,

t~ATION.At llAlifK FOR REd6NS~RUOTION AND DEVELOPI@~

TO DE-SK

VJlTH1N ONE vVEEK

EOONOMIC DEPARTMENT

PROBLEMS RAISED BY LOANS ON SHIPS

Prepared by: Arthur Wubnig January 11,1949

Oopy No • .J£.

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Economic Department Prepared by Arthur Wubnig January II, 1949

PRO:BLE~·'IS RAISED .BY LOAl~S G:J SHIPS

1. This discussion is concerned with the urgency, productivitr. l'md

soundness of .Bank loans in support of ship investment.

I. Extent of Present Ship Investment

2. The world IS shipypxds are at "lOrl{ on a becklog of 13 • .5 million d':Tt

of new craft. worth perhaps ~2.8 billion.

Vessels on order, late 1948

i'iillion d,,,,t Under Uot yet Billion

Class Total construction le.id down dollars Total .llt.5. hl 8.2 2.8

Tankers 7.3 1.9 5.4 1 .. 1 Freighters 5.1 0.9 Pe~ssenger -

cFrgo ships 1.1 0.8

3. This is enough new tonnege to keeTl the yerds working close to C::".;:)8,-

city. as limited byma.teriels supply, for the next 4-.5 years.

Year

1946 1947 1948

Vessel launchings, 1946-48

000 GRT

2127 2136 21.50

~ Estime.te from performence in first 9 months.

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4. lvIuch more tonnege is due to be Bdded in the next 4-.5 yeers t:,l~n is

P-pt to be wi thdrp'c'1ll through scrapping. casual ties. E'nd depcti vD,tion.

Expected grot,rth of cape.ci ty. 1948-52 -l,Ii11ion d,,!t-

Passencer IvIeasure To tEll Tankers :E'rei{,;h tel'S shielS

U e':' tonn~ge t 13.5 f 7.3 f 5.1 {- 1.1 Scrapping 2.4 - 0.5 ... 1.8 - 0.2 CD.su~l ties 1.5 - 0.4 ... 1.0 ... 0.1 Def\ctivetion ~ M ... 5.7 --Net increase or

decrease t 3.9 t 6.5 - 3.4 t 0.9

!l! ';Ii thdra 1V't'1 for lay-u:!) in U.S. reserve fleet

5. The existing merchant mprine embodies considerebly ::lore freightt'n'

and tanker lift. but consider<,bly less passenger tonne{;e. tlum tt.e pre-NPr

fleet. On E\ broad vie,., of pve11pbility. counting U.S. reSerY9 Cl'?:ft, 20-?5

Tlercent ;:'lore shipping is afloat. On.9 strict vlEnl, isr~or:i.ng D.S. ~eserve

craft. 5-10 percent more tonnrge is evaileble.

MeE'sure i

To tel ?float U.S. reserve Effective sup~)ly TAnkers Freighters

PtlJ;Stimger - cargo

Compprison of current "d th. nre-':I&r fleet - Nillion dv't -

Se-gt. 1, 1939 June 30. Jr9~~ 80.6 99.0

2.4 III ~gl 78.2 .§.:L:i 16.6 22.2 51.9 55·5

ships 9.7 5.8

AI ~lainly or entirely freighters

+!1creC'lse or d0crease

.,.-....,-.. ,-1

f 231"

~5HQ.. + '7 . , f :J;, I 7 t

- 40

======================================~=========. --

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6. The effective su~rly of oce~n tonnpge is foreseen to e~and ue~~urpbll

over the life of ERP. True, srmev'h",t less freighter lift ',romises to be Ft

the disposal of the globsl eC0nomy in 1952-53 than is no'.,r F'flo~t. Yet 30 "1"'ler-

cent more tanker lift is due to be in service, 15 percent more :DB.ssenGer to!'.l.DG(

Compf'rison of current fleet "li til thr't in sight - Nillion d"rt -

Hessure Mid-1248 1252-~3 Incre~se or dec.~M...-Total afloa.t 99.0 108.6 f 9;; U.S. reserve 15.4 11:1 21.1 ~ fJ.'L Effective su~~ly 83.5 ~ ~ 5 Tpnkers 22.2 28.7 29 Freighters 55.5 52.1 6 Passenger - cargo

ships 5.8 6.6 t 14

~/ :Mainly or entirely freiGhters.

