Ji bai zi

Demand for foreign cars is down, too, at least on the west coast

Jibaizi saw this while getting ready to go to the airport, and was fascinated enough to almost be late. From the San Diego Union (a newspaper that doesn't get much respect), "New foreign cars pile up at port". (Apparently this came from the New York Times, but a Google search didn't turn it up.)

LONG BEACH – Gleaming new Mercedes-Benzes roll one by one out of a huge container ship and onto a pier. Ordinarily, the cars would be loaded on trucks within hours, destined for dealerships around the country. But these are not ordinary times.

New cars were driven off a cargo ship yesterday, headed for storage at the Port of Long Beach.

For now, the Port of Long Beach itself is the destination. Unwelcome by dealers and buyers, thousands of cars worth tens of millions of dollars are being warehoused on increasingly crowded port property.

For the first time, Mercedes, Toyota and Nissan each have asked to lease space from the port for these orphan vehicles. They are turning dozens of acres of the nation's second-largest container port into a parking lot, creating a vivid picture of a paralyzed auto business and an economy in peril.

This is interesting, but the following statistic is also interesting:

The backlog at the port is just part of a broader rise in the nation's inventories, which were up 5.5 percent in September from a year earlier, according to the Commerce Department.

5.5%, eh? That's a lot, especially since inventory implies financing and demand for credit. If time permits, Jibaizi will investigate that lead further.

Shipping News – the website

Jibaizi always enjoys watching the news available from Clarksons.net: http://www.clarksons.net/markets/default.asp. Martin Stopford, author of the standard text Maritime Economics, writes a weekly column.

Today (November 15), there's an amusing post on predictions (from a year ago) for the shipping market today. Average prediction was $34,000/day; the actual was $14,600/day. There was one winner – and apparently only one analyst who was even close – Roman Malonenkov of BOCS NV predicted $14,500/day.

Last week's feature was more educational (at least for Jibaizi): "For Those in Peril on the Seas, and Capesize Investors". If, like Jibaizi, you are a shipping "外行" ("waihang," outsider), you may not know that "Capesize" (not "capsize"!) is a term of art for ships that are too large to go through the Suez canal, and therefore must go round the world via the Capes (Horn, and of Good Hope).

Shipping is a perilous business and unfortunately, once in a while, a Capesize bulk carrier disappears without trace. On one occasion a big OBO went down so quickly that when the only survivors, two welders, were picked up they had no idea what had happened to the deck they had been standing on.

None of us would welcome this disappearing act, but many investors would be relieved if the Capesizes on the orderbook pull the same disappearing trick. They have a point. We have not seen an orderbook like this since 1973 when VLCC investors bet the farm. After recent deliveries of 45 Capes a year, next year output jumps to 164, followed by 349 in 2010 and 219 in 2011 (see graph). This orderbook of 840 vessels compares with 641 deliveries in the last 18 years.

Jibaizi discussed sales of ship for scrap, ship construction, and how this was affecting currencies, on October 26. If many ships are completed into a market which is experiencing a lowered retirement rate on old stock, the problem is magnified.

Stopford points out four factors:

1. The yards must be able to build the ships. He concludes that they are.
2. The investors might be able to "forfeit their investors and walk". His conclusion is not clear, but he seems to think that the investors are not going to walk away.
3. The investors must continue to be in business. His conclusion is that this may hurt the shipyards badly. The shipyard may try to resell the berth, but he thinks that anyone wanting a Capesize has already ordered.

His conclusion: "When VLCC investors constructed a similar investment edifice in 1973, most got built."

More shipping news (nonlinear and irreversible)

According to FT.com, "Concern over shipping derivatives losses":

Fears are growing in the shipping industry over the potentially big losses that could emerge this week on derivatives triggered by the October collapse in rates to charter dry bulk ships. ....

Traders in forward freight agreements (FFAs) – derivatives based on short-term charter rates – could owe significant sums if they were betting on a rise in charter rates for ships carrying coal, iron ore and other commodities.  ....

