Availability of finance will be a key factor in the shipping industry’s ability to cope with trade growth along the Maritime Silk Road, says Emmanuel Kapizionis FCCA
This article was first published in the October 2019 International edition of Accounting and Business magazine.
The Maritime Silk Road, the sea route component of China’s Belt and Road initiative, is set to link up more than 20 countries. Starting from China’s east-coast ports, it will extend via South-East Asia and the Indian subcontinent to East Africa, the Arabian Peninsula and Egypt, and finish up in Europe.
Expected to boost economic growth and build prosperity in all the countries along its extensive path, the initiative will demand greater investment in port infrastructures on three continents to meet anticipated future trade needs. Although global trade has fallen during 2019 and is expected to remain depressed in 2020, countries such as Singapore, Pakistan, Malaysia and India have made huge strides in developing their port infrastructures in anticipation of future growth as the new route takes shape. At the western end, Greece with its long maritime heritage is seen as the gateway to Europe and is one of China’s strategic partners. China’s Premier Li Keqiang has described the Greek port of Piraeus as ‘the jewel in the Mediterranean’.
Given these growth expectations, the next decade will be an important one for all sectors of the shipping industry – dry, wet, container and gas. The availability of shipping finance – from credit institutions pledging substantial funds to governments, ship owners, charterers, shipbuilders, shipyards and other associated parties – will be critical to support this growth. Chinese banks have already issued offshore bonds in US dollars and euros to finance various projects associated with the Maritime Silk Road initiative.
Regulation a key issue
The key question for the next decade is less about where shipping finance will come from (and in what volumes) and rather more about regulation (see box). Following the 2009 financial crisis, increased regulation of European banks – the established source of shipping finance – led companies to look elsewhere for finance. The question now is whether the unregulated parts of Asian banks, the quasi-banking industry and credit funds that have taken up the slack will remain unregulated. If they do become subject to regulation, then a shift back towards traditional bank finance will probably take place, or at least the traditional relationship between banks and shipping owners will return and make shipping loans more attractive again.
However, many other factors may affect global growth. In particular, geopolitical issues and political uncertainty may have a negative effect on global trade, causing it to lose momentum, and may be a signal for negative monetary policies all over the banking system. With this in mind, any kind of investment in shipping should aim to secure a long-term contract with first-class charterers, especially in the wet and gas shipping segments where the capital investment is relatively high.
As a bottom line, geopolitical factors seem to play an important role for the Maritime Silk Road. It will be interesting to see whether shipping finance will gradually move permanently towards Asian countries where cash has been more available for several years than in European countries. In other words, there is a trend for global cash to find available parking space in Asian countries where the Maritime Silk Road seems set to thrive in the years to come.
Shipping companies have to understand not only the leverage of their financial capability but also the cultural differences across the 20 countries along the Silk Road. Finding synergies among the 20 nations will be a huge challenge over the next decade, and it remains to be seen if harmonious cooperation among those countries and their governments can be maintained.
Emmanuel Kapizionis FCCA is a senior financial accountant at Nereus Shipping.
"There is a trend for global cash to find available parking space in Asian countries where the Maritime Silk Road seems set to thrive"