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paul slater

Managing the mess

"Since my New Year article of January shipping markets in all major sectors have continued to decline.

Simultaneously the world’s stock markets have also dropped sharply.

Whilst the 50+ publicly listed shipping companies only reflect a small percentage of the various world fleets, they are highly indicative of the problems that all owners face today.

The simple facts are that we have far too many ships in the water chasing cargoes that have sharply diminished over the last 3 years. Most of these ships were ordered and built without any contractual commitments from cargo interests to use them. As a result these ships sought business in the spot markets which have seen rates driven down to loss making levels.

Shipping, the ownership and operation of deep ocean ships, is a longterm business that will continue to carry 90% of physical world trade for centuries to come. It needs longterm investment to build and buy the ships that are comparatively short-term assets that depreciate physically and financially over an average of 20 years.

Historically it has been the close relationships between owners and cargo interests that have stabilized freight rates and focused the spot markets on the variances of cargo interest demand. Thus owners have been able to replace ageing ships with newbuilds or expand their fleets to meet cargo interest demands.

The Chinese boom of the last decade produced extraordinary profits for some owners but encouraged others to falsely believe that this was the new norm and raise huge sums of new investment capital and debt to build thousands of new ships.

The focus of the new money was not only the future stock market prices but the gamble that ship values would also rise.

When the China boom ended and was followed by a recession the speculation on future values collapsed and the spot market’s rates followed on as the supply of ships greatly exceeded the demand for their services.

Thus we now have a huge shipowner’s mess that needs to be managed to a new level of stability, which cargo interests and other charterers also need.

Ships cannot continue to trade at rates of income that do not cover all operating expenses, including prudent maintenance, experienced well trained crew, insurance of all types, interest and debt service on ship loans and the provision of cash reserves to meet future dry-dockings and statutory inspections.

The single voyage spot markets do not deal with these issues and owners who are trading their ships in these markets will become insolvent when the essential costs cannot be met. The ship values will almost certainly not have risen and many will not even meet the debt levels secured on them.

Owners that report their earnings on an EBITDA basis are failing to recognize all the essential costs of ownership including debt service and depreciation and also need to mark their ship values to market at least semi-annually.

There are no simple solutions except to recognize that shipping will always be a demand driven business and the survivors will be the ones who manage their finances prudently and take their ships out of service when rates continue to not cover their costs.

The public companies can play with their finances, reverse split their stock, cut their dividends, reduce costs to unsafe levels and fail to reserve cash for future dry-dockings and associated surveys. However their investment banks cannot do anything to increase revenues or ship values, and neither can their private equity or hedge fund shareholders.

The majority of private shipping companies are not involved in the financial manipulation of the public companies and certainly not quarterly reporting which only serves to encourage short term decisions. The majority of the public investors are stock traders who are only interested in the volatility of stock prices which are moved on rumors and speculation.

The facts are that the sharp reduction in the demand for moving cargoes colliding with the doubling of the size of sectors of the world fleet can only be stabilized by the laying-up of a large number of ships particularly in the dry-cargo and container sectors.

Dry cargo shipowners, should unite through their national owners and trade associations, and inform their brokers and all the cargo interests that they will no longer carry any cargoes at rates that do not cover their essential costs.

Increased scrapping will have little impact as most of the older ships can trade profitably at lower rates than the newbuildings.

The markets will not recover in any sectors including oil for at least the remainder of this decade and even that is dependent on a majority of shipyards closing down."

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

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