Perfect Storm: Why Too Many Dry Bulk Carriers Are Being Built

Today is day two of Sea Asia 2009 shipping exhibition and conference in Singapore (see yesterday's article here). I am like a child in a candy store surrounded by the technology I love, talking ship talk, and arguing economics. And what I love about Asia business is their marketing skills – young ladies in short skirts. I have yet to see the entire exhibition.

There was an interesting point made in a panel discussion explaining why too many dry bulk ships are being built. The story begins in the Amazon in 2004. Major storms caused flooding and several months of not being able to load commodities. The ships being backed up were the cape sized bulk carriers. The unloading facilities for this size of ship are limited worldwide. So not only were they backed up to load, there were significant waits for access to off-loading facilities. Cycle times were running 30% higher than normal.

Once this logjam began, it did not dissipate. Adding fuel to the fire was rail problems (getting commodities to the port) in Australia and China's growth (including the Olympics). Shipping rates (Baltic Dry Index) went ballistic as there was a shortage of ships. Ship owners suddenly saw non-shipping money flowing in to cash in on the riches. With the help of this new money, orders for building these cape sized bulk carriers started running eight times the historical average.

Suddenly the clock struck midnight, and everything turned back to pumpkins and mice. The Great Recession began. As quickly as the golden age began, it returned to the dog-eat-dog world of yesterday – only this time the economic crisis was worldwide, all these new ships were about to be delivered, and the new money evaporated.

What I loved was the smile on the faces of these major bulk carrier players. This was the challenge they had been waiting for.

Finance was the economic topic of the day with a panel lead by the banks and financial institutions which dominate shipping industry finance. For me, it was a continuation of the Perfect Storm.

The lending facility to shipping has dropped from 30 active banks to under 10 active banks. The interesting feature is that there are new banks such as Bank of America and Wells Fargo joining the ship lending group. The banks leaving the market either are in financial distress, or because of government bailouts are restricted to lending to “in country” clients only. WOW, in Europe or Asia when bailout money is given to the banks – they are restricted to lending within the country. In America, we are bailing out the world.

Even with loan syndication, industry loans are limited to $100 million. The Catch 22 is that syndication is almost zero in 2009.

Banks are cherry picking, only lending to the most credit worthy.

Bank's capital basis is very low. Worldwide, the banking capital base is down 25% requiring unwinding of their lending positions to rebuild equity. Banks are not lending.

The bankers all say LIBOR is not representative of their costs for lending and that a new benchmark is needed. Holy crap batman, isn't that what customers are saying too? Evidently, everyone thinks LIBOR is bogus.

There are high credit risk premiums for the shipping industry.

Vultures are waiting for the asset value of ships for fall to scrap value. The banking industry has made its highest profits when the shipping industry is under duress.

It is the opinion of the banking industry that most of the ships under construction will be completed – even if the fabrication contract is canceled. The governments where the ships are being fabricated will use this construction as economic stimulus. By 2011, there will be twice as many ships as needed across almost all shipping sectors. The industry needs the ship construction to be canceled.

Overall shipping industry asset values look to be in trouble. Future shipping rates seem to be under pressure due to overabundance of new build ships.

Disclosure: None

Comments

[notsosmart:]

i got a sinking feeling from this article.

Apr 22 12:34 PM

[joeevan:]

Goldman Sachs Raises China Economic Growth Forecasts (Update1)
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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 01:56 PM

[ramisle:]

China is making a comeback, but, too many people think that the recent surge in Iron Ore shipments is going to mean a dramatic rise in the charter rates. February, and March were record months for the import of Iron ore to China, and yet the rates are still too low, because the supply of ships is growing.
These are supposed to be growth stocks, if the growth of Chinese demand is 8-10%, but the size of the fleet grows by 10% you will not see a significant rise in the BDI, and Shipping Co. earnings will have to grow by acquisitions. While there will be many bargains out there, most companies will not be in a position to pile on more debt.
Don't count on scrapping to take much capacity out of the market, until the value of scrap metal goes up.

Apr 22 03:00 PM

[TEC:]

I read the entire article and thought - okay - doesn't look good for shipping. but, the line that sticks out is:

>WOW, in Europe or Asia when bailout money is given to the banks – they are restricted to lending within the country. In America, we are bailing out the world.

maybe an idea for another article article (if you haven't published one already)

Apr 23 04:46 PM