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Affinity Policy Comment 20 May 2024

A Drop In The Ocean

From an outsider’s perspective, China’s main supply issue is the nation’s industrial capacity and the danger its production is so big it will destabilize the global economy. However, in Beijing, the real worry appears to be about housing.

Developers for years took on leverage to snap up land and embark on grand new projects for which, it turns out, the demand just wasn’t there. When the central government began to force broad deleveraging starting in the late 2010s, it sent the industry into a downward spiral. Real-estate companies couldn’t get new credit to finish off their projects. Buyers were left hanging, having forked over substantial down payments, without getting their new home at the end.

That spooked other potential buyers, leaving developers with all the less money to complete new apartments in a vicious circle that according to data released last Friday, saw residential property sales crater by around 31 per cent y-o-y in April.

In such a situation, simply lowering interest rates and reducing regulatory down payment ratios isn’t going to fix the problem. Something much bigger is needed.

In Too Big to Fail, a 2011 film on the US credit meltdown, the Treasury secretary tells the Federal Reserve chair that a possible solution was for the government to buy up all the foreclosed properties across the country, then burn them down. That would remove the supply, bolster prices on remaining homes, and kick-start the development engine again.

Washington didn’t go down that route in the end. But according to Bloomberg Beijing appears to be taking a step towards phase-one. On Friday, China’s economic policy chief He Lifeng led a meeting aimed at mapping out a resolution. The grand plan is for local governments to buy up unsold homes. The central bank will provide loan support to commercial banks to extend credit for the effort.

Local governments can then turn the properties into affordable housing. Investors liked the idea, sending an index of developer shares up by about 10 per cent on Friday.

While the idea may look good on paper, in reality Beijing may be overlooking the immense challenges involved. Local governments already hardly have fiscal capacity to purchase the giant overhang of property supply. One of their main sources of revenue had been sales of land rights to developers. That revenue stream was decimated and the likelihood of the reverse happening appear extremely farfetched.

Local authorities also shelled out enormous sums during Covid to implement draconian pandemic controls. Goldman Sachs estimated their total debt load last year at USD 23 Tr. And according to the bank, getting outstanding housing inventory back to 2018 levels would require the equivalent of more than USD 1 Tr.

These figures make the USD 41 Bn of lending support from the People’s Bank of China unveiled Friday look like the proverbial drop in the ocean.

Elsewhere, underlying inflation momentum remains elevated in the US and is more well-behaved in Euro Area. Inflation drivers are painting a mixed picture with weak goods inflation and strong services inflation, but overall inflationary pressures should weaken in 2024.

Energy and metal prices have moved higher over the past month. Tight labour markets continue to support upside risks to core inflation despite signs of gradual easing. The overall market expectation is for central banks to take a cautious approach to cutting policy rates.

The latest US CPI was lower than expected on headline level at 0.31 per cent m-o-m but landed close to expectations in core terms at 0.29 per cent. Both energy and food contribution fell short of market expectations, but core components were widely in line with forecasts. Modest core goods deflation continued, while shelter, health care and other core services saw moderating inflation pressures. Especially the latter is a relief for the Fed after clear upside surprises seen in February and March data. Labour market indicators have also remained consistent with easing cost pressures.

Meanwhile, Euro area  inflation in April stood unchanged at 2.4 per cent y-o-y, whereas the core measure surprised marginally to the upside, falling only to 2.7 per cent y-o-y. The release confirms the overall picture seen in recent months with the momentum in services inflation to the high side. Services inflation came out at 0.3 per cent m-o-m in April following a 0.50 per cent m-o-m increase in March. In tandem with an increase in the PMI services price index the sticky services inflation poses an upside risk to the inflation and ECB policy rate outlook, especially with the economy growing again. Headline inflation should flatline over the summer due to energy base effects, but then continue to decline from the second half of 2024.


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  • Carbon

    Carbon

    Using tailored analytics platforms, we offer client-specific advisory and trading services across the global carbon markets. Contributing to hedging strategies, sustainability reporting and financing requirements, our aim is to assist clients in managing their financial exposure to the approaching energy transition.

    Contact: Hugo Wilson
    [email protected]
    +44(0)20 3142 0121

    Dry Cargo

    Dry Cargo

    Our dry bulk chartering teams in Sydney, Melbourne, Perth, Santiago, Lima, Montevideo, Buenos Aires, Singapore and London are cargo-focussed and they fix voyage, COA and time charter business on behalf of their clients with a wide range of ship owners.
    For Atlantic business please contact Hans Bredrup
    For Pacific business please contact Rahul Khanna

    Contact: Hans Bredrup
    [email protected]
    Contact: Rahul Khanna
    [email protected]

    LNG

    LNG

    Our young and dynamic LNG team possess wide-ranging experience of spot and term charters working with all major LNG shipowners and charterers. The LNG team has close interaction with the Newbuilding and Sale & Purchase divisions with an unrivalled track record of contracting LNG newbuildings and in the sale and purchase of LNG assets.
    We maintain up-to-date knowledge and an understanding of new technologies within the LNG sector to ensure that our clients can make the most suitable and cost-effective decisions on shipping solutions.

    Contact: Joni Mackay
    [email protected]
    +44(0)20 3142 0133

    Newbuilding

    Newbuilding

    Our Newbuilding team has concluded over 500 newbuildings of all types, including LNGCs, FSRUs, drillships, crude tankers, product tankers and dry cargo vessels. We have contracted in all major newbuilding centres globally, with particular focus on the Korean Shipyards.