-= ---7. The 1I1Orlcl sll.Ould thus be equi}')ped. '!;Ii th f' Inrc:er mercl:ant :::nrrir:e in

1952-53 thpn before the "rar. iieasured in nominal lift, tl,ere is t'T)t to be

much the same freighter tonnage (eprrt from depctiveted U.S. shiT-s), t1:ree-

fourths more tS.nker tClnnege. -but p third less pa.saenger tonnp~e. Iviee.sured

in true cansci ty, 1111 th full al10'."ance for FVer?ge !"ge, speed, stow'lge, t~n-

arnuud. etc •• there is !"pt to be 10-15 p€rcent more freighter sll'r'Tlly. t,·/ice

as much t~nker supply. but onl;:," three-fifths BS much passenger sl.i?)ping.

Comparison of fleet in sight '.'1. th that of pre-'''a.r -r:illion dut-

Measure To tel f'flor.t U.S. reserve Effec ti va suppl~.r

Tflnkers Freighters Ppssenger - cE'rgo shi})8

L!:1te 1239 80.6

2.4 !J.! 28.2 16.6 51.9 9.7

11/ loIIainly or entirely freighters

1952-53 108.6

21.1 sf §L.5. 28.7 52.1 6.6

lncrel"se or r;lecreose t 35;;' 1780 1 12;~ f 13

• - 32

------------------~------------------------~-------

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II. Urgency of Present Ship Investmen~

8. The need of ~.dded tanker capaci ty is clear-cut. Petl'oleum consU7nTltion

continues to sV1el1 the "rorld over. :Big yetroleum l")rojects f're under IIle:' in

the I'iiddle Ee-st end the Ceribbeen to feed more end nore oil to the 0.6./1..,

Canada. and \1estern Europe. Temporarily, the effective supply of ocean tankerE

is in reasonably close balance with the effective demend for oil neul?ge. Yet

e much bigger job impends requiring a much bigger fleet. So reason ticS oil

companies for \',hose direct or indirect Dccount the greet bulk of C'll tile new

tonnEge is building.

9. vlhether the wrld needs ell the ta.nker cl"lpe.ci ty nov' in sight is un­

certe.in. The existing construction program is geared to the expected gro\\rth

of demand PS foreseen by the bie oil coml)anies. Their forecasts ma.y over­

state or under-assess the future C'ppetite for oil 8S e fuel. 1utricant. end

raw material. In any Cfse. they envisage enou.gh eroHth of consu.;n;:;tion by

1952-53 to ~bsorl} the entire expected increo.se of ldddle Epst and Cari bbean

output. They are thus equipping themselves ,·rith sufficient tenker cP:':e.city

to haul a third more oil than presently moves in ocean transport, at lepst

twice as much as used to move before the lilar.

10. There is also a cleEl.r need of additional passenger tor.negs. Cut doW!

by "!ar losses to hD~f the effective size of the pre-'!!rr fleet, the existing

fleet ht's as much or even more traffic to haul. Overseas tourist trevel is

booming in a full employment economy. Surplus labor is migrf'tting from Europe

to other ares.s. Part of the swollen demand can be serviced by oversee_s air­

lines, a nei'l mode of transport, v1h1ch Bre moving about s. third of the combined

traffic by ship Eind phne. The bahmce, however, is far be~rond the existing

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capl?ci ty of the pe.ssenger fleet. Heavily overbooked, trip after tri:n, 'Doth

luxury liners end immigrant ships are in a,cute short supply.

