Thursday, 9 August 2012

Collapse in asset prices 'without precedent in shipping history'

The present near capitulation of ship prices - by far the industry's main assets- is almost unparalleled, industry experts say. Players are feeling the devastating storm across the board. For example, as many as half of all Chinese shipyards are on the verge of financial collapse. 

HSBC Shipping Services Ltd published a report recently, which said starkly, “This astonishing loss of value is, as far as we are aware, without precedent in shipping history. The bubble became so inflated that its bursting has caused untold damage to all market players, from ship owners and charterers to shipbuilders and banks.” The bubble referred to is, of course, the asset bubble caused by overtonnaging in the boom years, what with players rushing in to order vessels at unsustainable prices. 

Foundering global growth has exposed this folly today. Clarkson Research says that the value of five-year-old Capesizes has fallen 79 percent since 2008- when new build orders were at a peak- and values for large tankers have collapsed by 61 percent in the same period. The extent of the problem can be gauged by Clarkson's parallel figures for earnings- in 2008; rates for Capesizes were 118 times what they are today. Similarly, daily rates for VLCC's were at nearly $300,000 a day in December 2007; they are around 1,363 today - a massive 99 percent drop. The bellwether Baltic Dry Index was around 933 end July this year; it was at nearly 11,800 in mid 2008. 

The fallout of this perfect storm has hit Chinese shipyards hard. New vessel prices are at eight-year lows, orders have plunged to half and a huge number of yards are on the verge of bankruptcy. China has a staggering 1,536 shipyards all of which have been hit particularly hard because of the collapse in dry bulk vessel orders- their main market. Although the larger shipyards will survive- or be bailed out by the government- analysts expect scores of smaller yards to shut shop. 

Even large shipyards are suffering from a drying up of business; for example, China Rongsheng does not have even one new building contract this year, Guangzhou Shipyard profits are down 50 percent and Zhejiang Jingang Shipbuilding has filed for bankruptcy. State owned China State Shipbuilding Corporation expects about half of Chinese shipbuilders to close down within three years.

“It is a pretty depressing environment,” analyst Ajay Mirchandani of JPMorgan Chase & Co. told Bloomberg. “You just have too many yards and too few orders, which is hurting pricing and profitability.” 

Experts say it will take more than a couple of years for things to get better. The industry is hoping that the bloodbath at Chinese shipyards will end up flushing out capacity, reducing supply and stabilising or improving asset prices, especially if some return to scrapping ships. However, many analysts feel that there is still more pain to be borne before that happens. 


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