Shipping Sector : The Recovery That Never Arrived

ultramax_dry_bulk_top.jpgAs we approach midyear 2014, shipping’s economics remain stuck in the doldrums will little or no recovery in sight. The surplus capacity of ships to the cargoes requiring transportation has been aggravated by the delivery of a massive orderbook of new ships that followed the boom markets of the middle of the last decade.

This surplus is not limited to a few markets but, with the possible exception of gas, both LNG and LPG, it has affected the rest and in particular the wet and dry bulk, and the container markets. The effect has been severe as few ships in these markets generate a profit after operating expenses, debt interest and amortization.

Numerous public companies have gone bankrupt as also have many private ones. The German KG funds have been almost completely wiped out and created huge losses for the German shipping banks. The average age of the world fleet is at an historic low, meaning it will be around for at least another decade. Unfortunately when companies go bankrupt or when their ships get arrested and sold, they do not go away but continue to trade with lower capital costs, thereby prolonging the depressed freight markets.

Furthermore a majority of the fleets in most sectors trade in the spot markets without any period charter cover, in the false expectation that markets will recover or secondhand values will increase.

This however ignores the facts that shipyard capacity remains high and in countries like Korea and China has now become a strategic industry supported with domestic banks funding the construction period and government funds backing Export Credit. All without any secure operating income from charters.

Unfortunately this rush to order new ships has been fueled by an influx of new money, both equity and bonds from Private Equity and Hedge Funds that are gambling on ship values and not the long-term revenue streams from operations.

The vast majority of the ships on order today have no contractual employment and no evidential income other than indications of future ship values referenced back to the boom years of 10 years ago.

Some have likened this influx of new money to the “Blind Capital” of the mid-1800s. “Credulous capital, ignoring risks, flooding into unwise investments”.

There is no sign of any investment interest from Mutual Funds or Institutional Investors such as Pension Funds or Life Insurance companies which are usually averse to short term gambles. The speculative day traders have fun playing the rumors and the price volatility of the publicly traded companies.

Even more surprising is the activity of some of the Private Equity funds buying distressed bank debt at marginal discounts. If a shipowner cannot serve his existing bank debt, how is he going to service the new owners of the debt who have much higher expectations of return on their investments than simple bank margins?

It has been said that some of these funds are looking for default so they can convert the loans to equity, take over the ships and sell them for a profit. The track record of these deals so far is not good and the current focus on newbuildings only extends the excess fleet capacity and prolongs the lower freight rates which are the key economic of the shipping industry.

The list of publicly traded shipping companies on the New York stock exchanges is the worst performing of any sector. Original equity has been emasculated by secondary offerings and huge secured debts that in many cases today exceed the current market value of the ships that are the security. In the past 12 months we have seen the emergence of new forms of “Junk Bonds”, with double digit interest rates, which rapidly escalate on default and look more like the Cash Advance lending that proliferates among the poor. This junk is surprisingly not shown as debt in the borrower’s balance sheets and is ironically named as “Perpetual”.
So while new money is finding the shipping industry what is the outlook for the services it provides?

The freight markets for most ship types remain severely depressed because of the excess capacity that was generated from the new-building orders that followed the brief boom of 10 years ago, and then faced the financial crises and the global recession that still envelops the world today.

Yet it is reported that some $40bn of newbuilding orders were placed in the first 4 months of 2014.

This current reckless activity in ordering hundreds of new ships will only extend further the bad markets and push any balancing between supply and demand into the next decade, at the earliest. The claims of fuel economies of the new ships will not force earlier scrapping as the older ships will have less capital invested in them and can be maintained to operate until they are at least 20 years old.

There is no evidence of any increased demand for shipping, except in the gas sectors, and the newfound resources of oil and gas in the USA will have a negative effect on crude oil shipments. This may well be compounded by the new pipelines between Russia and China, the reduction in consumption of gasoline in China and the expansion of “Fracking” in Europe. The USA will reduce its imports of crude oil by at least 50% in the next 10 years and convert its trucking fleets to natural gas by 2025.

