Shipping not sunk yet

"No business generates cash like shipping when it's rolling. Currently, it's just rolling in the wrong direction," quipped one delegate at Capital Link's annual international shipping and marine services conference in London last month. That's true. A very large crude carrier (VLCC) bought for $55m (£34m) in 2002 would have been worth $222m six years later. Even after the Lehman collapse, Goldenport (GPRT) paid $10.5m for a Japanese vessel that's now worth near $20m.

But, right now, there are few sectors that illustrate the downturn as brutally as shipping. Yards couldn't build vessels fast enough in the run up to the crash when credit was cheap and the global economy was booming. Now, the Baltic Dry Index (BDI), a measure of shipping prices for dry goods, is stuck near multi-decade lows and ships currently being built still need financing. Ship owners are "slow steaming" to cut fuel costs and ships have been idled, but a lot of vessels can't even cover their operating expenses and the poor grain harvest won't help. As the table below demonstrates, the earnings generated per day by for most classes of vessel has slumped.

Oversupply was among the major issues discussed at Capital Link's conference - a meerkat exercise, according to one analyst. It affects all the London-listed shipping companies. That includes owners, such as Goldenport and Hellenic Carriers (HCL)– excess capacity means low rates and weak vessel values – and brokers Clarkson (CKN), Braemar (BMS) and ACM, (ACMG) for whom low rates mean less commission.

There are "a few positive signs" that balance is returning, according to Aristides Pittas, boss of Nasdaq-listed Euroseas. "The main lines have ordered most of their bigger ships and won't want to put pressure on the balance sheet," he says.

That's borne out by numbers from Clarksons. It reckons shipping is just passing the peak of one of the largest and most clearly defined capacity cycles in the global economy. Martin Stopford, president of the group's Clarksons Research arm, reckons we are close to the end of the order book. "For the third year running I reckon we're at the peak of the market," he says. He may be right this time. True, there's still a surplus of ships to clear, but deliveries are running at three times the level of orders and the price of new vessels is still falling. Second hand ships are getting cheaper, too.

Goldenport is already taking advantage, trading in older vessels while scrap prices are high and buying newer ships at near-bargain prices. Other Greek owners who cashed in at the top of the cycle are, too. Indeed, mid-size, mid-life vessels can be bought for close to scrap value now, so demand for new ships should ease, too. Scrapping has already picked up on the dry bulk side, but other fleets - container and liquefied natural gas (LNG) - are quite modern, so scrapping may not have quite the same impact as it did during the 2000-2003 recovery.

"I think for the majority of older ships to exit the market we need another 18-24 months," says Fotini Karamanlis, chief executive of Hellenic Carriers. Some owners may not have that long. "If this market continues for another six to 12 months we will have problems," warns Harrys Kosmatos, corporate development officer at Greek tanker company Tsakos Energy Navigation. "It depends on the banks, but we are beginning to see some cracks. The banks may throw some owners to the lions."

Indeed, financing remains the hot topic. Shipping is competing with other sectors for finite capital – Commerzbank and others have already jumped ship and, when the money does come, projects are often much more expensive than before. Anecdotal evidence suggests up to 40 per cent of new builds are unfunded. Yet many industry insiders actually welcome the lack of finance, given it prevents spendthrift rivals expanding the fleet. "The funding gap could be the industry's best friend," said one "…driving either consolidation or more failures. Markets are generally self-correcting, and it’s likely that will happen in this case, too."

What's more, with India and China still importing heavily for internal consumption, and the US recovering, Mr Kosmatos is bullish "past 2014," predicting "a very healthy tanker run that could last five years."

Mixed fortunes

Source: Clarkson Shipping Intelligence Weekly (28 September 2012)

Global stimulus efforts should be helpful, too, and a report from Norwegian bank DNB reckons trade in iron ore and coal will double over the next five years. Ms Karamanlis, however, is doubtful given the credit problem and eurozone crisis. "China may have more effect, especially on Capesize [over-sized ships], but I don't think we're talking a rally," she says. Neither does Henriette van Niekerk, a director at Clarksons: “fleet growth is still well head of demand growth, so freight rates will remain under pressure". By her reckoning, the market for huge Capesize vessels - so-called because their size forces them to traverse the Capes rather than the Panama and Suez canals - won't begin to improve until 2015.

And it's looking like the traditional peak season for the shipping industry, driven by big Christmas orders from retailers in the west, won't save the container market this year, either.

Currently, LNG and offshore oil and gas is attracting the hot money. Demand for energy is increasing across Asia and the emergence of the US as a net exporter of LNG within a few years is a potential game-changer, according to Magnus Fyhr, head of Clarkson Capital Markets. Indeed, 59 per cent of the $50bn of new ship orders so far this year are for LNG. For owners, the payback is quicker, too - just four years for a drillship at current rates, almost five for LNG compared with 15 for VLCC and 19 for Capesize.

IC VIEW:

Barring any serious supply disruptions - military conflicts are always good for business - the future of London's small fleet of shipping companies very much depends on clearing the supply overhang. Until then, vessel prices will remain depressed and, for the Capital's brokers - who match more ships and cargoes than anywhere else in the world - steady volumes should mitigate the impact of volatile freight rates. "[From] some of the investments made now, we'll be saying wow in three to five years time," said one conference delegate. No need to jump in just yet, then.