Global Shipping Industry Sees Long Duration Economic Recession

Global shipping faced with overcapacity and inability to lower fixed costs, the delegates to the Sea Asia 2009 conference believe things will get much worse before they get better. Delegates included ship owners, industry trade groups (such as Baltic Dry), government trade groups, major logistics players, Port Authorities and shipping industry support groups.

The overall consensus was that shipping was in a black swan mode. No industry members still alive have faced a global downturn before. They believe this crisis will last many years (five to be exact).

As a group, they are economically savvy as they are the conduit of international trade. Several electronic polls were taken and the results are as follows:

l Where will the Baltic Dry Index be at the end of 2009? 13% say under 2000, 63% say between 2000 and 4000, 21% between 4000 and 6000, and 3% say over 6000.

l When will dry bulk shipping capacity reach equilibrium? 5% say 2010, 26% say 2011, 41% say 2012, and 27% say after 2013.

l Where will crude oil prices be at the end of 2009? 40% say less the $60, 52% say between $60 and $80, while 7% said above $80.

$350 billion of financing for new ship construction is necessary within the next two years. Even in normal times, the tradition sources of financing would only have been able to provide $250 billion. According to some delegates, the difference could be made up by exim banks where the ships were being constructed. However, this will leave the market will too many ships. The industry favors scrapping new construction plans if possible.

It is not in China's interests to have high freight rates, and industry insiders believe China will keep an oversupply of vessels to keep world shipping rates low. As many of these new ships are being built in Chinese shipyards, it is believed the government will complete the ships even if the orders are canceled.

The industry has a 8 times its historical number of new build ships entering the market within the next two years. They are coming online as the industry capacity is underutilized. This is leading to an asset value (deflation) crisis. You can get a new build resell ship at 66% of the value of a contract price for a yard build. Delegates believe there will be a secondary asset value cascade beginning next year. Ship owners are now facing asset valuation problems with bank financing (sound familiar? Maybe they need good 'ole American M2M accounting magic).

Most delegates believed that a significant amount of shipping is surplus. Either the banks, the ship operators or ship owners will be left holding the bag. Many ship operators and ship owners are on borrowed time with debt issues

On the issue of peak oil, although the delegates acknowledge that 2008 was probably peak oil – they believe that the demand will fall for oil faster than the supply contracts. They do not believe Asia will emulate Western energy use – and believe the West will change they way they use energy. The bottom line is that they believe peak oil is a non-issue.

Delegates believe an expensive and painful shipping bubble will now burst. The world economy cannot return to the 2007 consumerism. This will cause a major economic reset. For shipping, the worst of the crisis is coming.

Delegates do not believe China will have any effect on helping end this worldwide recession. There is no middle class, and the vast majority of the population is poor. China's economy is geared for export. Only the small group of newly rich are causing growth. Delegates believe China has an imbalance in their economy (as it is geared to exports) which will be solved over time.

12% of the worldwide container fleet is idled, and there is an increase in capacity of 30% coming on line before the end of 2009. The consensus among the delegates was that 20% of the world wide container fleet would be idle by the end of 2009. On a positive note, it is believed that container counts have already bottomed, and as recovery occurs there will be more of an Asian flavor to container services. No delegate believed that America consumerism of the past will return.

Disclosures: None

Comments

[CautiousInv...:]

This is an interesting article and suggests that the Baltic Dry Index could lose some of its value as a guage of international trade activity if there is a surplus of ships. If true, this would keep rents rates for dry vessels depressed even if there is an uptick in the movement of grains, ores and other materials.

I have pasted below something I am having a hard time getting my arms around. If China is deiberately producing too many ships to depress freight/rental rates, why are do others need finanacing to build additional capacity?
______________________...

$350 billion of financing for new ship construction is necessary within the next two years. Even in normal times, the tradition sources of financing would only have been able to provide $250 billion.