11. 1vhether the "lOrld needs all the added passenger tonMge no'" b'tndint~

1s obscure. Insufficient capacity 1s on order if ,,,e aSsume that tr!e global

economy "Till continue to function all-out, that European emigration Tlressure

\,r111 remain intense. and that traffic losses to airlines ",r111 hold "rlthin,

certain bounds. Excessive capacity may be on order if "'fe assume tl big slm-np

in consumer income levels and/or ~t big cutback of Europee.n migrrtion schcd'1.1es,

andlor further big trnffic d1 Yersion in fevor of airlines. Given only three­

fourths as much \'.Tork. the 19.52-53 fleet should be no less intensi vely emplo~red

tru;..n that of 1936-39. To operl':\te ElS intensively 1"S the e:.l';isting fleet, 110'.'[­

ever, "rould require 20-25 percent more traffic than is presently !:loving. 7et

the existing fleet is overbookei 1;,1i t,h rruch !:lure t7'pffic than it cP"n heul,

forced to render inferior servi.;e for \'rant of ar'.y ",'orkin£; mrrg::'n of spf're

capacity I"t all.

12~ Ii plaUSible CBse con be r:J['da for the bulk of the freighter tonn1"!ge

currently on order. f.'Iuch of the exi sting fleet needs to be replflced by ne'"

craft in the interest of fuel, turn-pround. and cRrgo-working efficiency; e.g.

w~r-built Liberties or Victories a.s "lell as overage ships. Certc-i::.. forms of

traffic such as refrigeretor transport are subject to structurel t:;ro 1;lth cr-lUng

for a,ddi tiond capaci ty. Deepi te an ample suppl,y of tramp shipping as a 'l-lhole.

there is a tight sunply of sm811, handy tra.'nps fit to service the Baltic and

IvIedi terranea,n ports. Oper!"ting bigger Bud better freighter fleets, the

European economies ",rould exo8nd their p011Ter to e?'.Tll and save dollar e:xch!mge

from shipping.

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13. Prrt of the freighter tonnage now building is demonstrably non­

essential. A certain fraction, Le. is on order bece,use the U.S.A. hea loc}:ed

up a gree.t reserve of 'llFar-buil t cr;:lft w:b..ich foreign operators ere deberred

from buying or chertering; because verious extrp. ..... EtlrOpean econoI:lies inten.d to

become self-sufficient in shipping regf'rdless of the international division

of labor; because of the v.,orld-\"ide trend outside Europe to traffic quotE'S

in favor of the home-o~'med fleet. As such ns'll! tOnl'l8.g0 comes into service,

a. larger body of ships "Jill be on ce~l to do the same jO'!J which e, smRller rJ eet

could readily perform.

14. The e.deqUc"),cy of the freig::ter fleet ir~ sight depends on export -

import levels ell.ead, the U.S. policy of deectivpting her surplus , f:nd

the pa.ce of the extre.-::JurO'DeDn d:ri va to shipping self sufficiency. To et:l"91oy

the pverege freighter of 1952-5. 1:0 less intens::" 'l'S: y th!:'n t;i8 pverege ship

of 1936~39 "lould ret;Luire e.t leest 10-15 ?ercent more ,,'odd trade than pre-\%lr.

Regardless of traffic expansion "rl., thin replistically conceivP'ble 11mi ts, a

glut of tramu shipping would ~romptly ensue the U.S.A. decides to re-

Dctivrte much of her reserve tonnege; e.g. PI:! a merlsure to help revive Gerrnsn

pnd Ja})8neSe shipping. Despi te full :?rouuction, full e~:1plo;yment. s.nd flourish­

ing trr--de, Europe might be seriously over~equipped "Ii t.h freig~lters in a ;,:;10b81

economy vlhere each country operates enough ships to !1eul half her export -­

import trpffic.

