Saturday, December 06, 2008
Owners fear domino effect from loss of trust
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Justin Stares, Brussels - Friday 5 December 2008 TRUST among shippers and shipowners is crumbling as a result of a wave of contract defaults, Europe’s top shipowner has warned.
The time-honoured tradition that a trader’s word is his bond is disappearing because players throughout the transport chain use the financial crisis to walk away from their commitments, said European Community Shipowners’ Association chairman Philippe Louis-Dreyfus.
Speaking after an Ecsa board meeting in Brussels, Mr Dreyfus condemned those who are using the dramatic drop in freight rates as an excuse to break contracts. If they did not stick to their commitments, there could be a “domino effect”, with financially sound companies going bust as well as those which have taken bad risks, he said.
“There has been a general loss of confidence in the markets, both economically and in counterparties,” Mr Louis-Dreyfus said. “It strikes me that we see more and more companies in shipping, and their clients, both talking about it and doing it: not sticking to their commitments.”
Plummeting rates, which in some cases have fallen more than 90%, were no excuse to walk away, he said.
“Some companies are claiming it is force majeure. That’s not force majeure, it’s business.”
With many in the industry already struggling with letters of credit, a lack of trust could force the market down further, he added.
“This is very bad for shipping because it has always been based on confidence. Otherwise we will have a domino effect, we good people suffering as much as the bad. There will be more lay-ups and unemployment. It’s very sad.”
The Frenchman, who heads a diversified family business, said shipping needed to return to supply and demand economics. The speculative bubble of recent years was made worse by shipowners ignoring their core business and becoming financial players, he said. Banks also lent without considering fundamentals.
Mr Louis-Dreyfus, whose own company is understood to have anticipated the downturn and locked ships into long-term contracts, was particularly damning of the futures markets. Freight forward contracts should be used to cover physical positions and not to trade, he said. “It is important that we all go back to the idea that shipping is an industry and not a speculative machine.”
Banks need to re-start lending to legitimate businesses or there is a risk of a lack of finance “for trade in general,” he said.
Citing the 18th century motto of London’s Baltic exchange — “our word is our bond” — Mr Louis-Dreyfus said this principle needed to survive.
“It’s important not only for ethical reasons but for efficiency reasons,” he said. “If we lose trust it will affect business.”
Those companies that were happy to enjoy the sky-high rates of recent years should not be allowed to walk away just because the market has turned sour. “They were happy to enjoy the high markets, now it’s the other way around. It’s a dangerous trend. People too easily say ‘we won’t pay’.”
He message was reinforced by Baltic Exchange chief executive Jeremy Penn.
“The Baltic Exchange expects all contractual obligations to be met in a timely fashion in all circumstances,” he said. “We are aware of a number of organisations in the market who appear to be failing to perform and would regard any such action as a breach of the Baltic code.”
The exchange has threatened to expel members who breach the code. It has a “posting system” which allows members to report those believed to be in breach, and has a database of problematic companies.
As adapted from Lly
Justin Stares, Brussels - Friday 5 December 2008
Philippe Louis-Dreyfus
The time-honoured tradition that a trader’s word is his bond is disappearing because players throughout the transport chain use the financial crisis to walk away from their commitments, said European Community Shipowners’ Association chairman Philippe Louis-Dreyfus.
Speaking after an Ecsa board meeting in Brussels, Mr Dreyfus condemned those who are using the dramatic drop in freight rates as an excuse to break contracts. If they did not stick to their commitments, there could be a “domino effect”, with financially sound companies going bust as well as those which have taken bad risks, he said.
“There has been a general loss of confidence in the markets, both economically and in counterparties,” Mr Louis-Dreyfus said. “It strikes me that we see more and more companies in shipping, and their clients, both talking about it and doing it: not sticking to their commitments.”
Plummeting rates, which in some cases have fallen more than 90%, were no excuse to walk away, he said.
“Some companies are claiming it is force majeure. That’s not force majeure, it’s business.”
With many in the industry already struggling with letters of credit, a lack of trust could force the market down further, he added.
“This is very bad for shipping because it has always been based on confidence. Otherwise we will have a domino effect, we good people suffering as much as the bad. There will be more lay-ups and unemployment. It’s very sad.”
The Frenchman, who heads a diversified family business, said shipping needed to return to supply and demand economics. The speculative bubble of recent years was made worse by shipowners ignoring their core business and becoming financial players, he said. Banks also lent without considering fundamentals.
Mr Louis-Dreyfus, whose own company is understood to have anticipated the downturn and locked ships into long-term contracts, was particularly damning of the futures markets. Freight forward contracts should be used to cover physical positions and not to trade, he said. “It is important that we all go back to the idea that shipping is an industry and not a speculative machine.”
Banks need to re-start lending to legitimate businesses or there is a risk of a lack of finance “for trade in general,” he said.
Citing the 18th century motto of London’s Baltic exchange — “our word is our bond” — Mr Louis-Dreyfus said this principle needed to survive.
“It’s important not only for ethical reasons but for efficiency reasons,” he said. “If we lose trust it will affect business.”
Those companies that were happy to enjoy the sky-high rates of recent years should not be allowed to walk away just because the market has turned sour. “They were happy to enjoy the high markets, now it’s the other way around. It’s a dangerous trend. People too easily say ‘we won’t pay’.”
He message was reinforced by Baltic Exchange chief executive Jeremy Penn.
“The Baltic Exchange expects all contractual obligations to be met in a timely fashion in all circumstances,” he said. “We are aware of a number of organisations in the market who appear to be failing to perform and would regard any such action as a breach of the Baltic code.”
The exchange has threatened to expel members who breach the code. It has a “posting system” which allows members to report those believed to be in breach, and has a database of problematic companies.
As adapted from Lly
