it’s stable in its instability,” said Dynagas’ Procopiou. “The volatility is how you make profits and timing is the key.” Not customers then? No. Thought not. That’ll come as no surprise to the many I speak to who are exasperated with being the collateral damage in a game of tonnage speculation where the ships are worth money and the customers aren’t. Those kind of comments are really going to go down well. According to Capital Link Mr Procopiou was apparently making, “a rare public appearance this Posidonia as a show of support for the Greek industry during difficult times.” Rare. But perhaps not rare enough.

But if he’s right, if volatility really is how you make money in shipping then where is it? You couldn’t ask for a more volatile global economic and business environment over the past few years, so—to paraphrase Jerry Maguire—show me the money, George?

It certainly isn’t in evidence in the container sector, although that doesn’t seem to have made the radar of some people. Here’s my personal favourite quote from Capital Link at Posidonia,
“George Youroukos of Poseidon Containerships and Technomar did leave room for some bullish opportunities for those with “balls big enough” to invest in larger secondhand boxships on the market.”

Balls big enough, eh? For those of us who operate outside shipping, just listening to this stuff is jaw-dropping. What’s even more astonishing is that the whole event was supported and funded by the NASDAQ, the Big Board and EY.

That’s EY, whose latest marketing campaign is all about digital transformation and the exponential technologies changing the world, and how they can help companies profit from it. Maybe they should divert a tiny fraction of the millions they’re spending advertising it towards explaining it to their shipping division. Because judging by this performance, they don’t seem to have any idea.

Here’s the thing, individual greed and big balls is a poor basis for an industry, and in a world turning faster and more transparently than ever, it’s no wonder things are beginning to fall apart.
The tragedy is that shipping could be an investment-grade industry. The family ownership structures could enable risks to be taken that would be harder elsewhere, and enable new relationships and partnerships that could transform things.

There are those who have seen the writing on the wall. Danaos CEO John Coustas for example, who was a lone voice at the Capital Link forum. “For many years, world trade volume had grown about twice as fast as global economic output, but that multiplier dropped to less than one in 2015, Mr Coustas pointed out,” reported Capital Link. “As a result, this structural shake up in the correlation between trade and GDP growth means the latter can no longer be taken for granted as a practical indicator of shipping.”

People know. People like John Coustas, and Christopher Rex, and even Hamburg Süd. Take a look at their recent annual report and you will find buried in the executive summary an acknowledgment that the link between volumes and GDP can’t be relied upon any longer. MSI’s Adam Kent wrote recently that it was likely for “shipping market cycles to become shorter with lower peaks.” So not cyclical any longer then?

Because if that’s the likelihood, then why not stand up and tell all these people we’re advising that the old chestnut about shipping being inevitably cyclical, like that link between global GDP and shipping volumes, is a busted flush?

BridgeMaybe because ship owners don’t seem to like analysts, at the best of times. Or that analysts have been wrong about a lot of things. What about the analysts in Seoul who were still tipping Hanjin Shipping to outperform Seoul’s main bourse in the same month that it finally began to seek creditor approval for restructuring? According to financial data provider Wise FN, only 0.1 per cent of reports expressed sell opinions. 86.6 per cent gave buy recommendations, with 3.6 per cent of those strong buy recommendations.

Apparently there’s going to be an investigation. But I can save them some time. I know exactly what the problem is, and how you fix it. There’s a certain Danish gentleman who wrote something very instructive which should be required reading for the shipping industry. And I don’t mean Christopher Rex—although he should be too.

The Dane they should be reading is Hans Christian Andersen. Specifically his short story called the Emperor’s New Clothes. It’s about a couple of weavers who tell their emperor they’ve weaved him a suit of clothes which is invisible to anyone who is stupid, incompetent or unfit for their positions.

Once they’ve dressed him in the non-existent clothes he parades amongst his subjects, none of whom dare to point out that he’s naked. Apart from one small child.

It’s a tale of the blindness of powerful men, how those who depend upon their favour will collude with them. And the importance of speaking truth to power.

The shipping emperor is naked. And when the emperor is parading around naked it’s hardly surprising that he has an unhealthy preoccupation with the size of his balls. But the truth is they’re shrivelled and wizened just like his balance sheet. And it’s about time that the people funding him took a long hard look at just how unappetising a sight he’s become.

It’s about time they started asking the hard questions, about where demand is coming from in the future? What the projections for growth and profitability in his companies are actually based on? What kind of vision for the future there really is?

Because until we all begin to accept the reality of the new Seaconomics, shipping has no chance of righting itself in the digital age. And being prepared to stand up and say that really does require substantial cojones.

Instead of throwing more money at him, it’s time you grabbed that emperor by those balls of his.
Because then, and only then, will hearts and minds follow.

Images courtesy © Intel/DVB, Stig B. Fiksdal/Getty Images

This article appeared in the July 2016 issue of Futurenautics.

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