III. Productivity of Current ,Shin Investment

15. The commercial productivity of ship investment is distinct from its

be.lance of y8>yIDEmts yield, from its imppct on £;10081 \·Jell-being. OOln.lnercially,

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the new ships no','! building ,·Jill be productive as they yield profits to t:leir

o1:rners. From the balpnce of TJE:yments vie\tpoint. they 'crill be productive !':.S tIH'!;

can help to e~and the doller income of the rest of the ,·mrld at the eXY f3Lr;8

of the U.S.A. Considering the global economy, they will be productive 88 tney

tend to incre~se the \<JOrld out"(jut and exchange of goods and services.

16. "iii thout disputing the urudence and sagacity of shipowners 'll'Jho order

ne~'T tonne.ge at prevailing 1')rioes (double or tri pIe pre-;.,ar) the vI time te

profi ta,bill ty of ship investment B.t the current market is open to serious

doubt. Recent slumping values for old second~hand craft (do~m 25-35 percent

since early 1948) suggest the possible imminence of lo,,,er purchase :'lrices for

ne"! built craIt as well (e.g. through some contraction of shipbuilding profit

margins). Tramp c.b.arter rates are apt to drop fnrther (do'llrn 35...40 percent

since early 1947) end liner tt;l,riffs may also be forced dO'l.\1l1 as U.S. relief

and reconstruction exports continue to contract in the face of en expending

world fleet. Since the necessary payload factor for a ship to break even is

. 1/ 1 () much higher today then ever before , the cost y new--built craft ~re: a higl'.J.y

vulnerf' ble profi t-'II'rise to cyclical slumps (less fCerega.te cr-rgo on offer) as

"rell C's shipping slumps (less cP.rgo per vessel i (b) hie;hly vulnerable. if

financed through mortgage debt, to any deflation of "'odd prices ~.head; and

thus, (c) pa.rticulE'.rly risky purchr>"ses for ()pere.tors ,.,ho Mve to pay hlgher

weges than do their foreign competitors; e.g. European wage bills rer~ing from

31-32 percent of U,S. costs for France, ltely, and liorwey through 35 ... 36 per.-.

cent for the U.K., the Netherlands. sad Sweden to 4)-45 percent for Denmark and

Greece.

l(By payload f1!'ctor 'lIe here eBen th~ percent of a, sh~pf$ capl",city to 11ft cargo which is actually utilized in heuling revenue freight.

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17. \'Jestern Europe is under e.cute pressure to restore end ey;.,end l'.er

dollar receipts from merchant shipping. Her exch ... '"'nge of ship'!ing services

"n th the U.S .A. used to bring home large net receipts; i.e, roughly ~125

million in 1937. It now engenders large but shrinking net pFlyments 'I:lhich

totel $1 • .5 billion from 1946 to date. In 1949, Western Europe may 'l-rell incur

e deficit of $50-$100 million on shipping account with the U.S.A.

===================== .. , Shipping e.ccount between U.S.A. end )vestern Europe

- t·Ullion U.S. dollars -

U oS. receipts e.t Euro~ean receipts Year European expense ~/ et U.S. expense Jd/ 1937 150-175 275-300 1946 880 310 1947 1130 390

1948 (first helf) (590) £/ (370) £/ 1948 (full year) (520) sf (350) V 1948 (400-500) !AI (350-400) !!I

Net ]j-llrolJean baltnce

I- 125 - 570 - 740

-(220) .,.(170) -(50-100)

~ Freights end fares of U.S. shi~s plus port exnenses of European shins. b/ Freights and fares of Europeen ships plus port expenses of U.S, shins. £! Annual rete. £1 Crude approximation. ~ Crude forecast.

t' ..!...--

18. \vestern Europe needs a bigger, better fleet to increase her :l'Jotential

earnings and savings of dollar exchange from merchant shipping. Without added

tanker capacity, she will be forced to pa~ for the hire of U.·S. craft.. i:i thout

added. passenger capacity, she will be forced to forego the haulage of IT.·S.

tourists. :By replacing overage and functionally unfit freighters ':lith now,

efficient craft, she will reduce her dollar charges for fuel, lubricants,.

loading and unloading.

