Tuesday, December 23, 2008
China stimulus good for ship owners, if they survive
Tuesday, 23 December 2008
The 4 trillion yuan ($586 billion) Chinese stimulus package is likely to be a boost for the world's battered bulk shippers, but only if they survive long enough for the country's planned infrastructure projects to get rolling. "The Chinese stimulus package is all well and good, and it's the right idea," said Natasha Boyden, an analyst at Cantor Fitzgerald. "But it won't happen overnight."
The abrupt end to the recent boom for bulk shippers left many laden with debt for ships they bought at the top of the market. They now owe more than their ships are worth, meaning Chinese stimulus spending will come too late for many.
"A number of bulk shippers are going to struggle to survive through 2009," Boyden added.
"For heavily leveraged shippers in particular," said Omar Nokta, an analyst at Dahlman Rose, "the next couple of quarters look pretty difficult."
Dry bulk shippers haul vast quantities of bulk commodities such as iron ore, coal, steel and grain. More than 90 percent of the world's traded goods by volume is carried by sea.
These shippers have seen their world turn upside down. Just seven months ago, the Baltic Exchange's chief sea freight index hit an all-time high of 11,793, and their ship charter rates soared on demand for raw materials from China and India.
But the blood bath on Wall Street and falling commodity prices hit charter rates, which nose-dived after the collapse of Lehman Brothers in September.
"FELL OFF THE TABLE"
"The dry bulk market simply fell off the table," said Nikolas Tavlarios, president of marine fueling company Aegean Marine Petroleum Network.
Much of that fall came as China cut back on iron imports and steel production as prices and global demand for steel dropped.
China is the world's biggest importer of iron ore, accounting for 45 percent of all imports in 2007. It is also the world's largest steel producer, so Chinese cutbacks dealt a devastating blow to bulk shippers.
"China is not just a major player -- China is the market for iron ore," said Gregory Lewis, an analyst at Credit Suisse.
The sea freight index hit a low of 663 on Dec. 5 -- more than 94 percent below its May 20 peak. Daily charter rates for capesize ships, the largest bulk-carrier class, fell more than 98 percent to $3,000 in November from $230,000 in May.
The credit crunch made matters worse, as banks avoided issuing letters of credit -- bank guarantees on behalf of buyers that are given to exporters -- leaving cargoes stranded.
In the past few weeks, the mood has improved a bit.
The chief sea freight index has climbed 25 percent, to 829, obtaining letters of credit has become easier and credit conditions for shippers have eased.
"Since early December we've seen an improvement in letters of credit," said Douglas Mavrinac, an analyst at Jefferies. "The system is not necessarily fully functioning, but it's better than it was."
HOPE ON THE HORIZON
Chinese iron ore imports and steel production have stabilized, giving some hope the worst is over. The thawing of the credit market and the prospect of the Chinese stimulus, announced in early November, have also boosted bulk shipper stocks.
The stimulus package -- including large infrastructure projects to build railroads, roads and bridges, which all require steel -- has raised some questions as to whether the $586 billion figure includes all new projects, or some that had already been announced. Nonetheless, it remains sizable.
"The stimulus package could be enormous," Mavrinac said. "The only question is when it will happen."
For some shippers, the market meltdown means it is already too late for them to benefit from any upcoming boom.
Australian investment firm Allco Finance Group collapsed in November and the liquidation of the firm's assets includes the sale of seven bulk carriers.
Last week, Danish dry bulk operator Atlas Shipping -- with a fleet of 41 ships -- filed for bankruptcy, saying long-term freight rates negotiated before the crisis would result in a loss of $3 million a week.
Others are expected to follow. Many bulk shippers bought ships at high prices with large loans. For instance, capesize ships that sold for as much as $150 million in the summer now sell for around $50 million -- leaving many shippers under water.
"If you're heavily leveraged and paid top dollar, you're in trouble," Credit Suisse's Lewis said. "More than a few companies will default on their credit facilities."
Fire sales of ships from bankrupt companies like Atlas could push asset prices even lower, exacerbating the problem.
Some publicly-traded bulk shippers with strong balance sheets and relatively low debt -- Cantor Fitzgerald's Boyden singled out Paragon Shipping Inc, Diana Shipping Inc, Navios Maritime Holdings Inc and Genco Shipping & Trading Ltd, and Dahlman's Nokta singled out DryShips Inc -- have a greater chance of survival.
"By 2010 we could see the Chinese stimulus benefiting bulk shippers, but they have to make it through 2009 first," Nokta said. "For now we are still very cautious and would like more clarity on the market before we advise buying these stocks."
As adapted from Reuters
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