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

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

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