The Waiting Game: why recovery in the shipping sector has stalled


Predictions of a recovery in the shipping sector in 2014 have proved to be premature. James Walters of Gray Page – writing in Bunkerspot, where this article first appeared – looks at why the much anticipated upturn may have stalled.

I am not an economist but I have been in the shipping industry for 25 years now, both as a shipbroker and in my current role as a market analyst and investigator. Shipping is all about gut feeling and from my recent conversations with players in the shipping community, the outlook for the industry continues to remain uncertain across all the core sectors. Amongst my broking and ship owning friends, confidence simply is not there. The tanker sector is facing stable levels of oil demand but the decline in US imports has caused a major headache for very large crude carriers (VLCCs) due to the loss of a core long haul route. Chinese long haul imports from West Africa have not yet replaced the tonne mile position, and scrapping is not making up for the levels of new tonnage entering the market.

Bulk carriers, despite the fact that global trade is still growing at a substantial rate, are still faced with newbuilding deliveries and a substantial order book that continues to outpace the current rate of scrapping. This imbalance, therefore, continues to bring pressure on rates.

The iron ore trade has risen 10% year on year and steam coal is also up 7%. However, high stock piles and a settling of the Chinese economy may delay any anticipated improvements in the market over the next year and dampen confidence. The recent reports of a $10 billion hole in some commodity trades in areas of China also do little to bolster confidence.

In the container market, the effects of the failed P3 merger talks and the hang over from the German KG crisis continue to be felt. The huge cost of fleet renewal and new port development is also pressurising profit margins, although the most efficient operators do still make money. The ongoing European economic malaise and the slowdown in China also continue to cause concern. There is a critical need for consolidation and it is hoped that the 2M and G6 alliances – albeit slimmed down versions of original merger proposals – can bring about some stabilisation of the market.

Overall, it is the fact that all three of these industry sectors are poor at the same time, some five years after the economic crash, which remains a cause concern. Owners used to operate in two or more sectors in an attempt to iron out market fluctuations. However, this can’t be relied on any more, and hence we have seen the move of some owners into the more niche liquefied natural gas (LNG) and liquefied petroleum gas (LPG) markets, with existing market players now raising concerns about over ordering in these sectors as well.

Many shipping businesses started 2014 with high hopes for the start of a sustained upswing. However, changing trade route patterns, such as the growing shift of the United States away from oil imports and the opening up of the Arctic sea routes, have created new uncertainties in the market as to where shipping trends may be heading. Some signs of positivity have begun to emerge, however, witness the opening up of smaller oil fields or mineral deposits which have resulted in renewed opportunities for smaller vessels.

The ongoing Chinese economic slowdown and high stock piles may be limiting future growth in bulk demand. Indonesian and Indian export bans earlier this year also had a big effect on Supramax markets, with a lower than expected grain season in South America further dampening rates.

2013 was originally seen as a time of massive pent up demand to invest as analysts all predicted that we were at the bottom of the 8-10 year cycle. Too many analysts reading from the same data led to investors taking the same decision in isolation of each other.

Large numbers of newbuilding orders placed at the predicted bottom of the market and following on from what had already been the biggest ship replacement period since World War II have simply unsettled confidence. The market had already picked up on the fact that newbuilding order levels were becoming out of step with the market as far back as the spring of 2014. Senior executives from some of the shipping companies were known to be lobbying senior bankers to stop supporting further ordering. However, they carried on, and the venture capital firms, using other people’s money, also continued to fund newbuild projects.

Venture capital firms seem to view the asset value of ships as a higher priority than freight earnings. Maybe it is because it is not their money? Shipping is a very capital intensive and long term business, whereas venture capital funds are often driven by making a return on their investments within a short time frame. Shipping has not faced this situation before.

At the same time, new ship yards all eager to build more ships in an ever shorter timeframe mean that the cycles are becoming shorter, and the volatility is increasing.

Low levels of interest rates are also leading to struggling owners or charterers remaining in the market longer than in previous cycles. Banks simply do not want to take on the running of ships. Debt is sold on to vulture funds.

As a result, ships have not been placed in lay-up in large numbers and slow steaming has shielded uneconomic vessels from having to face the unpalatable decision of scrapping a vessel before the end of its expected trading life. The effect of the latter is very important as after 10-15 years this is when if a ship has been cleared of bank debt, and if well maintained then this is when a ship can be at their most profitable. It is this that slows down the levels of ships going for scrap.

Given the unprecedented volatility in rates between 2003-2011 and clear break away from previous fluctuation patterns, I would also now ask the question, ‘Are we heading towards increasingly unknown territory?’

The period between 1985-2004 showed normal fluctuations in a shipping market that was still recovering from 1973/1974 newbuilding order hangover. Some newbuildings delivered in 1978 had gone straight into lay up and only emerged in the mid-1980s.

The subsequent super-heated market in 2004-2008 reflected years of under investment in the industry coupled with the rapid growth of China, while 2011-2014 saw the delivery of the massive newbuilding order. There has been a shift to low levels of return, and any recovery is likely to be delayed by further over investment in new tonnage.

Are we perhaps seeing a return to a 1974-95 period of minimal returns interspersed with only short periods of profitability triggered by some unforeseen event? And what measures can be taken to cope with such a time of market uncertainty?

