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A long winter beckons

A long winter beckons

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Paul Slater from First International Corporation is in a pessimistic mood looking at almost every sector of shipping.

As the landlubbers in the northern hemisphere struggle to cope with extreme weather conditions, shipowners continue to deal with unprofitable markets in most sectors.

The excess supply of ships continues to face no growth in demand for their services while new newbuilding orders have emerged as shipyards continue to lower their prices.

The average age of the operating ships remains historically low whilst the ship recycling industry continues to offer low prices and itself faces reduced demand for the recycled materials. Mid-size container ships dominate this market as more mega-ships continue to deliver causing a trickledown effect into the feeder trades.

The public face of the shipping industry is mainly the publicly traded companies quoted in New York and Oslo but these collectively represent only 30% of the fleets trading in most sectors.

However, it is reasonable to assume that the freight markets affect all shipowners even though the majority do not report their results.

The major factor affecting the industry today is the virtually complete withdrawal of commercial banks from funding the shipping industry including the offshore supply vessel sector. The level of non-performing loans is enormous and most owners can only pay interest on their debts but no principal. Ship values continue to decline as they are physically depreciating assets causing much of the debt to be under-secured.

Creative funding from the private equity and hedge funds has done little to relieve the decline as the issue of insufficient income from the freight markets continues to dominate.

It is ironic that the cargo owners have not obtained increased demand for their products or expanded their markets because of the cheap freight rates. Thus the losses being experienced by shipowners have benefited nobody and shipowners need to collectively resolve to drive freight rates up.

Returning to time charters and contracts of affreightment can secure the relationship between shipowners and cargo interests who need their products moved.

We have seen the catastrophic effect of a shipping bankruptcy with Hanjin, where thousands of loaded containers were stranded on ships and in terminals and the cargo owners were forced to pay to recover their products and deliver them to markets.

Another serious issue that the low freight rates have caused is the forced reduction of operating costs. This has resulted in cheaper, less experienced crews, minimal spares and poor maintenance.

While new ships can operate on minimal operating costs, the mandatory surveys will become increasingly expensive if this continues. Much of the speculative capital that has come into the industry in the past few years was expecting a profitable return in five years or less. This has not materialised and instead more capital is needed to fund the cash flow shortfalls whilst the asset values continue to decline.

Recent bankruptcy filings have evidenced the fact that there is little or no equity remaining in the industry and that the banks are looking to get out before their security diminishes further.

This is of serious concern to the cargo interests who need to pay more for the services they need and secure those services on period contracts.

It is highly unlikely that world trade will grow over the next few years until there is greater global stability and reduced warfare in the Middle East.

Chinese demand for raw materials and energy goods have reduced already and show no signs of increasing while their export of manufactured products has also stalled. They will continue to build ships and provide export finance provided they are operated in Chinese trade, thereby controlling the freight costs.

The oil markets will continue to operate at marginally profitable levels in both crude and products but face intrusion for the new Iranian and Iraqi tanker fleets. The reduction in the size of the fleets owned by the oil majors will present opportunities for time charters but only for the financially strong shipowners.

The new US government’s determination to become “energy independent” will certainly affect the tanker industry but the US could well become an exporter of oil when the new pipelines are built but new oil terminals will need to be built also.

Finally, the offshore supply vessel industry is in deep trouble as the reduction in drilling activity in the Gulf of Mexico and the progressive shutdown of the North Sea, as well as little or no offshore work anywhere else, have combined to create a huge fleet of laid-up vessels and a number of bankruptcies, with no end in sight.

Bigger shipping companies with strong equity capital for the long-term and affordable bank debt will be the future for an industry whose services will be needed for the long foreseeable future.

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1 Comment

  1. Andrew Craig-Bennett
    February 24, 2017 at 11:59 am

    All true.

    The demand for the carriage of good by sea is essentially price inelastic, as Basil Metaxas pointed out in his book “The economics of tramp shipping” in 1971. The reason is that freight makes up such a small part of the value of the delivered commodity. We have been too efficient for our own good since the triple expansion tramp steamer.

    What has now happened is that shipbuilding has joined us in being too efficient for its own good or ours.