Thursday, December 11, 2008
It's not all death and doom in shipping industry
Thursday, 11 December 2008
Having just perhaps a wee bit more grey hair than most in shipbroking, I have experienced five post-war recessions in my working career and therefore feel that my spin on the current market might just hold some credibility, which certainly speaks volumes in these great and capricious times. The rapid impact of the current global recession on shipping has been more dramatic than anything ever seen before and has given the industry a very bloody nose, the magnitude of which very few were expecting. The dry cargo market has been particularly badly hit, due to huge cutbacks in industrial production coupled with a lack of liquidity in the banking sector.
The capesize market, specifically, has been hardest hit and it has become cheaper to lay up rather than to continue trading. The dizzy spot rates in excess of US$200,000 per day that we saw only four or five short months ago are now just a sweet memory. Current rates are merely at 'token' levels with US$1,000 a day having been paid recently for a transatlantic spot charter.
China is apparently attempting to deplete its huge stockpiles of iron ore, which may improve matters. Having been in China recently and seeing mountain upon mountain of iron ore in varying degrees of oxidation (signifying that it had been hanging around for a goodly while) on every available quayside, I am just a touch dubious that much impact is being made.
The Baltic Dry Index has plummeted from 11,500 points in May to where it now lurks under a dismal 700 points. Second-hand values in the modern dry sector have plunged some 70 per cent since the highs of early summer and a huge correction, which some may argue was inevitable and long overdue, is certainly well underway.
Over the last four years, we have seen both tanker and dry cargo ships achieve unprecedented values and of course freight rates have appreciated in tandem.
One will note that tanker values, while in decline, have not been affected anything like those of the dry sector. Going forward, however, with crude stockpiles in the US and China (the world's top two consumers) at massive highs and a wavering demand, prospects for 2009 look unsettled.
Interestingly enough, the dry cargo values cited above indicate that we are more or less back to pre-'boom times'. Back to reality maybe?
The stability of the world economy over the past four years and the tremendous hunger from China and India for raw material had contributed to a very positive shipping market. The freight futures market (FFAs) has also been instrumental in pushing freight rates to levels that many would argue did not reflect the 'real' market.
Courting problems
Logic dictates that with a 'paper' market much larger than the actual physical market, this sector has been courting problems for some time. FFA activity is currently down to its lowest level since records began and perhaps we may see it morph back to its origin as a pure hedging tool, rather than the lottery which it has become.
The buoyant market spawned a rush to newbuild as second-hand prices, buoyed by high freights, became untenable. It was halcyon days for the shipyards and competition for berths was intense. Greenfield yards sprang up in China and South Korea, offering earlier berths than the already established yards were able to offer.
At last count, the world order book for dry cargo ships (between 20,000 deadweight tonnes to capesize) stood at some 3,450 vessels, or about 300 million dwt. This represents some 70 per cent of the existing fleet.
One does not really have to be a rocket scientist to wonder how this number of vessels could have been absorbed. To add to the dilemma, older ships continued to trade, taking advantage of the high freight rates prevailing, when under normal market conditions, owners would have been thinking about scrap.
But take heart, there is a good chance that there could very well be a silver lining to this cloud. Asset values of much of the newbuilding fleet are currently well in excess of current values. A lot of them are probably unfinanced and thus, there must be a more than even chance that a sizeable number of the dry order book for 2010/2011 and beyond will simply not materialise.
While it is likely that a good portion of the 2009 order book will materialise (save for those that may simply walk away, forfeiting deposits or attempting to cancel due to late delivery etc), there is bound to be a certain amount of rescheduling of deliveries, rather than perhaps having to face putting a brand new ship straight into lay up.
Rumours abound that cancellations of the existing order book could amount to anything between 30 and 40 per cent. Ship scrapping has been picking up impetus and not only the Indian sub-continent but even China now wants a big part of the pie in the demolition market.
If we estimate that some 25-30 million tons per annum of dry cargo ships will be scrapped in the next 12 months, and couple this with a dry cargo order book that is reduced by some 40 per cent, the spectre of an overtonnaged fleet may not loom as largely as originally feared. A more balanced fleet could be in reach sooner than expected.
We have not said too much about the tanker market. Fundamentally, tankers are in a lot better shape than the dry sector although a perceived overbuilding in the MR sector may act to dampen product carrier rates in 2009.
Although the tanker market is traditionally far more volatile, rates and indeed values - while showing signs of weakness - are holding up far better than the dry market and, so far, show no sign of slipping back to the 'pre-boom' levels of 2004.
With oil inventories high in both the US and China, and demand for oil tailing off as the wheels of industry slow down, it is logical to expect both rates and values to weaken in 2009.
In adversity, there is always opportunity. Already, some cash-rich reputable Greek buyers have clear sentiments that dry cargo values have bottomed out and hence, deals are being done, particularly in the modern Handymax and Panamax sectors.
These buyers have been sitting in the trees like vultures but a 70 per cent fall in value has proven sufficient incentive to come down from the trees and take the carrion. Suddenly, there appears to be many buyers out there for such deals and although the majority of enquiry emanates from Greece, there are now some Far Eastern buyers out shopping as well.
Of course, cash is king and those who have it can cut themselves a good deal and leverage up when the banking system returns to some semblance of normality.
It is not all death and doom, therefore. Of course, there is likely to be more bad news to come and some fourth-quarter results may make unpleasant reading in the early new year.
The boom years have been an exciting and indeed rewarding ride for shipping. We have become so used to values and rates charging forward that we have conveniently forgotten the old adage of 'what goes up, must come down' and it is back to bite us once more!
As adapted from Business Times Singapore
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