We have been reporting from time to time on the impact of the credit crisis on international trade. The main focus has been on how buyers and sellers of cargos are finding it increasingly difficult and costly to obtain letters of credit. However, a second effect is on shipowners themselves, both directly (via plunging freight rates, in some cases leading them to leave ships idle) and indireclty (via higher financing costs to them).
A new but expected symptom is cancellation of orders for new ships. While ocean transport is a notoriously cyclical industry, some incumbents have said this is the worst market they have seen.
From the Financial Times:
Shipowners are forfeiting tens of millions of dollars to cancel contracts to buy vessels rendered uneconomic by one of the industry’s sharpest downturns.
Last week, New York-listed Genco Shipping announced it was forfeiting $53m in deposits it had placed to buy six new vessels due to cost a total $530m.Hellenic Carriers, listed on London’s junior Aim market, said it was forfeiting a $6.97m deposit and making a further $1m payment to abandon a $69.7m contract sealed in July to buy a dry-bulk carrier.
At the same time, Oslo-listed Golden Ocean told Lloyd’s List, the shipping daily, it was reviewing its ship orders, although none had yet been cancelled.
The cancellations follow a collapse in the short-term, spot market rates for dry-bulk ships carrying iron ore, coal, bauxite, wheat and other commodities. The fall – of 71.9 per cent in October alone – has sent ship values tumbling. Consequently, it is often more worthwhile for shipowners to forfeit their deposits and pay compensation than to go through with deals on which they would never earn a reasonable return.
Quentin Soanes, managing director of Braemar Seascope, a London shipbroker, said that, for the worst-hit sizes of dry-bulk carriers, 40-50 per cent of existing orders could be cancelled. Braemar’s current estimate of the world order book of dry bulk ships stands at 3,920 vessels.
he said: “It’s going to be very, very messy, I think,”.
By cancelling orders, the shipowners rfelease badly needed cash they would otherwise have to put towards future payments on ship purchase…
Shipyards, meanwhile, are struggling to secure the guarantees that will refund shipowners if they fail to complete their orders. Without such guarantees, orders become void.
Stamatis Molaris, chief executive of Excel Maritime Carriers, told investors he no longer expected to receive four large dry-bulk carriers ordered for $311m from Korea Shipyard in Mokpo, South Korea.
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Santa is cutting back on elves, reindeer, toys and will be using a smaller more efficient sleigh this year and the elves will be working in coal mines versus building toys. The good news is, although coal is not sweet, it can heat!
Reporting on this is conspicuously lacking from the much ballyhooed US media establishment that endlessly brags about its superiority.
A fall in prices of 71.9% in ONE month qualifies as a hyperdeflationary microburst.
Hyperdeflation is a term you will never hear on CNBC until it is likely too late.
Deflation is EVERY bit as pernicious as inflation. Those who claim that a deflationary episode will be promptly followed by an inflationary one are deluding themselves.
Matt Dubuque
Matt Dubuque
Right, shipping is having serious problems… but given that world-wide trade was pretty obviously at unsustainable, manic levels before the bust hit, who can say that they are genuinely surprised by this? Responsible shipping and ship-building companies should have seen this coming, and should have insured themselves in some form.
Nor does this, by itself, spell doom and destruction of the world economy. For practically all things that are globally traded (at least for manufactured goods), there are local alternatives to be had. The enormous, non-sustainable increase in shipping was partly due to the “China Phenomenon”, where everyone, for a brief period of time, thought that it would be an enormously smart idea to outsource practically all manufacturing to China. And import goods from there.
This phenomenon will not disappear, but rather shrink to more sane levels. And along with it, the shipping fleets will shrink a bit, too. No-one with a longer attention span than that of a Canary should be very surprised by this. Nothing (much) to see here, move along…
Part of this problem stems from the massive overcapacity that was built during the momo commodity years 2005-2008. The average age of the the ships for companies mentioned above is around 3-4 years…this is off the top of my head b/c i can’t remember where i read it, but ships typically last 6-8 years (maybe longer?) before they are scrapped. Instead, it sounds like 3-4 year old ships are on the verge of being scrapped given the massive overbuild (take your losses now and live to see another day).
