17 Feb 2012
by Charles de Trenck
Here is the 2012 forecast, with the usual caveat that forecasts are generated mostly to be wrong, although understanding where we are wrong is useful.
How off was the 2011 forecast?
First, let's see what we got wrong with the 2011 container forecasts. I was going for 2011 "way below 2010" as my initial position in 4Q10. But, I was still expecting for 2011 mid-single digit type volume growth in long-haul trades in 4Q10. I recall Maersk started 2011 with forecasts around 8% overall. By August 2011, it was still forecasting global TEU growth of about 6-8%. In a sense I was expecting a mild 2011 and potentially a worse 2012 when taking capacity into account. It was only during 1Q11 that I ratcheted down my demand growth expectations further.
After my initial 2011 forecast in December 2010 when the BDI was around 1,200 to 1,400, I was busy trying to warn investors to stay away from the HPHT IPO and its over-pricing. I was in the process of shifting down my expectations for 2011 further. In mid-February 2011, we issued for clients a Container Box Drivers Update which went through the mechanics and continued the warning on the HPHT IPO. I was sounding like a broken record.… "mis-marketing of growth drivers and valuations…"
My main mistake, especially from a 4Q10 perspective, was to expect similar growth profiles out of Asia to the US and to Europe in mid-single digits. What we got instead was more like zero growth into the US, while demand into Europe was a little better even if rates were catastrophic. Another mistake was to incorrectly estimate the depth of the declines in real rates. I had expected 2012 rates to be lower than 2011–but not to decline about 9-10% despite higher bunker (this is important: not adjusted for bunker, compared to bunker which rose about 20% on average in 2011). You need to get your rates and your bunker correct, which are a product of demand, supply, commodities, oil dynamics–and psychology.
A whiff of a 2012 forecast
Since real rates in 2011 collapsed so disastrously, I don't expect significant further combined volumes times Rev/TEU drops equal to huge further declines, unless oil prices decline significantly (i.e., taking down nominal rates with them). The problem is "what type of rebound can we expect?!" Consensus views for 2011, that we collected 4Q10, looked more like a weaker 2012 than 2011. This does not make much sense anymore. But what if 2012 is not much better than 2011? We have often heard that container profitability rarely stays at abysmal levels for 18 months or more. The problem will be that–if you sign off on Keynesian over-stimulation effects since LTCM, as I have–there may not be many tricks left in the global reflation bag at the central banks. We may stretch the 18 months to 30 months with an all engines failing scenarios. This is the bigger picture problem/risk. We are in a global deflation ex the effects of weaker dollar masking that deflation somewhat on a lagging basis. In macro terms, we are not going to go anywhere very fast in 2012. This is the average case–that nothing gets resolved in 2012 and we putz around some more.
A parallel trend which can't be forecasted but can be observed, is the tendency for financial markets to have been in a trading range since mid-2009. Yes, since the initial rebound out of the 4Q08 crisis correction, we had until end-'11 simply range traded in markets. IF equities rise some 15-20+% and the dollar remains weak while gold and commodities rise, we may have a "goldilocks" (their definition not mine) type recovery that would lead to higher container volumes--but also to inflationary pressures (despite the deflation we have tended towards). But the Powers That Be actually have their fingers crossed for inflationary pressure to develop.
The Silver Lining
But a little bit more at the micro level: I am inclined towards positive for the US on a relative basis for container demand. Also, Europe may be in the process of creating its own massive reflation, which could have an effect of devaluing debt relative to gold, assets and dollars. But the timing remains to be seen. A big reflation via huge injections into banks and quantitative easing (QE) European-style could hurt the EUR, which would introduce a range of scenarios for trade–not all positive to be sure. Europe had yet to do major QE as of end-2011. A major QE which takes the EUR down another notch or two would have an impact of making Asia/China goods more expensive, and would represent one headwind to consider initially, to be followed by a more competitive Europe (i.e., German export machine stronger revival).