The market uncertainty stems partly from the complex chains of transactions in the market and the lack of clarity about different companies’ FFA trading.

It is widely expected that hedge funds could be particularly badly hit.

However, Philippe van den Abeele, managing director of Castalia Fund Management, a hedge fund specialising in FFA trading, said he expected hedge funds to experience bigger problems over speculative charters of actual ships.

The risk is another example of nonlinearity and irreversability in the financial system.  Once the loss becomes so much that the losing party's capital is exhausted, the system becomes nonlinear, just as an amplifier starts clipping and distorting when driven beyond its limits.  Irreversability is when the system breaks:  the losing party becomes bankrupt, affecting all parties, not just the direct counterparites; the amplifier overheats and catches fire.  

When nonlinearity causes irreversible events, the economic system (at least locally) is forced from one trajectory through state space onto a new one.  If the event is big enough (or if there are enough of them) then the economy will change state, typically to one in which everyone is a great deal poorer, on average.

Shipping News

FT.com, October 26: Sales of ships for scrap being 'suffocated':

A key safety valve for regulating the world's supply of ships has stopped working in recent weeks, after credit and other problems brought the sale of ships for scrapping to a near halt.

….The central problem, according to people involved, is that many shipbreakers' banks are no longer willing to issue letters of credit….

This certainly seems to add to the empirical case for a global credit crunch. In any case, it's interesting to look a little more closely at the information.

The costs of transport

In chapter 3 of book 1, Smith touches on the enormous cost advantage of sea transport over land transport in the 18th century.  He doesn't compare prices directly, but he breaks down the labor input:

A broad-wheeled waggon, attended by two men, and drawn by eight horses, in about six weeks time, carries and brings back between London and Edinburgh near four ton weight of goods.

That stopped me short.  Three weeks in each direction!  As the footnotes, Britain made rapid improvements in ground transportation in the subsequent decades, but still...

In about the same time a ship navigated by six or eight men and sailing between the ports of London and Leith, frequently carries and brings back two hundred ton weight of goods.

He of course realizes that one could send two hundred tons by land transport, by sending 50 wagons.  But then he reckons that in that case, instead of 6 to 8 men, you'd have 100 men and 400 horses to feed for six weeks; and notes as an aside that feeding a work horse is just as expensive as feeding the laborers.

Whereas, upon the same quantity of goods carried by water, there is to be charged only the maintenance of six or eight men, and the wear and tear on a ship of two hundred tons burthen, together with the value of the superior risk, or the difference of the insurance between land and water-carriage.

(I'm working for memory, but as far as I can tell this is the first place where he casually mentions that increased risk must be accounted for as increased cost.)

Smith rightly concludes that at this cost, were only land travel to be available, that long-range commerce would be impossible.  "Who could bear the cost of land transport between London and Calcutta?"

Cannan (the editor) quibbles a bit:

The superiority of carriage by sea is ... probably exaggerated.  [Playfair in 1805] says a waggon of the kind described could carry eight tons, but, of course, some allowance must be made for thirty years of road improvement.

But then in a later note he drops some really interesting data:

Playfair ... says that equalizing the out and home voyages goods were carred from London to Calcutta [around 1805] at the same price (12s per cwt.) as from London to Leeds by land.

I make London to Leeds at about 200 miles, and London to Calcutta by sea (prior to the Suez Canal) as about 8,000 miles -- so this is a roughly forty-fold difference in cost per mile.

To return to chapter 3 -- these costs are cited to explain why some locations and countries developed division of labor earlier, especially focusing on the availability of easy transport. 

I suspect that economic historians might treat this topic differently now (particularly in light of Marxism).  However, as an example of Enlightenment practical reasoning, this chapter is delightful: an educated person reasoning and educating the reader about society much as a physicist (Feynman comes to mind) might reason and educate the reader about an interesting physical problem. 

Generally speaking, one must work hard to prepare a graceful argument. We should admire chapters such as this not only for the insight they give us, but also for the skill of their construction.