Friday, 20 March 2009

More Gloom and Doom for Shipping?

Mumbai, March 11: Recent industry reports emerging last week forecast an even more tempestuous future for the industry. Bloomberg reports that Singaporean ship finance company Seafin Pte expects about a third of shipping companies to become insolvent this year. This alarming number comes even as the Baltic Dry Index touched its highest levels since October this month, doubling in 2009. However, the BDI is still at about a quarter of last May’s highs. Meanwhile, four major shipping lines have declared insolvency and sought protection since October. Dimitris Belbas, Seafin’s head of shipping finance is quoted as saying, "Everyday there is an auction for ships, but who wants them?"

Coincidentally, Craig Eason of Lloyd’s List reports a DNV analysis indicating that the industry has a tonnage overcapacity of up to ten thousand ships. The Norwegian classification society also says that a thousand ships are currently lying idle, and that 43 of its own ships have been cancelled. That number represents 10% of the global number of vessels cut from the order book to date. The situation has gone downhill so fast that Singapore, a favourite idling ground, has no more space for vessels headed for layup, with similar reports coming in from elsewhere. Collisions between ships manoeuvering in congested layup anchorages are on the rise.

However, what industry experts will find even more dismaying is DNV President Henrik Madsen’s worrisome assessment that the number of cancellations of ships was likely to increase dramatically over time. “Something will have to happen on the supply side but here it is not one nation now, but all nations that somehow have to agree to take out capacity which may be difficult,” Lloyd’s List quotes him as saying. “To believe it will be over in one or two years is a bit naive.” DNV estimates that even if the economy were to improve to a 3 percent growth rate after 2010, there would still be an overcapacity of four thousand ships.

The Bloomberg report quoted earlier reinforces this view, saying that although the recent Chinese US$585 billion economic stimulus plan has helped the BDI, the global credit squeeze is very much on. It quotes HSH Nordbank AG, the biggest ship finance company in the world, as saying that the industry will be hard pressed to source finance for at least another year and a half.

Shipping lines will likely continue to struggle to borrow funds for at least 18 more months because of the global credit crunch and recession, according to Nordbank. The company has faced problems too, and has had to seek a bailout from its shareholders.

Recent widely circulated industry reports had hinted that the financial crunch was far from over. Marex had earlier reported that Thailand’s largest shipping company, Precious Shipping, was expecting about a third of existing vessels to be scrapped within two years as available capacity exceeded demand by a huge margin. Precious’ CEO Hashim now says, "The banking system is destroyed”, adding that while China's stimulus plan would help, it wouldn’t improve things anytime soon.

In other related news, Maersk announced plans last week to layup twenty five more containerships this year, in addition to the six it idled in December. Maersk CEO Kolding told Reuters that this was a move to maintain Maersk’s market share, adding that at least some industry players would go out of business this year if the market does not improve.

Meanwhile, the World Bank says that the global economy will move at a snail’s pace this year, growing at just 0.9 percent; other economists say even that even this figure is optimistic. Japan’s trade deficit has risen to alarming levels because its exports have come down by almost 50%. China, too, is slowing down; exports fell 26% last month, the fourth month in a row that this has happened. In addition, DNV’s Senior VP Magelssen has warned, in other reports, that box ship and bulker cancellations could mount to 30% of the order book in the next few years.

In fact, the only glimmer of hope out there for the industry seems to be the relative resilience of the BDI. Platou’s market research report is encouraging in this regard, saying that “In the second half (of the year), fiscal stimulus may support tonnage demand sufficiently to prevent freight rates to fall back to the extremely low levels seen at the beginning of this year”


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