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A critical new year for shipping

A new year has begun, but not one of happiness for shipowners or investors and one that will be critical for the shipping industry.

A number of issues continue to negatively affect the industry and some of the industries it services.

Shipping has been the instrument of its own problems however as the excess capacity of ships in most sectors comes from a reckless disregard of the economic fundamentals of the industry.

Shipping provides a demand driven service to cargo owners of dry and wet bulk commodities, manufactured goods and energy products which require many different sizes and types of ships.

Shipping’s good times are when a majority of ships are employed on period charters with cargo owners and a minority is trading in the spot markets which function to pick up and deliver the cargoes that are not contracted for.

Following the Chinese boom, owners rushed to order new ships of all types but failed to secure period charters for most of them, falsely believing that the boom would continue and that spot charter rates would remain strong. However most of the Chinese cargoes moved during the boom were on spot charters and very few period charters were entered into.

Thus the charter rates fixed during the boom period were extraordinarily high and analysts predicted that Chinese economic growth would continue in double digits for the foreseeable future.

Numerous new companies were formed and capitalized in New York, Oslo and Germany to finance the newbuildings being ordered. Additional capital in the form of bank debt was raised with a complete disregard for the lack of contractual employment for these new ships.

The shipbuilding capacity in Korea expanded enormously and China also emerged as a major shipbuilding nation. Yet by 2010 the Chinese economy was not growing so quickly and when the new government came in in 2012 it signaled more centralized control and a slowdown in growth which has continued today.

Meanwhile hundreds of new ships were being delivered and surprisingly, new ships were still being ordered.

The financial crisis of 2008 and the problems with the Euro sharply slowed demand for Chinese goods in the USA and Europe which further negatively affected the Chinese economy.

There has been a severe reduction in the global demand for raw materials which together with the delivery of so many dry bulk carriers has driven the spot market rates to levels never seen before and which barely cover the ships’ operating costs.

The collapse of the oil price from $100pb was seen by many as a positive for the crude tanker sector yet demand for oil has not increased but declined and orders for new large tankers will inevitably push the spot rates down as they deliver.

The oil majors have already covered most of their projected needs with ships they have ordered themselves or chartered from highly regarded private owners. The product tanker markets are still absorbing the huge number of new ships that were ordered since 2012, but with no perceived increase in the demand for products that market will remain soft.

Many of the new investors looked to make short term profits from the projected rising values of the new ships, as had happened in the Chinese boom. This has not happened and is very unlikely to, as the revenue streams cannot support the capital costs of the new ships and there are no potential buyers in the markets.

The publicly traded shipping companies represent a minority of the world’s fleets and are mostly funded by short term traders. Few of these companies have any brand value and will continue to be valued by their declining asset values and negative cash flow.
Bankruptcy protection in the USA is not an option as the legal costs are excessive and the secured creditors would consume most of the proceeds of any asset sales.

Scrapping has its own limitations and owners of older ships can operate marginally profitable with their cheaper ships.

In a subsequent article I will deal with some thoughts on how to manage these immense problems.

This article was written by Paul Slater, Chairman and CEO of First International.

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