On September 19th, the Federal Reserve began its first interest rate cut in four years, lowering the federal funds rate by 50 basis points to 4.75% to 5.00%, a decrease that exceeded market expectations. The interest rate cut will have a chain reaction on the global economy. For the shipbuilding market, it will be beneficial to reduce shipbuilding costs, narrow exchange rate gains and losses, and boost the new shipbuilding market. Its impact is mainly reflected in the following three aspects.
1, New shipbuilding demand
The Fed's interest rate cut will lead to a decrease in financing costs for American businesses or individuals, thereby stimulating the US consumer and investment sectors and boosting the domestic economy. With the rise in commodity prices and the absolute increase in the quantity and amount of imported products in the United States, the expected profits of domestic American companies will increase, which will drive the growth of trade volume with US trading partners, commodity trading volume, and the global economy. The growth in global trade volume will stimulate demand in the shipping market. In recent years, against the backdrop of high inflation and interest rates, global trade volume has continued to decline. In 2021, the growth rate of maritime trade volume was 3.4%, but in 2022, the growth rate of maritime trade volume contracted to -0.3%. After the pause button was pressed for interest rate hikes, the growth rate of maritime trade volume recovered to 2.4% in 2023. The sluggish global maritime trade volume has caused certain suppression of demand in the shipping market. It is expected that after the implementation of the Federal Reserve's interest rate cut, it will drive the growth of global trade volume. The recovery of trade demand will further promote the long-term development of the new shipbuilding market on the basis of the green development of the shipbuilding industry and the renewal of old ships driving the market.
2, Ship construction cost
Prior to the Federal Reserve's interest rate cut, the increase in import costs of power and propulsion equipment, mechanical and electrical equipment, and communication equipment denominated in US dollars, due to inflation and the Fed's interest rate hike, greatly increased the cost pressure on shipyards. After the unexpected interest rate cut by the Federal Reserve this time, the procurement cost of ship equipment that must rely on imports in subsequent new ship orders may decrease, and the pressure on shipyard cost control will be reduced. Meanwhile, as the interest rate cut has to some extent reduced the financing costs of independent shipowners and shipping companies, the financial expenses they need to bear will also decrease, which will help increase investors' cash flow and enhance their willingness to invest in new ships, promoting potential shipowners to increase their plans to purchase new ships and further expand their fleets.
3, Exchange gains and losses
The Federal Reserve cut interest rates more than expected, resulting in a decline in the yield of US treasury bond bonds, a decline in valuation and discount rates, and a rise in US stocks and global stock markets. At the same time, due to the general decline in financial product yields, which drives up safe haven assets and capital outflows, the US dollar will face downward pressure. As the main reserve currency, the US dollar's interest rate cut by the Federal Reserve will weaken its strong position, causing other countries' currencies to appreciate relatively. After the Federal Reserve opens the interest rate cut channel this time, it may trigger a downward trend in the US dollar index and an upward trend in other major currencies in the short term. If the exchange rate of the Chinese yuan against the US dollar appreciates significantly relative to the Japanese yen and the Korean won, the bargaining power of shipping companies in subsequent new orders will be relatively weakened. In terms of income, as exported ships are settled in US dollars, if the current relatively friendly exchange rate level shows a significant shift, it will to some extent narrow the profit margin of shipbuilding enterprises.
