Seeking Alpha
Growth, long/short equity, momentum, newsletter provider
Profile| Send Message|
( followers)  

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
Source: Global Shipping Industry Sees Long Duration Economic Recession