Apr 21 08:11 AM

[Mono:]

good read steven. its interesting when you look at all walks of life instead of just being pigeonholed to wall street or finance. freight forwarding and logistics is a puzzle. many of these guys run their companies lean. no assets. they simply buy and use cargo space on each mode of transportation. they have to be more efficient then the next guy. low margin companies and little debt. luckily- this also means they can pass on costs like higher oil to the consumer, as long as the service is provided. the private equity shops try to pick off the top logistics companies and run them by issuing debt for acquisitions to expand their global footprint- not a good move. if you think about it, which you obviously did, this is how you can look at our economy. we need to run low margin and efficient for some time before we can get back to a reversion of the mean in the markets. instead the government issuing debt and playing PE shop and will only lead to the largest bankruptcy in history. look how battered the corrugated box numbers have become, a descent indicator for shipping, and try and rationalize protectionism. we aren't getting out of this on our own.

interesting perspective

Apr 21 08:18 AM

[morph366:]

The comment about the absence of a consumerist middle class in China is very telling and underlines one of the points that was made at the recent G20 meeting - who/what is going to replace the American consumer as the dynamo of sustainable prosperity?

Apr 21 08:40 AM

[Steven Hansen:]

there are many elements of this convention i did not publish as they were not directly related to investing or economics. i was there because one of the shipyards i do business with invited me to the exhibition, and i pulled a press pass to get into the conference.

i was blown away by the level of economic understanding exhibited by this high powered group. discussions ranged from currencies (including a free traded rmb) to political dynamics of the last g20 meeting.

the conference goes on for two more days and it will post if anything else of interest comes up.

Apr 21 08:54 AM

[john s. gordon:]

the dalian (china) shipyard is reported to be the world low-cost producer of cargo vessels/
> jack

Apr 21 09:16 AM

[Steven Hansen:]

cautiousinvestor - china is not building these ships but rather they are ships being built under contract in chinese shipyards. there are 420 million dwt of dry bulk carriers on order worldwide with the majority being constructed in china, korea and japan.

according to the delegate electronic survey, their estimates of cancellations are as follows: 8% believe less than 20% of all tonnage will be canceled; 39% believe 20 to 30% will be canceled; 35% believe 30% to 40% will be canceled; and 17% the canceled tonnage will be greater than 40%.

for the canceled ships which are being fabricated in chinese shipyards, the delegates believe the chinese government will complete the construction. the benefits are two fold as it stimulates the economy, and it gives china more ships to keep the dry bulk rates lower.

the delegates believe chinese yards will have no new builds under construction after 2012 (and neither will anywhere else in asia).

Apr 21 09:35 AM

[Hillsfar:]

I think this means pretty much companies should be looking into locking up long-term leases.

Steven, has there been any news on the types of ships coming on-line now and in the next 3 years? Dry bulk versus container versus oil, gasoline, LNG. And sizes?

The reason I ask is, this may be relevant to performance for companies like SSW (containers), NAT (oil tankers), DSX, etc.

Apr 21 10:07 AM

[Repsonsible...:]

Yes American consumerism will reset , NOT because people are getting more frugal NOT this Generation No its because they won't have the Plastic to whip out when they see something they WANT , also the Refi Boom will be short lived only 1 in 3 who applies will get a refi loan and thats among those with people 750 +Credit scores , the rest need not apply , got that little tid bit from a Good friend who owns a small bank . The banks DON't Want to Loan out money at 5 % for 30 years on real estate with all the forclosures out there that will keep prices depressed or falling for years and also with inflation looming a year or so from now .And with 600K people losing jobs a month this rescession could be long and deep . So Hold On to Your money , and pray . The Banks wont help You .

Apr 21 10:15 AM

[Steven Hansen:]

hillsfar -
container ships - this sector has overcapacity but not to the degree of dry bulk. the industry sees a new trend back down to ships in the 8000 teu range. 13000 teu ships only for the trans-pacific and asia / europe routes with a reduction in the amount of ships running these routes due to lower demand. as far a my memory serves, the new capacity coming on line shortly is in this 8000 teu post panamax size.

tankers - this sector appears to be in better shape as there has been many vloc to vlcc conversions. additionally others have been converted into floating production storage offloading units, or just scrapped. this sector has relatively much fewer new builds.

special product carriers - the delegates believed this sector would be one of the first to recover. there was little discussion in this area, and no discussion on capacity or new builds.

Apr 21 10:42 AM

[Steven Hansen:]

errata - sorry, got to go to bed. under tankers it should have read:

"there has been many vlcc to vloc conversions".

Apr 21 10:48 AM

[joeevan:]

Hello, Steven...and thank you for your generous, detailed posts. You mention "special product carriers." Could you give some examples of companies in this category. Thank you.


