First International

Don’t treat ships as betting chips


SHIPPING markets are due for a major correction and recent financial turmoil makes this both imminent and inevitable. Ship financier Paul Slater isn’t mincing his words.

He will warn a Financial Times shipping conference in Athens next week that the industry faces its largest and sharpest economic correction since the mid seventies. It’s time for shipping to go back to basics. “It’s a long-term transportation business,” he says, “not a casino where the chips are ships.”

He is under no illusions. While there will be opportunities, there are some very difficult months ahead. “How will private ship owners fund their newbuildings?” he asks. “If I’d made a couple of billion running my ships over the last five years and I faced today’s global economic downturn and the chaotic capital markets, would I bother to build any new ones? I’d probably be wiser to write off the signing installment, sit back and wait.”

The First International chairman and MD of US investment bank Griffin Holdings points to a whole range of new shipping companies that have been floated in recent years. “Some started out in one sector and ended up in another, often run by people with no ship operating experience,” he says.

“More than ten billion dollars of equity value has been lost in the last year despite attempts to support prices by maintaining unrealistically high dividends.”

Secondhand ship prices are already on the way down and charter rates are also slipping as the credit squeeze tightens and demand for shipping’s services eases. This is already evident as the great driver of shipping’s recent record markets – China – starts to slow down.

Vast outsourcing of manufacturing has driven Chinese demand for raw materials and spurred its export trades to the US and Europe. But these consumer markets are flagging as high energy prices bite, financial uncertainty spreads and the spectre of rising inflation looms everywhere.

Slater is deeply concerned about the orderbook although he believes a significant volume of tonnage may not get built. “Even those who have already secured construction finance may face higher costs and problems with refund guarantees and the additional credit enhancements such as interest rate hedges and other financial insurances,” he says.

People taking delivery of ships over the next couple of years will be staring into a financial black hole, he warns. Not only will these be the most expensive ships ever built, they will also be ships that cost as much as $10,000 a day to run, instead of the projected $6,000.

The greatest worry is excess shipbuilding capacity. And shipyards will still want to build the ships even though the original owner has walked away, he warns, pointing out that steel, main engines, generators and other components will already be on order.

He is determined to re-emphasise the function of shipping. “If the shipping service becomes too expensive, then customers will make other arrangements.” This is already evident, with Brazilian iron ore mines signing up for new Very Large Ore Carriers.

“We are coming to the end of a tsunami,” he concludes. “As the waters recede, we will still have an underlying high-quality business, but we will be rid of the speculative excesses. The business will beat to a different drum.”

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