First International

A rocky road to correction?


BAD NEWS travels fast. And these days that means minutes rather than the days it took for news to spread of the 1970s oil crisis, for example. Reaction times are shortened and as a result market volatility is heightened.

Commenting on the financial meltdown that has seen liquidity in banking systems dry up, one shipping analyst told Fairplay: “The problem today is that no-one’s come across a situation like this before; news travels so fast that the peaks and troughs are much greater.”

Even highly reputable and credit-worthy shipyards are finding it more difficult to run their daily business. Credit lines for daily expenses such as materials, labour, and machinery have evaporated, and the problem only intensifies further down the quality range.

Eventually shipowners will start to feel the impact too, as refund guarantees can no longer be honoured by yards that cannot complete a newbuild because of a lack of credit in the first place.

Last week European banks shuddered in fear that Europe may not be able to come up with its own US-style bailout bill if finance markets continue to shrivel up, and raised the Euribor inter-bank lending rates to their highest peaks for 14 years.

As a benchmark figure – that’s just more bad news.

The credit crunch has dried up ship sales too, as detailed on p36. Newbuild orders are also responding to tightened cash flows, as illustrated on p34.

The biggest problem, according to ship financier Paul Slater, is that the inter-bank lending market is now frozen and this has blown Arctic winds over the commercial debt market and locked in money needed for daily business.

“Banks have lost confidence in each other, and how much each has in its coffers as a back-up. That will have a huge knock-on effect on shipping,” he said, adding, “What’s more worrying is the lack of real cash in the system – I see huge issues in that.”

Ironically, however, salvation may just come in the form of what Slater describes as a ‘ridiculously large’ orderbook. With many of the owners that have ordered ships now sliding into recession, there’s “no reason to build all of these ships and there will be huge increases in cancellations, bringing the supply and demand balance back to more healthy – if not exotic – levels in a couple of years,” he said.

But it is an extremely bitter pill to swallow in order to win a more healthy market outlook.

And, he went on to warn, “there’s not a chance we’ll see such exotic profits again – at least not on any regular basis!”

Source: Fairplay Online, 9th October 2008.

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