Thursday, 17 January 2013

“Crisis, which crisis?”

Two big names from the industry- international accountant and shipping consultant Moore Stephens and broker Intermodal- imply that the worst is not over yet for the maritime industry. It appears that vessel values may well fall further and costs increase. 

Moore Stephens partner Julian Wilkinson says: “For shipping in 2012, it was not so much a case of ‘Crisis, what crisis?’ as ‘Crisis, which crisis?’ This year will be equally challenging. Operating costs are going to go up.” Wilkinson expects that banks will exert more control over shipping as debt-to-equity ratios deteriorate, and scrapping of ships will accelerate because of the “considerable gap between the volume of new building deliveries coming onto the market and both the amount of tonnage scrapped and the availability of suitable demolition facilities.”

Intermodal’s analyst Panos Tsilingiris seems to agree. Examining whether this is the right time to buy ships, he says, "Currently, the indicative value of a 5-year old Panamax is high $ 17 million. Such levels were last seen 10 years ago in January 2003. At first sight, this looks like a strong hint to buy, but is it? Back then, the respective one year TC rate was at mid-11,000 $/day. By contrast today's 1-year TC rates for a Panamax struggles to stay in the 7,000s $/day range, while operating expenses are substantially higher. If the present depressed chartering market persists, which is implied by the bleak FFAs outlook and the recent 2-year period TC which is in the region of 6,500-7,500 $/day, then prices could go further south”. 

Analysts point out that, along with fuel and crew costs, regulatory costs will become particularly high, leaving operators with no place to hide. Besides, falling asset prices have another consequence; as Wilkinson says, “The danger is that each successive fall creates a new benchmark”. The Moore Stephens partner feels that the Ballast Water Convention coming into force will have a huge impact on costs. “Ballast water is not sexy, but it is expensive,” he says. Although there is some time before the Convention comes into force, he feels, “Owners need to be thinking now about where the money for retrofitting – and it is a lot of money – is coming from”.

Intermodal’s Tsilingiris warns against counter cyclical ordering of vessels. “In the 1980s, any hope for market rebound was killed by the excessive ordering during of 1982-1984…. a clear lesson to be learnt from the 1980’s crisis is that counter-cyclical massive ordering shouldn’t occur again" he said. 

It appears that shipping, stuck between a rock and a hard place, will have no choice but to absorb higher regulatory and operating costs in the near future. In an atmosphere of declining freight rates, says Wilkinson, adding that the industry is “like a commuter facing another increase in rail fares and no extra money coming in”.


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