Expect the largest and sharpest correction in shipping for more than three decades, says ship financier Paul Slater
The Chinese industrial revolution has resulted in a bonanza for shipping for the last five years, says Paul Slater, First International Corp Chairman, coming after some fifteen years of mediocre returns. The result has been a spending spree of unprecedented proportions, fuelled by extraordinary short-term charter rates and an abundant supply of cheap debt.
Slater will warn delegates at the Financial Times 1st World Shipping Congress in Athens next week that the maritime transport industry now faces the largest and sharpest correction to its economic structure since the mid seventies. The knock-on effects of the credit crunch for shipping will be dramatic, with debt scarcer and more expensive for years to come.
Slater, who is also a Managing Director of Griffin Holdings, believes that the present excesses stem from unrealistic projections of China’s growth and the attendant expansion of shipyard capacity. The time delay between ordering ships and taking delivery has always been a factor for those gambling on the spot markets, he says, and this has now extended beyond three years.
This may well shorten if there are a significant number of order cancellations, Slater believes, but there is no escaping the fact that the current newbuilding orderbook is at record levels at a time when the outlook for demand is grim. The industry will need to seriously retrench and downsize to re-energise the freight markets, he warns, but this could take several years. Significant lay-ups of ships and further cancellations of ships are likely.
Each of the different shipping sectors have their own drivers but the outlook for dry bulk looks very bleak, particularly in the larger sizes, Slater says. Tankers face the huge challenge that perhaps the US demand for imported oil has peaked and clearly, the container sector is already over-tonnaged and faces further problems as the present order-book delivers over the next three years.
Meanwhile most commercial lenders to shipping have sharply reduced their lending activity and some have stopped altogether. Private equity investors have mostly moved away and the public markets are effectively closed. Companies that have already taken delivery of expensive new ships, and those with ships delivering in the next two years without charter cover that reflects their true cost, face spot and period markets which barely cover capital and operating costs, leaving little or nothing for investors.
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