Measure

Comparison of U.S .. with llJ'estern Europeen Fleet ... million dv/t

Late 1939, AcU.·$ 1952/1953 Exnected

Europe J?J u. s. A-I

llurop~/ U.S.A ..

Passenger-cargo ships.. 6.7 Freighters •••••••••.• 35.5

0.9 4.5

4.1 28.9

0.5 14.8

L~. 8 31.1

0.6 8.9 8.4 1·9 Tankers ............... ~.-=1~0.:.. • .L5 ___ -~~_ 11.0 2;4 15·9

Effective supply •••• 52.6 9.3 44.0 22.6 51.8

2.4 £I • 1~,4 s/ • 11.7 t14.0 38.1 51.8

u.s. reserVQ ••••....• ~. __ ~.~ ____ ~~~-= Aggregate supply .! •. 52.6 39.0

ODC countries only; ]:}./ .P.lmost entirely freighters from :Jorld :Jar I; Almost entirely freighters from Horld. i'Jar II.

19. Western Europe's shi~ investment effort may yrove to be much less

productive of dollar exchange than she now envisages.

A. The U. S.A.·, Brazll, Argentina, India. and other extra..,.~ropean

countries are expanding and modernizing their fleets. The intend

to operate them in their own export - import traffic. ~'hey mean

to haul at least half the cargo.

B,. '1Jhe German and Japanese merchant fleets may be permitted to reviVE

conceivably through the chartering of laid-up freighters from the

u.s. Reserve. If a revival ensues t the foreign eihcnage potential

of the British. Dutch,. liorwegian. and other eXi?anding fleets i'lould

necessarily be cut back •.

20. The world-w~de trend toward shipping bilateralism may react seriously

on the earning power of certain Euro~~ fleets '<lhich get most of their income

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from third-country traffic. The :ari tisht lior>1egian., and Greek fleets e. g. are

highly vulnerable to 50-50 traffic rules such as those ap::Jlying to :SCA e::)orts.,

In a global economy where each country hauls hal.f her export-im~)ort in her Oim

bottoms, the bulk of the norwegian and Greek merchant marine "I:!Ould ha,v0 to bc

laid-up or sold. So "lould much of the U. K. t s tonnage.

21. Ship investment at present is a reasonably productive uSe of the

world's resources of materials, labor, and equipment.

A. The optimum functioning of the global economy clearly cal.ls for

more tankers t more refrigerator crafts t more i.l1llnigrent shi:Js. As

modern, efficient freighters re:-llace overage, obsolete craft, the

\'lorld fleet can haul more cargo for less use of fuel, supplies t

and manpm·ler. If foreign travel be deemed desirable, lu:x:u.ry

liners to help realize it qualify as productive.

:a~ Certain countries must invest heavily in ships if they are to

invest productively at all. Without big merchant fleets, both

norway and Greece would lose most of their 2'0\-.'0r to cOI1:lrJP...nd

goods and services from the rest of the ,vorld. Ueither the

Hether1ands nor Italy has e. "ride range of e:lq)ort al ternativ0s to

the sale of shipping services. The U.K. "lould be hard-pu.t to

maintain her present standard of living \1i thout international

income from shipping~

C. Certain countries must invest heavily in shipping to realize

full use of their manl'o\-ler and equipment. Italy is a notable

Case. She has unemyloued shipyard labor. unemployed shipbuild­

ing facilities, By putting both to "Jork to ex.::>and the merchant

fleet, she gets a useful return fr.om labor \-Thich would other'tIise

have to be suppo:rted in idleness. from equipment i'lhich ,,,auld

otherwise have to lie unused~

22t Part of the current ship investment. however. is an outright waste of

labor, materials. and equipmen~~ Som of the tonnage n~w puilding stems from a

lock-up of deactivated U.S. craft, self-sufficiency motives, 50-50 traffic rule~

.J.

