THINK TANK

It’s going to be a longer road to economic recovery for the shipping industry than previously hoped. With loans exceeding assets, dwindling orderbooks and cash flow problems, any recovery in the shipping sector has well and truly stalled. And the recent wave of ‘new’ investors in the sector may be feeling less bullish about potential returns.

James Walters of Gray Page, writing for Bunkerspot where this article first appeared, presents a sombre outlook for 2016.

The New Year certainly started on a disappointing note. The realisation seems to have dawned finally that China cannot grow forever, and at a time of year when the level of shipping activity should be at a peak (pre-Chinese New Year), there is little sign of demand.

As we predicted in our last article (Bunkerspot August/September 2015), and evidenced from our own visits to China back in 2014, the momentum, which had been seeing annual growth figures in excess of 9%, has been running out of steam for a while now. Nevertheless, if you believe the figures presented, China still managed to record a 6.9% growth in gross domestic product (GDP) in 2015.

The shipping market’s level of wellbeing has been centred on the continued growth in China’s demand for commodities since the start of the last boom of rates back in 2003,and possibly even longer. The fall, particularly within the coal trade, should be seen as a major concern and one that is now being reflected through the collapse in Chinese share prices and in the gloomy market for dry bulk.

The crisis has resulted in the rapid fall in second-hand ship prices. This means that the financing banks are finally having to ‘wake up and smell the coffee’, particularly in terms of realising the extent of their exposures. This is no better illustrated than through the arrest by Deutsche Bank of vessels that were  linked to investments made by Oaktree, which were reported at the end of November 2015.

The scale of the problem, whereby the loans granted to ships now exceed the value of the assets, is now so serious that it cannot be ignored any longer. More loan restructuring, debt for equity swaps, or forced sales can therefore be expected throughout 2016.

Quite how some of the investment funds will be explaining their level of shipping investments to their financial backers has yet to be seen. The expectation had been that their rapid investment into shipping since the start of the economic crisis in 2008 had been timed to coincide with the bottom of the market cycle. By now they should have been seeing bumper returns. However, this belief was clearly wrong. Many see their involvement as a contributor in the failed recovery of the shipping market post-2014. Perhaps in this day and age, where everybody can access the same economic data, it should not be surprising when independent analysts, educated in the same economic modelling, all predicted shipping as the ‘next big thing’. As a result of this spike in new investment, and cheap bank finance, all that happened was that the recovery was kicked like a can down the road.

At a time when ship deliveries were peaking, cargo volumes have struggled in core sectors, including grain and coal markets. As a result, the dry cargo freight rates have continued their fall. At the time of writing in late January, the Baltic Exchange reported that its dry index had reached its lowest level since its inception. This means that Capesize bulk carriers are now earning an average of just $2,750 per day for spot business. Yet operating costs, excluding any allowance for dry docking or financing costs, are hovering at around $7,000-$8,000 a day.

This is creating a potential blood bath and is leading to predictions of yet more pain to come through the rest of the year. This is especially the case where few analysts are predicting the return to growth in levels of cargo volumes within the core bulk sectors that will be sufficient to cover the growth in the world merchant fleet. The one glimmer of hope rests with the likes of Rio Tinto, which, despite the collapse of iron ore prices, is still predicting rising levels of iron ore exports from its mines in Australia. The only concern will be, given the glut in steel already in place in the global market, who will buy it, and at what price?

One result of the issues over falling cargo demand will be the scrapping of yet younger ships, with vessels approaching only their third special survey even being seen as potential candidates. However, with scrap prices now almost half the levels seen in 2014 – down to $270 per light displacement ton (LDT) – the incentive to scrap remains low, and as explained previously, it is during the final 5-10 years of a vessel’s life that the opportunities to make a respectable financial return are often the strongest.

Nevertheless, some owners with continued access to funding see this as a time to buy a bargain. Some big Greek names, like Angelicousis and Martinos, have joined the likes of Bocimar and Golden Ocean in committing to second-hand purchases. Let’s hope the funding allowed within their calculations sets aside a significant figure for operating at a loss as most commentators have already written off the chances of a recovery until Q4 2016 at the earliest.

But it’s not just the dry cargo market. Container rates collapsed again in the second half of 2015, after what had been a positive first half of the year. This was caused by a faltering in imports into Europe from the Far East.

Hapag Lloyd has very recently announced the cutting of 23 ships from its services. That represents a substantial fall, and even AP Møller is having to trim services and Triple E container ships have been reportedly placed into lay-up.

The slowing down of the deliveries of some newbuildings will be knocking on the distress into the shipbuilding industry, a market that is already seeing dwindling orderbooks and cash flow problems due to increased competition from the new yards in China.

Stock markets have fallen significantly since last summer, and optimism over the Far East’s support of the global economy has all but vanished. The volatility in the Chinese shares does not help confidence in the country’s ability to sustain its semi-capitalist economy, especially when combined with potential falls in housing prices and the need to maintain domestic political stability.

The only good news globally seems to have been the resolution of the Iranian nuclear programme issues. The lifting of sanctions has occurred far earlier than anticipated, and this should be beneficial for shipping, with the resumption of some good long haul business for tankers in particular. It also opens a market that has suffered from ageing port and utilities infrastructure, which is ripe to benefit from new investment.

Nevertheless, the prediction that Iran may not need to import as much grain as in previous years is a further knock to the fragile bulk market. IRISL’s substantial container fleet may also dampen the chances of a recovery for many liner operators. Despite this, the move of owners MSC and AP Møller to resume port calls to Iran show the need for speed in re-establishing a foot hold in this once important market.

Prior to the lifting of sanctions, the steam was already starting to come off the tanker market. The latter had been benefitting from falling oil prices and a well-balanced fleet profile. Sadly, spot rates have already declined significantly since the start of the year, with some publicly quoted tanker companies actively trying to stave off a drop in their share prices by issuing positive market statements. However, the spate of placing orders for new tankers at a time when yard capacity was growing and prices were attractive suggests that the owners had learnt nothing from the dry cargo crisis. As a result confidence has started to fall in this sector too. Let’s hope that the trade with Iran will raise shipping cargo volumes in this sector by a greater level than the re-entry of what is a substantial national Iranian fleet.

Wouldn’t it just be nice to be able to end on something a little more positive? But with the concerns extending now into the offshore sector as well, the cupboard seems a bit bare of areas for hope. So, as the mantra goes, keep calm and carry on.