It is imperative to keep up-to-date with market information and regularly check those counterparties who may be at risk. Keep a close eye on what trades are doing and control your levels of exposure accordingly (and always allow for the exposure of your competition). Expect change to happen quickly and always monitor the cash flow of customers, who may be operating at significant losses.

If we are to see continued low levels of financial return then cash flow could be adversely impacted and there could well be further casualties to add to the bankruptcies seen over the past five years.

The threat of rising interest rates also remains, although low levels of growth and inflation seems to be delaying this. However, this may be a key indicator to monitor, given the very high debt levels within the industry.

The limited ability of hedging mechanisms to offer protection also needs to be considered. Forward freight agreements (FFA) offer limited protection from market fluctuations at present for a number of reasons, including the limited liquidity of trading partners, and the introduction of the Dodds Frank legislation which has further restricted the levels of market players due to the complex requirements for levels of capital that have to be locked in to trades. With rates at current low levels, there is also very little downside that can be experienced by the market.

In periods of high market volatility, the ability of shipowners and charterers to manage their risk exposure becomes very difficult. The chances of management mistakes becomes more of an issue on longer term contracts where cover is difficult and the lack of liquidity within some hedging mechanisms may increase levels of exposure.

Staying in tune with what a customer’s market exposure really is therefore becomes more important, and relies on building closer relationships. The prompt payment of the last invoice and the mantra of ‘we have known them for years’ can no longer be seen as sufficient due diligence.

Keeping up to speed with freight market fluctuations and focusing on the exact routes a customer works in also becomes even more important. I would advise that many clients tend to forget that they will not be alone in chasing debts, and as a result credit limits become very difficult to assess.

So what should you do if a customer begins to get into trouble? Remember, always watch for early warning signs, such as requests for delayed terms and reports of operational issues, and research your options for recovery before things get worse. Maintain a dialogue with your client and use an expert to investigate its asset position. Monitor vessel movements and, should a situation deteriorate, act very quickly to protect your own interests before others get there first.

An understanding of which legal jurisdictions may offer a favourable choice for seeking a means of recovery can also be established by studying the client’s trading pattern.

Being prepared before issues arise can give you a significant advantage over competitors.

Speak to shipowners or charterers of the vessels to establish other parties’ exposure to your clients.

Remember it is better not to secure a deal than to do so and then not be paid for it.

At Gray Page, we have also had several charterers as well as publicly quoted and private shipowners facing major problems this year. We have also had numerous clients, including owners and bunker suppliers, asking us for help in recovering outstanding monies in relation to these issues

The first sign of a problem tends to be when the charter style being used to purchase bunkers suddenly requests to have a different account name inserted on invoices. This is usually a key warning sign that something is starting to go wrong.

The next phase in the deterioration comes when the charterer also changes the former charter style within different sectors of the business, or it switches to undertaking voyage charter business only. We know of a charterer which started using a different charter style on trips to West Africa where there had been a tendency to call for bunkers in South Africa en-route. This was in an attempt to
avoid having chartered vessels arrested.

Of course, bunker suppliers can often arrest a vessel even after its charter to the target company has ended. However, this can lead to serious implications on future business dealings with the head owners, many of whom could also be facing additional claims for unpaid hire or disbursements. We have therefore set out an example where the choice has been taken to try and find other assets or ships on charter controlled by a charter operator or its affiliated group, and how we would typically be called in to assist on a case.

With groups now consisting of multiple single purpose vehicles each controlling different sections of a group’s activities, it becomes important to understand how the entities fit together; to specify the common aspects within the structure and to establish if the connections between the entities, be it shareholdings, corporate directors or intermingling of corporate accounts, can be evidenced. Different legal systems require different burdens of proof, a factor which becomes very important when choosing where to pursue any claim. Places where we have assisted in the arrest of vessels include the United States, South Africa, India and Belgium as well as Singapore and France.

Gathering additional evidence from our network of charterers, ship brokers and shipowners, as well as from bunker suppliers, helps establish the scale of any problems, the levels of ongoing activities and also how remittances are being arranged.

Finding evidence of any preferential treatment of specific suppliers or owners can also be useful should arguments occur later. As stated before, information gathering remains key.

Initial reports for advice can then be circulated amongst the legal teams and a plan of action can then be put in place.

In the case of freezing order applications, reports tend to be focussed more on evidencing that there are no other options available for obtaining settlement of an outstanding debt. They also focus on evidence that other parties are still receiving some or partial payments.

In the event that ships are being targeted for arrest, the reports will seek to evidence the enquiries taken to confirm that the ship is under charter to the specific entity, or where an alter ego argument has to be made to show evidence of the common ownership or control over the affiliated party.

To assist in this, we often use a complex relationships chart which sets out the links that exist between various entities, and these prove very successful in helping a judge see the connections within a short space of time.


This paper is intended as a general summary of issues in the stated field. It is not a substitute for authoritative advice on a specific matter. It is provided for information only and free of charge. Every reasonable effort has been made to make it accurate and up to date but no responsibility for its accuracy or correctness, or for any consequences of reliance on it, is assumed by Gray Page.

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