Could Global Inequality Be Bad for Shipping?

Image courtesy KfW IPEX-Bank

By Paul Benecki 2016-09-12 09:50:35

Like many others, Dr. Carsten Wiebers, outgoing head of KfW IPEX-Bank's Maritime Industries department, believes that the ongoing downturn in shipping is structural – not cyclical – driven by easy financing for new orders and by weak demand. But his proposed cure is less commonly heard: he believes that alleviating global poverty is the best way to improve demand growth for shipping. 

In a valedictory presentation at the Maritime Future Summit at SMM in Hamburg last week, Wiebers gave his views of market conditions. First, heavy shipbuilding activity has been incentivized by cheap credit and heavy-tail payment schedules, which make the up-front cost of placing an order relatively low.

"We all know that cheap money is a major incentive to order and buy capital heavy goods," he said at the Maritime Future Summit at SMM in Hamburg. "We believe that as long as the interest rates are so low, there will always be somebody who will order a vessel today" for delivery during some future expected boom. 

Second, the market downturn in China is putting a cap on the demand side. "For the last 15 years, China has been the driver for all shipping segments and a significant driver for all countries worldwide," he said. "When we talk to our customers in Brazil or Chile or Africa, it doesn't matter, it is all the China factor."

With that 15-year run now cooling off, which country might fill the gap? 

Wiebers doesn't see potential for a nation or group of nations to take over the creation of shipping demand. Instead, he cites a factor more commonly mentioned by international development NGOs than by shipping bankers – the idea that (all notions of fairness, ethics or politics aside) global income inequality is bad for business.

"The only new driver which I could imagine myself is if, looking far into the future, we had a more even distribution of assets worldwide," Wieber said. He cited an estimate that the world's 300 wealthiest people have more than the three billion poorest combined. [Oxfam's latest study finds that global inequality is rapidly increasing, and that 62 high-net-worth individuals now hold assets equivalent to those of the poorer half of the world's population.]

"It is this gigantic portion of the world's population that would become the new driver for demand" if they had assets and income, he asserted. 

In economic policy circles this is a common argument, though it remains controversial. The OECD claims that inequality prevents "lower income people . . . from realising their human capital potential, which is bad for the economy as a whole" and an impediment to GDP growth. Likewise, the IMF's studies have found that "inequality negatively affects growth and its sustainability." More inequality, less GPD growth; less growth, less shipping demand, Wiebers argues.

Of course inequality is unlikely to change in the near term, and Wiebers suggested that the present shipping downturn is the "new normal," a structural, long-term period of lower profitability. 

At the end of his address, Wiebers mentioned that he has departed KfW's shipping finance unit after an 18-year career; he now heads up the bank's multi-billion-dollar aviation and rail division.

The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.