It unfortunately will take several years before the current influx of new money faces the reality that it is operating income that makes a business and not the fluctuating values of the operating assets.
Source: First International Corporation

Ship owners invest $18.4 billion during April for newbuildings and second hand vessels

shipbuilding_frontview_shipyard_top.jpgShip owners around the world have kept on piling up newbuilding orders as demand for modern tonnage has remained unabated during the month of April. According to data compiled by shipbroker Golden Destiny, a total of $16 billion was invested in newbuilding orders during April, with an additional $2.4 billion headed for second hand tonnage. Newbuilding orders were up by 7% on the month and up by 53% on the year. A total of 318 vessels were contracted, while 181 new orders were reported at an undisclosed price. In terms of second hand vessel pruchases, Golden Destiny reported a decline of 54% on a monthly basis and a fall of 30%, compared to the same month of last year. A total of 93 vessels were traded.

According to the shipbroker’s analysis, “April ended with unexpected downward pressure in the performance of dry freight market as oversupply of vessels seems to head downwards the freight market recovery. World economy in a recovery mode with fears of slowdown from the weaker performance of Chinese economy that also shadows the freight performance of dry bulkers. Chinese economic growth slowed down to 7.4% during the first quarter of the year, but its iron ore appetite stays solid and is expected to bring future firmness in Baltic Dry Index that now tries to stay afloat above the psychological barrier of 1,000 points. A downward pressure is also witnessed in the performance of crude freight rates, while the container market tries to benefit from the gradual recovery of developed Eurozone to resolve the key issue of “oversupply”. The significant upturn of dry and wet freight market, during the first quarter of the year, resulted also in a continued upward momentum of shipping investments that now has started to slow, but asset prices have not yet followed the downward incline of freight market. Investors seem that wait to see the performance of freight market and development of asset prices in the coming days in order to renew their investment strategy”, said Golden Destiny.

It added that “2014” signals to be one more challenging year with threats and investment opportunities as asset prices remain significantly at lower levels compared with their 10 years average prices. Vessels oversupply is very likely to be rebalanced with demand growth this year for the first time since the first downturn in 2009, but it is too early to confirm this trend as newbuilding appetite keeps high and refuels the existence of imbalance between vessels’ supply growth and demand”.

The shipbroker also noted that “overall, S&P activity in the secondhand market for April 2014 ended on lower levels than last month and even last year. Scrapping activity is also showing slower volume and newbuilding appetite persists on the high side. Despite the downward incline of secondhand purchasing appetite in April, shipping players keep much higher levels of activity from last year. During January-April 2014, the average number of weekly reported S&P transactions is 35 vessels, up by 40% year-on-year compared with 25 vessel purchases in the first four months of 2013 and up by 67% from 2012 levels (21 vessel purchases).
Compared with the investments in the secondhand market, in terms of number of vessels, the ordering appetite for the construction of new vessels is 97% higher than the number of vessels purchased by shipping players worldwide. During the first four months of 2014, the average number of weekly reported new orders was 69, up by 86% year-on-year (37 new orders on average reported per week in January-April 2013) and up by 165% from 2012 levels. (26
new orders on average reported per week in January-April 2012)”, said Golden Destiny.

“In the demolition market, the scrapping appetite of shipping players shows almost similar levels of last year with a soft downward incline from 2013 and 2012 levels. Record scrapping appetite in the container segment supports strong ship recycling business for the shipyard in India that offered very alluring levels of disposal rising to excess $500/ldt.
During January-April 2014, the average number of weekly reported demolitions represents 16% year-on-year decline with 16 vessels reported on average per week in 2014 compared with 19 vessels disposals per week in 2013 and 20 vessel disposals in 2012″, the shipbroker concluded.
Nikos Roussanoglou, Hellenic Shipping News Worldwide



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