On Apr 21 10:42 AM Steven Hansen wrote:

> hillsfar -
> container ships - this sector has overcapacity but not to the degree
> of dry bulk. the industry sees a new trend back down to ships in
> the 8000 teu range. 13000 teu ships only for the trans-pacific and
> asia / europe routes with a reduction in the amount of ships running
> these routes due to lower demand. as far a my memory serves, the
> new capacity coming on line shortly is in this 8000 teu post panamax
> size.
>
> tankers - this sector appears to be in better shape as there has
> been many vloc to vlcc conversions. additionally others have been
> converted into floating production storage offloading units, or just
> scrapped. this sector has relatively much fewer new builds.
>
> special product carriers - the delegates believed this sector would
> be one of the first to recover. there was little discussion in this
> area, and no discussion on capacity or new builds.

Apr 22 10:20 AM

[joeevan:]

Goldman Sachs Raises China Economic Growth Forecasts
By Shamim Adam and Kevin Hamlin

April 22 (Bloomberg) -- China’s economy will expand faster than previously forecast this year and next as the government’s 4 trillion-yuan ($586 billion) stimulus package spurs domestic demand and boosts investment, Goldman Sachs Group Inc. said.

The world’s third-largest economy will expand 8.3 percent in 2009, from an earlier estimate of 6 percent, Hong Kong-based economists Helen Qiao and Yu Song wrote in a note published today. CLSA Asia-Pacific Markets also increased its estimate for growth this year to 7 percent from 5.5 percent earlier, according to an e-mailed note.

China’s fiscal stimulus has already driven investment back to pre-crisis levels and lending surged more than six times in March. China’s economy will continue to recover this quarter and growth will reach the government’s 8 percent target in 2009, central bank deputy governor Yi Gang said today.

“Policy makers in China have been pushing the envelope on policy easing in only one direction -- for more and more,” the Goldman Sachs economists said. “In the next three quarters, we expect domestic demand growth to further strengthen, bolstered by loose financial conditions and continued policy stimulus.”

Growth will quicken to 10.9 percent next year, compared with a previous prediction for a 9 percent expansion, they said.

Urban fixed-asset investment surged by almost a third in March and industrial-output growth accelerated. First-quarter gross domestic product grew 6.1 percent, the slowest pace in almost a decade, as exports slumped.

“This is a dramatic rebound,” said CLSA’s research note. “China has the resources needed to keep GDP growth in volume terms high for 2009 and 2010.” It estimates growth will reach 8 percent in 2010.

(end excerpt)

Apr 22 01:53 PM

[Trolson:]

From the article:
l Where will the Baltic Dry Index be at the end of 2009? 13% say under 2000, 63% say between 2000 and 4000, 21% between 4000 and 6000, and 3% say over 6000.

l When will dry bulk shipping capacity reach equilibrium? 5% say 2010, 26% say 2011, 41% say 2012, and 27% say after 2013.

The question is, where will BDI be when shipping capacity reaches equilibrium?
The participants of the poll above apparently beleive that the equilibrium is at 6000 or above. When were these polls taken? After several drinks I guess?

Apr 22 03:00 PM

[elliot_mllr:]

Freya:
There are fleets of what are known as shuttle tankers, the sole function of which is to transport oil from deepwater offshore rigs to onshore refineries. The best of these is operated by Teekay Offshore Partners LP (TOO), in which I happily own units.


On Apr 22 03:13 PM Freya wrote:

> There is one thing to consider as far as Oil Tankers are concerned.
> The farther offshore the rigs get, like Petrobas, the longer it will
> take to get the oil to land.
>
> More ships would be needed to keep the same volumes flowing.
>
> Meanwhile, in the case of Natural gas, the prolific producers have
> always had a problem shipping it to areas that wanted it. Is there
> overcapacity in the LNG arena?
>
> Is China really building supertankers or are they aircraft carriers?

Apr 22 04:06 PM

[smilingpilgrim:]

I am scratching my head over the same contradiction in your article, Steve - can you follow up?


