Shipping outlook bleak

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Friday, 28 November 2008

Global shipping demand is shrinking, as evidenced by the fact that the London Baltic Dry Index is trading at its lowest levels in years. Closer to home, October throughput at the Hong Kong port was down after posting strong gains through the summer. The decline in shipping traffic has been sudden and dramatic. “Quite frankly, no one’s ever seen anything like this,” says Standard Chartered managing director and head of shipping finance Nigel Anton. “It’s been quite incredible across all the sectors, but particularly in the dry bulk and the container market. There has been some weakening on the tanker market but nothing like what we’ve seen on the dry and container markets.”
The Baltic Dry Index, a measure of global dry bulk freight rates, closed at 804 points on November 25, down 93% from the high of 11,793 points in May.
In Hong Kong, the Transport and Housing Bureau reported that October throughput was down 2.9% to 2 million TEU (twenty-foot equivalent units or one standard container). This comes after the bureau posted a 7.8% increase in port throughput in July.
The outlook for shipping companies has weakened amid the bleak global economic outlook. Last week, Moody’s Investors Service released a report downgrading the outlook for the Asia-Pacific shipping industry across all sectors – dry bulk, container and tanker – to negative for the next 12 to 18 months. The report cited slack global growth, unstable operating costs and volatile shipping rates as reasons for the downgrade.
The frozen credit markets are seen as at least partially responsible for the negative outlook. "A freezing of trade credit has exacerbated a slowdown in demand for commodities and contributed to the recent, unprecedented plunge in the sector's Baltic Dry Index," says Moody’s senior credit officer, Peter Choy.
Moody’s maintains stable ratings for most of the region’s shipping companies including MISC Berhad, Nippon Yusen Kabushiki Kaisha (NYK), Mitsui O.S.K. Lines (MOL), BW Group and Humpuss Intermoda Transportasi (HIT).
One impending challenge for the industry is the burgeoning order books at the shipyards. “While existing owners are laying up ships we have this massive order book and a lot of those ships will clearly not be delivered,” says Standard Chartered’s Anton. “People will begin to walk away from orders, they already have, because they have generally paid very little in deposit and just say: ‘Fair enough, I’ll leave the deposit on the table and just walk away.’”
Moody’s reports that current orders for dry bulk and container lines is equal to roughly half of current capacity. For tankers, orders are equal to the current capacity.
Anton predicts that a large number of regional shipyards, especially the newer players and those not yet open, will either close or never come to fruition.
While shippers and shipyards are dealing with overcapacity, the value of current assets continues to decrease. “I was just chatting to a broker who is trying to circulate a ship. This is a new ship that six months ago was valued at $80 million and now they are looking at offers of about $35 million,” says Anton. “Six-months ago the chartered rate was about $45,000 a day but now you’d be lucky to get about $15,000.”
The decline in ship values is in no small way influenced by the credit crunch. The value of ships is determined by the forecasted charter rate for different types of vessels, for example the Baltic Dry Index determines the market rate for dry bulk carriers. As charter rates fall, the value of ships declines and forces shippers and banks to revalue their assets.
When the shipping market will turn around is anyone’s guess. “A volatile and extraordinarily challenging dry bulk market is anticipated to continue through Q4 2008 and beyond,” Hong Kong-listed Pacific Basin Shipping notes in a third quarter market update.
Both Standard Chartered’s Anton and Moody’s reiterate the sentiment that a volatile and unpredictable sea freight market will continue for an indeterminate period into the future.
“The current crisis started with the banks, then you could see it in the consumers and now the car makers in the States may go into bankruptcy – it is one thing knocking after the other,” says Anton. “We’ll have to see how it pans out.”
As adapted from Finance Asia