Negative Rates Hit Global Shipping Market

The owner of the world’s biggest shipping line says negative interest rates are hurting the industry by delaying the consolidation wave so badly needed.

The monetary policy environment “means that consolidation will be much slower because it’s easy for banks to keep weak shipping companies above water,” Nils Smedegaard Andersen, chief executive officer of A.P. Moeller-Maersk A/S, said in an interview.

shippingeconomics_small Negative Rates Hit Global Shipping Market

It’s the latest example of how negative interest rates are distorting markets and potentially even slowing growth. The policy has so far had limited success in reviving inflation while money managers in countries with negative rates are warning of the risk of asset price bubbles. With the unintended consequences potentially including a slower global shipping recovery, questions as to the policy’s efficacy are bound to persist.

“Politicians aren’t making the reforms that are needed and are leaving it to the monetary policy makers to solve the economic problems that many countries face with low competitiveness and low investment levels,” Andersen said. A reliance on cheap finance in container shipping has led to “many negative effects,” he said.

The shipping industry doesn’t have the buffers to deal with more hurdles. Container lines are “staring at a terrible 2016,” with a slowdown in global trade volumes, low freight rates and overcapacity, Drewry Maritime Equity Research said in a report last month. It estimates the industry will lose $6 billion this year.

Hanjin Shipping Co., South Korea’s biggest container carrier and the world’s no. 8, is in the middle of a debt restructuring. Its banks on Wednesday agreed on the terms on condition that all creditors, including corporate bond holders, join the plan.

Global shipping lines are increasingly forming alliances to help cut costs and underpin freight rates. Last month, CMA CGM SA and three other major lines signed a preliminary agreement to form a new group called Ocean Alliance, which could become the second biggest after Maersk Line’s partnership with Mediterranean Shipping Co.

“We’re satisfied with our current position within our alliance,” Andersen said.
“But if a container line were to come up for sale — with the right profile and also at the right price — we would consider it. We are, after all, businessmen.”

Meanwhile, the era of extreme monetary stimulus looks set to continue. A growing number of central banks from Sweden to Japan have resorted to negative interest rates in an effort to revive lending and growth. Maersk’s home-country of Denmark has the world record in negative rates after hovering below zero for the better part of four years.

“The negative interest rates are unhealthy symptoms and can lead to bubbles,” Andersen said.

After almost four years of negative interest rates, Danish policy makers need to act now to prevent a housing bubble, according to the International Monetary Fund.

“We strongly encourage the authorities to take early action to lean against the wind on house price increases,” David Hofman, IMF mission chief to Denmark, said in an interview. “We see a need for action on a number of points.”

No country has experienced negative rates longer than Denmark and the way the policy plays out will hold lessons for other economies, Hofman said. While banks have fared relatively well in the extreme monetary environment, it’s “exactly in the housing market” that the effect of negative rates is clear, he said.

The IMF says measures Denmark should consider include relaxing regulation in its rental market, while house price developments might benefit from zoning rules, according to Hofman.

“The low interest rates are fueling rapid house price increases,” he said. Though a bubble isn’t necessarily around the corner, “we do think that if these things are left unchecked we may fairly soon reach a situation where house price levels are less comfortable.”

Apartment prices in Denmark rose 11.6 percent in February from a year earlier, while house prices were up 5.3 percent in the period, Statistics Denmark said last week. Apartment prices have soared more than 50 percent since their low point in 2009, Nordea Kredit estimates. Meanwhile, household debt burdens are the highest in the rich world at about three times disposable incomes, the Organization for Economic Cooperation and Development estimates.

The central bank’s deposit rate was raised by 10 basis points in January to minus 0.65 percent, but economists at a number of Denmark’s biggest banks predict policy makers may need to cut rates again after the krone strengthened. The country’s sole monetary policy mandate is to defend the krone’s peg to the euro. The extremely low rates brought on by that policy have fed through to Denmark’s mostly AAA-rated mortgage bond market, with some short-term loans available at negative rates.

Danish home prices have surged even as consumer prices have stagnated and economic growth has remained weak. Handelsbanken characterizes Denmark’s situation as a “low-growth crisis.” And despite being home to the world’s longest negative rate experiment, private investment has slowed and savings have risen.

Hofman says the lack of investment is “more of a global phenomenon” that’s “tied to high uncertainty.”

But in Denmark specifically, “there’s been deleveraging among companies,” which has “impacted their ability and eagerness to spend money on new investments,” he said.