On Apr 21 08:11 AM CautiousInvestor wrote:

> This is an interesting article and suggests that the Baltic Dry Index
> could lose some of its value as a guage of international trade activity
> if there is a surplus of ships. If true, this would keep rents rates
> for dry vessels depressed even if there is an uptick in the movement
> of grains, ores and other materials.
>
> I have pasted below something I am having a hard time getting my
> arms around. If China is deiberately producing too many ships to
> depress freight/rental rates, why are do others need finanacing to
> build additional capacity?
> ______________________...
>
> $350 billion of financing for new ship construction is necessary
> within the next two years. Even in normal times, the tradition sources
> of financing would only have been able to provide $250 billion.<br/>
>

Apr 23 12:56 AM

[Terence Smyth:]

An interesting and well written article, Stephen. Thank you for it. And interesting discussions.

We deal mostly in ports and port businesses but keep an eye on the shipping market.

Regarding the container trade, we currently expect world container trade to decline by about 5% in 2009, the first decline in the history of container shipping. And U.S. container port traffic to fall by about 10% this year.

Regarding the dry bulk market, there are a number of size classes of ships. In industry jargon, some of these are:

- Handysize (plus some sub-classes), around 50,000 deadweight tonnes (DWT), the gross carrying capacity of the ship. These are used in a variety of minor bulk trades and also carry break-bulk cargoes such as forest products and steel. Break-bulk cargoes are those moved as individual pieces or in packages and lifted onto and off of ships with cranes; dry bulk cargoes flow.

- Panamax, generally between 60,000 and 80,000 DWT but some are outside this range. These ships can just fit through the present Panama Canal – hence the name. Their principal cargoes are dry bulks but there are some movements of specialized break-bulk cargoes such as steel slabs. Panamax ships carry a wide variety of bulk cargoes such as grains, sulphur, potash, phosphate rock, and some iron ore and coal.

- Capesize or Capes. These are ships too large to fit through the Panama Canal and generally range between about 100,000 DWT and 250,000 DWT. Some ships are larger (I think 365,000 DWT is still the largest), but these are in most cases “ore carriers” that have only enough cubic capacity for dense iron ore. Capes carry only iron ore and coal (both thermal – mostly for power generation – and metallurgical – for steel making in blast furnaces).

An interesting indicator for Cape demand is crude steel production. I just updated some information on this today.

Annualized monthly production of crude steel (monthly times 12) for the world was around 1.4 billion tonnes in early to mid 2008, fell to about 1.0 billion tonnes in November 2008 and remained around this level to February 2009. It moved up to 1.1 billion tonnes in March.

For China alone, it was about 0.5 billion tonnes in mid 2008, fell to about 0.4 billion tonnes in November 2008 and has been gently rising to reach 0.55 billion tonnes in March.

The crude steel trends parallel to a large degree the movement of the Baltic Dry Index (BDI), which fell dramatically from mid 2008 to a trough in December 2008 (especially for Capes), and then roughly doubled from this trough.

About a week ago, I read a knowledgeable article in one of Canada’s best newspapers that dealt with Chinese steel. The article authors considered that the real demand for steel in China is about 400 million tonnes. It will be interesting to see if this proves to be the case.

The question for us investors, of course, is how can we make some money out of the shipping market?

To close, most the bulk shipping guys I have worked with have a very keen sense of markets in general. After dealing daily with shipping, one of the most volatile markets in the world, real estate and equities must seem simple to them. One should take the survey results noted in Steven’s article quite seriously.

Apr 26 07:32 PM

[einstein p ...:]

I missed this article and couldn't be happier.

Now, I'm holding EXM, PRGN, and SBLK with a nice dividend on two of the three and huge profits on all. Fully expect them to continue to rise, reinstate dividends, and live happily ever after.

The same type of investment has been working in the oil and natural gas trusts. In the long run, this may be the better of the two sectors. Natural gas is very undervalued by traditional terms and we have problems all over the world --- Canada isn't one of them.

It's amazing how much this market continues to trade on emotion instead of logic.

May 21 07:40 PM

[Freya:]

There is one thing to consider as far as Oil Tankers are concerned. The farther offshore the rigs get, like Petrobas, the longer it will take to get the oil to land.

More ships would be needed to keep the same volumes flowing.

Meanwhile, in the case of Natural gas, the prolific producers have always had a problem shipping it to areas that wanted it. Is there overcapacity in the LNG arena?

Is China really building supertankers or are they aircraft carriers?

Apr 22 03:13 PM