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It thus represents capacity for which there ,,,ould be no need at all und.ar a,

rational use of ,"1orld resources.

IV. Soundness of Present Ship Investment

23. Although the world's ship investment drive is reasonably 1;lell fopnd.e6

the :Bank incurs genuine, ponderalble :ri sks by lending on the security of me:'chB:,1

vessels. There are risks, e.g., of:

A. A big cyclical slump in the next fe"i years 'I.-Thieh mitht t em~Jora:dl

"lipe out the earning pm-ler of all but prime eraft. and drive d01.'Tr.

vessel"values far beloW' the present market:

:B. Recurlng slum~s after 1952 of such tnte»sitl and ~lrat1on as

might greatly reduce the average earr.ing p01l1er anel sales value

of ocean ships computed over the entire business cycle.

C. A shipping su:rplus proper in the sense of a ~rolonGed lay-up of

much of the world fleet becallse foreign trade, oil consumption,

and ocean travel fail to reach certain post~EP~ norms:

D. A deflation of \",orld prices, including ocean freights nnd fare t

serious enough to impair most or all the equity behind the 3ank f s

prior liens;

E. Limited hard-eY~hange earnings by the Europerul fleet despite an

ample income at the expense of Latin ,America. the Far De,st,

colonial de~endencies, etc.:

F. Over-~nvestment by certain European economies in the sense of

incurring dollar. debt for craft \'lhose earning pm'Jer is mainly

in soft currency;

G. A progressive loss of earning p01:fer f if 50-50 practices s~')roadt

by European fleets mainly operating in third country traffic;

H. A collapse of tramp shipping should the U.S.A. decide to activate

her laid-up freighters. of tanker shipping if serious over-

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production of 011 develops. of immigrant shipping if OVcrS€;2r,

countries become un'!tlilling to absorb surplus European labor.

24. Although some of these risks are inherent to the financing of ',Jorld

recovery, others are \Ali thin the partial control of the :Bank a..'1d might be l:!in::'­

mized as follows:

A. Restricting our ship loans to the procurement of ur6ently-r.0ed.ed

craft with a favorabie demand outlook. e.g. tankers, iL~1igr2nt

vessels, refrigerator carriers, a'1d certain handy tram9s for

coastal ,·'ork.

:8. Refusing to lend for the proourement of extremely expensive

craft subject to extreme vagaries of earning ~oo""'er - e.g.

lumry liners - or for that of craft vrheih are alreao.y in

ample supply, e.g. ordine,ry tramp freighters.

C. Lending for ship procurement to no countries e:x:cel)t those vlntch

have clear-cut natural advantages to operate a merchant fleet.

\lhieh are heavily reliant on shipping iMome for "balance of

payments purposes, and which are demonstrably proficient in

running ships so as to bring home forei~l eXhcnage earnings.

D. Refusing to lend for the e~ansion or modernization of fleet

vIhere national self-sufficiency is the primary motive, "lhere the

international division of labor miGht be thl"arted, 1:1here un­

necessary ne'Vl capacity t'l7ould be engendered.

E. Refraining from dollar loans on ships i'lhose earning povJer is

apt to be primarily in soft eY~hange.

F. Financing the full purchase,price of no ships e~e~t those

bought as outright bargains; other1:11se financing the collateral

value only on the premise of a forced sale,

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G. Securing loans to private shipOimers by a ship mortg8Ge to -;:'e

further backed, if feasible, by a long-term contract of C~18,rter

hire in appro,riate currency.

25. Subject to these precl;l.utions. the :Bank may lend as p::"oductivelJ < .• J

safely for ship investment as for investment in any other basic industry

closely tied to world trade.