In the cellar …
There’s good news and bad news to report, so let’s begin with the good news. Baseball season is just around the corner.
And that takes care of the good news. The bad news will take several reams and could never be covered in just one commentary. But let’s do what we can today.
1. From Exim India: “Rising fuel costs, EU woes & lack of funds worsen shipping crisis”
“Escalating fuel costs, Europe’s economic crisis and lack of bank financing have worsened a four-year-long shipping crisis and dragged it deeper into the abyss, according to analysts. Container and bulk shipping companies, which transport everything from grain to coal to consumer goods, have already burned through much of their cash, but no immediate respite is seen as this situation was expected to extend well into 2013, experts said.
“The only positive news for bulk and container firms was that banks were desperately trying to avoid seizing assets.
“Shipping companies, banking on rapid trade growth, had ordered new vessels in 2007-2008 and many of them are being delivered this year. However, they today face severe overcapacity because demand, particularly on the once lucrative routes between Europe and Asia, has fallen sharply. Even a major player like Norway’s Frontline had to recently give up its status as the world’s largest tanker firm as the crisis forced it to shed 20 per cent of its fleet and most of its orders for new vessels. Operators say that the US ‘recovery’ hasn’t helped the shipping sector as container lines rely heavily on Asia-Europe trade and tanker companies on trade into Europe.
“European container imports from Asia fell by over 9 per cent in the fourth quarter, and box rates plunged 25 per cent over the year as the eurozone heads for an almost certain recession. Meanwhile, soaring bunker prices, which account for up to 70 per cent of shipping costs, were making smaller vessels out-dated; often well before their normal lifespan, the analysts pointed out. – ”
2. From The Journal of Commerce: “MISC Blames $ 405 Million Loss for Liner Shipping Exit”
“Malaysian shipping group MISC Berhad blames its withdrawal from container shipping for a $ 405 million in the nine-month period ending 31 December.” The company, which reported an $ 815.2 million profit in the same period in 2010, said it lost $ 475 million from withdrawing from the liner business, which became too costly as larger rivals ordered bigger ships …
“Group revenue over the nine-month period fell 9.5 percent year-over-year to $ 2.8 billion. The conglomerate, which also has heavy engineering, offshore and liquid natural gas divisions, said higher bunker costs and depressed rates had affected all its shipping businesses.
“‘The demand outlook for shipping remains weak,’ said the company. ‘The supply-demand imbalance will continue to further depress and add volatility to petroleum and chemical rates.,” –
3. From Singapore Business Times: “Shipping loan losses seen hitting US $ 13b”
“(LONDON) Banks will lose US $ 13 billion over the next two years on 3 per cent of all shipping loans as a collapse in earnings drain vessel owners’ cash flows amid depressed asset values, Nomura Equity Research said. Thirty-one per cent of loans held by 83 shipping companies with US $ 201 billion in debt may ‘be vulnerable’, and 10 per cent might become non-performing, the investment bank said in a report dated Feb 7.
“European banks provide US $ 430 billion in loans to the global fleet, which is worth US $ 841 billion, according to the report. Dry-bulk carriers are ‘in most trouble’, followed by tankers and is prepared to take over more container ships, it said. Loans extended in 2007 and 2008 will fare worst because the vessels used as collateral have lost the most value, according to Nomura. ‘Freight rates are at stress levels’, it said. ‘European banks are major lenders to the global shipping industry, which is facing headwinds in terms of supply-demand imbalances, low freight rates eroding earnings and sensitivity to the economic outlook’. –
4. From Singapore Business Times: “Most top shipping banks stop lending to industry”
“(LONDON) Thirteen of the world’s 19 largest shipping banks stopped new lending to the industry amid an ‘extreme’ vessel surplus that’s cut cash flows and led to vessel seizures, financier DVB Bank SE said. The Rotterdam-based transportation leader that’s financing 1,500 vessels through 450 loan agreements is one of six remaining banks funding shipping. Dagfinn Lunde, a member of DVB’s board of managing directors, said at a presentation in London on Friday. As many as 100 were lending to the industry four years ago, he said.
“Fifteen DVB loans worth US $ 2 billion breached loan-to-value clauses after asset prices fell during the past four years and needed additional cash or security to regain compliance, Mr. Lunde said. The bank controls 20 ships, has seized and sold others and is prepared to take over more as rates for vessels ‘haven’t hit bottom yet’, he said. Mr Lunde didn’t give a total figure for numbers of vessels seized.
“‘We don’t mind taking the ship at all if there’s a risk the loan is coming under water and the owner says he’s not willing to support or stand behind or do something,’ Mr. Lunde said.
“The glut of vessels will depress freight rates for container ships, tankers and dry-bulk vessels for at least the next 12 months and as long as two years, Wolfgang Driese, chief executive and chairman, said at the presentation.
“‘The crisis is not yet over,’ Mr. Driese said. ‘It’s a composition of lower demand and an idiotic situation that everybody ordered at a time when they should have stopped ordering ships so there’s a huge overcapacity in the market.’
“Overcapacity at the world’s shipyards is ‘extreme’ and needs to be addressed to pave the way for a recovery in freight rates, Mr. Lunde said. ‘We have a capacity for shipbuilding which is about double what we need for normal fleet renewal and that’s really scary and it doesn’t go away.’
“Prices for new ships will drop further over the next 12 to 18 months, forcing some yards to close, then bringing supply of ships and demand into balance, he said. Delays in delivering new vessels are due to owners postponing completion in a poor market, not because they can’t pay, he added.
“Export credit agencies are loaning money to owners unable to secure finance from banks to pay the final instalment on new ships, he said. Shipbuilders are also providing ‘seller’s credit’, effectively deferring the last payment so the vessel is able to leave the yard.
“Rates for oil tankers that haul crude are ‘especially bad’ because of ‘brutal supply and struggling demand’, Mr. Lunde said. Tankers account for 32 percent of DVB’s loans. Freight rates to haul manufactured goods in boxes on container ships are expected to recover as soon as the end of this year, he said.
“Today’s market is all about cash flow, according to Mr. Driese. ‘It doesn’t help me to finance a vessel at 50 per cent in today’s depressed market if you can’t pay the first instalment and can’t generate the cash flow,’ he said.
“Many owners of vessels seeking finance are approaching DVB amid the curbs on new ship finance lending elsewhere, he said.” –
Remember the expression, “It depends upon whose ox is being gored”? That’s all these maritime officials care about, and because of their tunnel vision they’re unable to see, and assess, the real cause of the industry’s tailspin. Cause and effect – supply and demand – the basic concepts in economics mean absolutely nothing to these individuals.
Although “supply and demand” is mentioned in an offhanded way by these financial geniuses, they give it no second thought because the plight of consumers is the farthest thing from their minds. They acknowledge the inherent greed of vessel owners and bemoan the loss of the annual billions of dollars brought about by “overcapacity”, but the “idiotic situation” of “ordering at a time when they should have stopped ordering” should have been addressed by these lenders when it was happening, and they should have locked the barn back when they were approving of those loans, rather than at this late date well after the horse has been stolen.
They were willing partners at the dance. It takes two to tango. It’s called second-guessing.
It all comes back to the unemployment crisis throughout the world and unless the elite in this world can figure out a way to put the consumer back to work, they can forget all about shipbuilding, overcapacity, financing, slow-steaming and vessel-sharing-agreements.
The bottom line is telling the story. Vessel owners are “going south”, and if the consumers – the little guys – can’t find jobs, then the big guys will soon be joining them in the unemployment line.