We hand over this guest blog spot to Paul Slater of First International, where he discusses the difficulties shipping is facing.
"THE shipping industry continues to struggle to become a profitable business, despite a massive inflow of new resource from the various capital markets.
Economies around the world in many sectors are still in deep recession and face little or no growth in the future. The demand for shipping services has stalled.
Most of the new money has come from private equity and hedge fund firms in either debt or equity, while some public issues have attracted money from other sources.
What have these investors been reviewing and what are they expecting in return for their investments?
The majority of publicly available information is limited to the filings of the publicly traded shipping companies, which contain no forward projections, and the reviews and projections of various analysts in investment banks and brokerage houses.
However, the number of ships owned by the independent public companies (i.e. not subsidiaries of large industrial corporations that mostly do not report their fleet’s results) is less than 25% of the total world fleets in most sectors.
Thus, judging the industry or making investment decisions about it from the publicly available information is highly risky. Shipping is a service industry that uses assets that physically and financially depreciate over a period of 20 years, and whose values rarely fluctuate.
Such upward fluctuations are always short-lived, as the ability of shipyards to deliver new ships removes the in-balance and inevitably creates a new surplus of ships. This is falsely described as shipping being a cyclical industry, yet the changes are of its own making.
The new money is totally incapable of improving the income of the shipping companies in which they invest and, as usual, focuses on reducing costs. This has serious repercussions on the safety of crews and the quality of service the ships provide.
The problem now facing the shipping industry is how to make the supply and demand of cargo capacity balanced again.
Unfortunately, most of the restructurings of recent years only dealt with the financials, while leaving the ships still operating with less debt, thereby maintaining the overcapacity. Worse still, most of the ships involved are trading today at rates reflecting their lower debt and thereby continuing the depression.
This is particularly evident today in the dry bulk sector, with rates across the board barely covering operating expenses and making no contribution to debt service, let alone paying any dividends.
The equity in most of these companies is worthless, yet they continue to operate while the corporate managers and the fund managers get paid their fees and the balance sheets fail to show the true ship values.
On the positive side, a large number of shipyards are no longer building dry bulk carriers and many, particularly in China, are closing down and not switching to other ship types.
The troubles also exist in other sectors; particularly containers and tankers.
The container sector is dominated by large multi-national companies that own or lease most of their fleets and operate them on various fixed routes in liner services moving mainly finished goods and agricultural products around the world. The competition is fierce and the ships have grown enormously as these large companies have sought to reduce their costs by carrying larger volumes of containers.
Behind all this are numerous public and private shipping companies that are forced to focus on feeder services, but are seeing more and more large ships being cascaded down from the major owners and changing the economics of the smaller ships.
With several thousand containerships laid up and many more operating at a loss, the outlook is very poor as the economic rebound from the last recession has failed to materialise and little or no growth is projected in the feeder markets.
The tanker sector is also facing great uncertainties in both the crude and products markets. The huge drop in the price of crude oil failed to produce any new demand but led to a lot of rerouting, which has fed the crude markets and given unforeseen life to the suezmaxes.
Strong interest in the very large crude carriers, however, has created a large new orderbook, but with a young average age in the existing fleet, this will negatively affect rates as they deliver.
The products markets are lively but adversely affected by the huge speculative orders placed by a few companies that exaggerated the benefits of new engine and hull designs and are unable to resell the ships at a profit. While some corporate executives get rewarded for buying and selling the ships, this speculation will continue, with negative effects on charter rates.
If the markets continue to drift for the rest of this decade, much of the new money will seek exits by selling the ships and the owning companies at a loss, but the capacity will remain. This will offer great opportunities to the well-funded private owners that don’t publish their results but offer charterers the certainty of quality service."
Paul Slater is chairman of First International