For containers only, I am looking for Asia to US long-haul growth to be better than the zero growth 2011 levels. The US in 2012 will be a year of politics when it would be tough to cut spending. We'll have to see also what the likes of Wal-Mart have to say, which will be later.
Since Europe growth was a little ahead of US growth in 2011, the starting position is to expect US demand to be at a lower hurdle to beat Europe. But Europe is more diverse. Also the politics of economic stimulus policies are still lagging the US. As of end-2011, I am targeting (roughly of course) 3-5% growth in TEU volumes into the US from Asia and 3% growth into Europe from Asia. Rates should be flat to higher as 2012 proceeds (ex fuel). These forecasts are subject to adjustments at all times, and will likely shift around after Chinese New Year.
The big picture, all-in forecast
• Currencies: In 2011 (starting in 4Q10 pretty much) I sold down non-dollars and stayed pretty much that way. I am not likely to go long the EUR. My long term weighting is USD+CAD+XAU (gold). The only thing that changed in the last 1-2 years was going from negative to constructive on the dollar. I like to look at all assets and prices, including container rates, in NON-dollar terms. To me that says that the dollar is still in undervalued territory, though it can stay there longer too (and I can't therefore hold all dollars)
• Commodities/oil: See the next section on China too. I am not holding my breath for a big jump in commodities in 1H12. Oil prices in December appeared to finish strong. I am not going to bet on a big drop. But I am not expecting a rise from approx $100-120/bbl levels yet. If global growth does slow more than expected and truly dips into recession, then I will expect a generally firmer dollar and weaker commodities on balance, as per normal reactions… what if we had close to zero growth in 2012, although this does seem to be consensus? My small variance, but is also partly consensus now, is the US as being a little better than expected
• Retail, China and GDP: US retail demand a little better in 2012 over 2011. I feel better about the US short term than many other areas of the globe. The political cycle is also bound to distort the picture – and may hurt prospects for needed deeper budget cuts. We will all have a better feel after Chinese New Year, of course. Industrial related demand could be weaker in 1H12, if China remains in the doldrums. The BDI end-11 certainly closed with a whimper. This type of weakness may affect demand and price levels for certain commodities (ie, iron ore for steel) relative to where anti-dollar and pro-China pro-commodities uni-directional pundits have been (ie, somewhat of a surprise to commodity bulls). But longer term the question is if China can put itself back on this "we need to pump growth for the new leadership in 2013" and "we need to get property prices up in socially delicate areas…" If this is the business as usual scenario we do see later, then this will deliver more growth. It's in the program (if we stick to the script… The US Fed loves scripts)
I've learned over the years that GDP growth, especially China GDP growth is non-sensical (with some estimates sometimes even too low!) … but it's about the socio-political process of guidance around the 8-10% China GDP levels that counts. China is between a rock and a boulder. Wages are going to go 10-20% higher in 2012, properties may be flat in Tier 1 cities, lending could be tight, but talk will have to be on letting loose on policy a bit to dampen potential protests. All the while China will still need to build a proper base for growth. Letting the economy rip in 1H12 would be a mistake, and inflation would certainly develop into a bigger problem in such a scenario.
• Inflation or deflation: We've only really gotten commodities inflation linked to the dollar declines and China over-spending, in essence. Elsewhere we have seen a lot of deflation tendencies. And deflation is bad for assets, and those who bought ships, for instance at higher levels. Many of us suspect that the desired effect is inflation. But inflation that starts off slow and quiet could become a risk later if the QE and money supply expansions are not somehow reversed (so far they were absorbed to "save the banks" and selected institutions, the quick version goes)
Let's hope we find proper growth again in the next few years, but after proper consolidation is allowed. Fake growth only leaves the system more unstable for later, which is the mistake Greenspan initiated during the LTCM collapse/bailout in 1998.
|Charles de Trenck of Transport Trackers is a Hong Kong-based independent transport advisory specialist and is the former head of Citigroup's Asia transport equity research. Transport Trackers focus on cargo flows, shipping and related macro trends. TT’s information and analysis are based on a best-efforts basis and are provided for information purposes only.|