Thursday, January 22, 2009
Thursday, 22 January 2009
I suppose it would be impossible to prepare shipping accounts for 102 years and not pick up a thing or two about the cyclical nature of shipping - and how astute owners make money in downturns. So when long-established London- based firm Moore Stephens says shipping is still a good business to be in despite the current downturn, it is probably right. It predicts that resourceful investors will find opportunities to expand, or get back into shipping, over the next 12 months. The words 'or get back into shipping' are significant. Julian Wilkinson, head of the Moore Stephens shipping team, says a lot of owners pulled off the classic strategy of selling parts or the whole of their fleets at the peak. Much of this trading takes place quietly but one consummate player, shipping tycoon John Fredriksen, certainly made a number of well-timed sales of new vessels in the months before the markets shifted.
Getting the timing right is vital. I heard recently of an owner who sold his fleet a few months before the credit crunch started. Apparently, even though he was an experienced hand at this sort of thing, he was beginning to get worried. When he sold his fleet, most of the 'experts' were still predicting further growth and continuing appreciation of asset values. Evidently, he had several months of sleepless nights wondering whether he had made a terrible mistake. Perhaps this time the boom would just keep going - and he would have got out of the market only to find it impossible to get back.
In fact, of course, his instincts were right. No market - and certainly not shipping - keeps going up forever. He has been sleeping well recently.
'Shipping enters 2009 with at least one certainty,' says Mr Wilkinson. 'The good times are over for now. The easy money has dried up. The old ships have been scrapped or are laid up. And there are no prospects of markets going up anytime soon.
'But in a cyclical industry, sensible players make money whichever way the market moves. For many people in shipping, a sharp downturn in freight rates and ship values is the sound of opportunity knocking, rather than the prospect of a knock-out.'
Writing in the firm's Bottom Line newsletter, Mr Wilkinson explains: 'Newbuilding order cancellations are growing quickly, so it is certain that some shipyards will never be built, and others will take a hit. Even the major yards are struggling with finance, and smaller yards trying to get into the market cannot secure guarantee finance. So although steel prices are falling, energy prices are falling, wage expectations are falling and interest rates are falling, it looks like a tough time for shipbuilders in general. The exception will be the major groups and yards in niche areas such as cruise ships, LNG and more complex vessels, which will emerge from the trough having seen lower-cost competition die before it could grow.'
The owner whom I mentioned earlier is not only sleeping soundly again but is also planning his re-entry into the market. He has cash available, as do a surprising number of owners.
The savvy operators, even those who kept expanding fleets in the good times, made sure they had little or no debt when the world entered into a recession. And the best prepared made sure they had medium-term credit facilities secured. So when ship prices fall, as they already have, these owners are ready to pounce.
A few owners with good track records will still be able to get loans even now but, as Moore Stephens notes, shipping banks are short of cash to lend, and that doesn't seem likely to change.
The accountant explains that although shipping is still a solid big-ticket business, many banks that came into shipping in rosier times will not relish the workouts they will face in 2009 and will walk away. 'So we can expect to see fewer banks in shipping, lending more carefully, at higher margins and for shorter tenures,' he says. 'Shipowners who have been around a while will recognise this as a good thing, especially as higher margins will be offset by lower interest rates as interbank rates come more into line with central bank rates.'
Inevitably, there will be casualties, Moore Stephens concedes. We have seen that already - worldwide and in Singapore. Every sector will face a cashflow problem. Every sector will struggle with ship valuations and loan covenants.
'But look again,' says Mr Wilkinson, 'and you can see why there is still considerable optimism among owners. The lower markets should rein in spiralling crew costs. Scrapping of old tonnage is increasing and will increase faster as the year progresses. And owners have made a lot of money in the past few years, so they are sitting on a lot of equity.
'Interest rates everywhere have plummeted. Put companies and newbuilding orders in trouble together in the same room as an owner with equity and access to low-rate finance, and you see assets moving from an overexposed and perhaps inefficient owner to a more prudent, solid operator.'
Yes, says Mr Wilkinson, 2009 will be a rough ride for everyone. 'But those who watch their cashflow and who have not overextended themselves in the boom, or who sold out before the peak (and there were a lot who did), will see this as a chance to expand, or buy back into shipping. Whatever is happening in the world, shipping is still a good business to be in.'
Well, yes, it can be - if you are clever and lucky, and if you get your timing right.
Source: Business Times Singapore