    Contact: Nick Wood
    [email protected]
    +44(0)20 3142 0111

    Offshore

    Offshore

    Affinity Offshore is based out of our Oslo and Houston offices. The Team focuses on world-wide sale & purchase of offshore support vessels, as well as chartering – particularly in the Americas and Mediterranean/MENA regions.

    Contact: Tor-Øyvind Bjørkli
    [email protected]

    Research

    Research

    Our research department combines real time market information with econometric modelling and the latest technology. 

    Contact: Sevita Kondyliou
    [email protected]
    +44(0)20 3142 0182

    S & P

    S & P

    Our Sale & Purchase team has extensive experience of working with private clients, national shipping companies, major corporates, oil companies, grain houses and institutional investors. We provide a cradle to grave services across all shipping sectors. We operate from London, Singapore and Seoul to give 24-hour coverage of the markets, working for both newbuilding and second-hand buyers.

    Contact: Tom Morrison
    [email protected]
    +44(0) 20 3142 0128

    Tankers

    Tankers

    Our established tanker chartering teams serve the industry from London, Houston and Santiago delivering a highly proficient spot chartering service with a prime position in the fuel oil market. The team has close relationships with oil majors, national oil companies, oil traders and major ship owners and operators. 
    Our ethos for operations and post-fixture is simple: these roles are as important to us as the chartering/commercial function, and we continue to apply those same principles of professional ship broking throughout the life of each fixture.

    Contact: Tim Gurdon
    [email protected]
    +44(0)20 3142 0142

    Valuations

    Valuations

    We provide transparent, objective ship valuation service to major owners, banks and other financial institutions at short notice and a daily basis. We provide a retainer service for regular fleet valuations.

    Affinity Valuations Limited Terms of Business

    Contact: Stuart Morrison
    [email protected]
    +44 (0)20 3142 0144

    Carbon

    Using tailored analytics platforms, we offer client-specific advisory and trading services across the global carbon markets. Contributing to hedging strategies, sustainability reporting and financing requirements, our aim is to assist clients in managing their financial exposure to the approaching energy transition.

    Contact: Hugo Wilson
    [email protected]
    +44(0)20 3142 0121

    Dry Cargo

    Our dry bulk chartering teams in Sydney, Melbourne, Perth, Santiago, Lima, Montevideo, Buenos Aires, Singapore and London are cargo-focussed and they fix voyage, COA and time charter business on behalf of their clients with a wide range of ship owners.
    For Atlantic business please contact Hans Bredrup
    For Pacific business please contact Rahul Khanna

    Contact: Hans Bredrup
    [email protected]
    +56 99 887 3036
    Contact: Rahul Khanna
    [email protected]

    LNG

    Our young and dynamic LNG team possess wide-ranging experience of spot and term charters working with all major LNG shipowners and charterers. The LNG team has close interaction with the Newbuilding and Sale & Purchase divisions with an unrivalled track record of contracting LNG newbuildings and in the sale and purchase of LNG assets.
    We maintain up-to-date knowledge and an understanding of new technologies within the LNG sector to ensure that our clients can make the most suitable and cost-effective decisions on shipping solutions.

    Contact: Joni Mackay
    [email protected]
    +44(0)20 3142 0133

    Newbuilding

    Our Newbuilding team has concluded over 500 newbuildings of all types, including LNGCs, FSRUs, drillships, crude tankers, product tankers and dry cargo vessels. We have contracted in all major newbuilding centres globally, with particular focus on the Korean Shipyards.

    Contact: Nick Wood
    [email protected]
    +44(0)20 3142 0111

    Offshore

    Affinity Offshore is based out of our Oslo and Houston offices. The Team focuses on world-wide sale & purchase of offshore support vessels, as well as chartering – particularly in the Americas and Mediterranean/MENA regions.

    Contact: Tor-Øyvind Bjørkli
    [email protected]

    Research

    Our research department combines real time market information with econometric modelling and the latest technology. 

    Contact: Sevita Kondyliou
    [email protected]
    +44(0)20 3142 0182

    S & P

    Our Sale & Purchase team has extensive experience of working with private clients, national shipping companies, major corporates, oil companies, grain houses and institutional investors. We provide a cradle to grave services across all shipping sectors. We operate from London, Singapore and Seoul to give 24-hour coverage of the markets, working for both newbuilding and second-hand buyers.

    Contact: Tom Morrison
    [email protected]
    +44(0) 20 3142 0128

    Tankers

    Our established tanker chartering teams serve the industry from London, Houston and Santiago delivering a highly proficient spot chartering service with a prime position in the fuel oil market. The team has close relationships with oil majors, national oil companies, oil traders and major ship owners and operators. 
    Our ethos for operations and post-fixture is simple: these roles are as important to us as the chartering/commercial function, and we continue to apply those same principles of professional ship broking throughout the life of each fixture.

    Contact: Tim Gurdon
    [email protected]
    +44(0)20 3142 0142

    Valuations

    We provide transparent, objective ship valuation service to major owners, banks and other financial institutions at short notice and a daily basis. We provide a retainer service for regular fleet valuations.

    Affinity Valuations Limited Terms of Business

    Contact: Stuart Morrison
    [email protected]
    +44 (0)20 3142 0144

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