- Tuesday 13 November 2012 -
THE third quarter of 2012 has come and gone and various public company reports show the financial results continue to worsen.
As I have said many times, shipping economics is primarily driven by the economics of its customers, the ups and downs of world trade and the macroeconomics of nations for which shipping is an essential service to support their industries.
It is shipping’s ability to respond to these changes that preserves its vitality, but when shipowners get ahead of the markets for their services and order thousands of new ships without contracts for their use, they create their own economic disaster.
Manufacturing industries can stop production, and mines and other mineral producers can slow their activities when demand for their products declines.
Shipping is saddled with fleets of ships of all types and sizes which, unless sold for scrap, can trade globally for 20 years or more. New ships on average take two years to deliver from the date they are ordered and a lot can change in two years.
The cause of the boom in all markets in the middle of the last decade was China’s surging economy. However, although China’s economy is not centralised, its policies are, while its industrial economics are driven regionally.
Thus the extraordinary growth in China’s regional demand for shipping services exceeded the overall requirement, as individual industries needing shipping were themselves governed by the demand for their products, mostly from outside China.
Put simply, China’s own recession was caused by the recessions in Europe and then the US, and Beijing’s new government is unlikely to stimulate its industries financially until the other nations’ economies recover.
Shipowners old and new took advantage of the ignorance of equity investors and the carelessness of the banks to order thousands of new ships of all types.
The abundant supply of public equity acted like a magnet to banks, which grossly overlent to shipping companies to order more and more new ships. These could only be paid for if the freight markets expanded above and beyond the unprecedented levels of 2005 and remained there for another decade.
Worse still, shipyards — mainly in South Korea and China — expanded their capacity to double the levels of the late 1990s and today can statistically replace the world fleet every seven years.
The results of all this are clearly and painfully seen today.
Except for shipping companies in smaller markets or those with ships on long-term charters, as in most of the liquefied natural gas fleet, most are losing money every day.
Bankruptcies and restructurings are the daily norm: “too big to fail” is a mantra that does not exist in shipping. Past collapses in the 1970s and 1980s show that fleet size is no protection if the charter revenues are not there.
Few, if any, public shipping companies have any franchise or goodwill value, and today most have little or no remaining equity value.
As an investment, shipping is viewed today as one of the worst industries and, despite the vitality of the services it provides, it will take a long time for investors to return.
The very recent collapse of Overseas Shipholding Group’s share price, which dropped 90% from its high in 2008 to October 1 this year, then fell a further 80% in the rest of October, leaves a market capital value of only $38m from its five-year high of $2.7bn.
Torm, another very large tanker company, has undergone major restructuring. Its banks now own 90% of a company that in 2008 had an MCV of $3bn. It will probably liquidate its fleet under bank governance.
Another major failure has been Excel Maritime, partly owned by the former major shareholder of Torm. Its peak MCV in October 2007 reached $7bn and it is now just $35m.
There are numerous other public companies whose values have collapsed and that operate under a mountain of debt that greatly exceeds the market values of their assets.
Behind the scenes, numerous private companies are facing similar problems. Even the major Asian owners are reporting sharply reduced revenues and growing losses.
As with all previous market collapses in the 1970s, 1980s and 1990s the shipping landscape changes and the recoveries take longer than upturns.
We still have a way to go before sustained recovery in freight markets is seen. Some are saying the capacity of the wet and dry fleets will need to contract by at least 30% for it to begin.
The container sector was looking to cope with the dramatic increase in ship sizes when the overall demand for slot spaces began to decline.
Today there are more containerships laid up than at any time before, yet the orderbook for jumbo-sized ships still shows a 50% increase by the end of 2013.
Companies such as Seaspan may reduce or defer some of their huge newbuilding programme as their customers face the problems that oversupply is causing.
Some factors may assist fleet reduction over the next few years, however.
The experience of investors in publicly traded shipping companies is as bad as the collapse of the dot.com bubble. Institutional investors are totally absent and short-term traders are very disillusioned.
The shipping banks are all carrying large amounts of non-performing debt, much of which will soon fail altogether. Thus shipping is a non-industry for most banks and it will be a long time before they return.
Private equity is also in short supply, demanding unachievable returns and short-term exit strategies that will mostly not occur.
In summary, there is no new money for new tonnage unless it is covered by charter contracts with real end-users.
The shipyards are already looking at a near 50% reduction in orders from a few years ago and, despite a significant reduction in prices, face further reductions.
The eventual outcome will be smaller fleets of more fuel-efficient ships that can trade profitably in the markets of post-recession economies, but these are far away.
The problems of today’s oversupply of ships will continue to haunt the industry for several more years.- Tuesday 13 November 2012 -