As the article hinted, the 10% loss taken on downpayments is a small price to pay vs. the potential for insolvency after hundereds of millions are sunk (pun intended) into more overcapacity.
matt, again you remain unaware of the flaws of fiat currency. the temptation is too great to simply “print” fiat especially when such recent massive printing is seeing at the same time dollar-strength. in fact, the strong dollar since july has made everyone forget the consequence of such printing: dollar debasement..its inevitable that fiat currency debasement in its present form will OVERWHELM the deflation soon enough…it may be another 3-6 months but again, forget not the ease with which fiat money can be made/created. your deflation is defntely here right now and it leaves the world craving dollars. and the world will get what it thinks it wants right now: us dollars and us treasuries..
$160bn in orders to be cancelled for dry bulk carriers
Still waiting to see the recycling of older ships, their owners can’t hold off forever. It’s a good time to retire, why fight it
The rest will be consolidated
Actually now is not as good a time to retire as a few months ago when scrapped ships were worth more, also with current economic conditions no one is going to buy your ship whole either.
A few 100 billion of Tarp money should keep the shipbuilders building. We can have GM build some ships. Shouldn’t be much of a change based on the sizes of their SUV’s. And imagine the cool macho ads they can run.
I wonder if taking a “slash and burn” type view toward shipping capacity might not be missing some other things that are going on in, and as a result of this trade financing matter and its spin-offs.
There are those who argue that importers of bulk goods, grains, ores, and coal are running down inventories rather than buying goods which will only be cheaper tomorrow. There is a question what happens when the inventories need to be replaced. The US is among the affected exporters in this kind of case along with Brazil and Australia etc, but letters of credit have dried up for the financing of these kinds of activities.
Chinese trading companies on the other hand are said to be maintaining lists of financial institutions whose letters of credit they will not any longer accept.
AS in other kinds of financial “services” much of the broking involved in financing trade, leasing ships, insuring cargoes, runs through London, where, presumably, some part of the world’s $14 trillion bill for trade in goods is integrated with currency, interest rate and other kinds of speculative activities.
I wonder if others have given any thought to the questions involved in this matter of trade financing, such as the time frame for more general economic consequences, the spin-off effect on already stressed financial markets and the derivative casino, the relation to the Libor and other money market interest rate questions which have generated such concern. The possible significance of China and others not accepting bank letters, as well as banks not issuing them.
Oh, and the oil business: is the same phnenomenon observed in the case of oil? Do the majors have such a stranglehold as to be immune from trade financing and tanker leasing problems? Could oil importing countries be looking at the same kind of problems in say 60 to 90 days as importers of other primary materials are?
Is the result of this both economic dislocation and higher prices as inventories are run down?
Any views?
Since the advent of the container, the shipping industry is even more cyclical than the airline industry. Huge capital costs plus low operational costs means that parking your ship doesn’t save you much money, so you get vicious price wars in downturns.
Until shippers either start going bankrupt or renegotiate the debt on their ships, expect more of the same.
Obama was voted for change, but he made a move last week, which supports analysis below.
War on iran/proxies coming in next few weeks!
Details below
http://www.marketwarnings.com/2008/11/is-attack-on-iran-syria-coming-soon.html
doc holiday… You make me laugh ! Thanks !
Anonymous said…
“Obama was voted for change, but he made a move last week, which supports analysis below.
War on iran/proxies coming in next few weeks!”
Ahem, sir I think you should consider if the “change” is from “The Uncle Tom’s Cabin”
to “The Uncle Tom’s… Kibbutz”
There is a possible implication here that some are missing and it is that all shipping companies are struggling to survive. The shipping business in some ways mirrors the banking business, in that many of the cariers and ship owners are so inter related that there is a risk of a dominoes effect. We could end up with a systemic risk in dry bulk shipping such that there are no financially viable companies operating. Here there are plenty of ships but all the owners are bankrupt and unable to trade. Fortunately the effect on other types of shipping is rather more muted for the time being and perhaps rescue activities could stem from there.
Yves,
Thanks for following up on this. I too am trying to find out more about this as the consequences of a trade breakdown would be devastating.
Having tried to gather data on the subject of letters of credit (or lack of) for about 6 weeks now I find little or non first hand data that would support these concerns. Where are the photos of containers stacked up in ports, where are the statements by grain exporters failing to find buyers?
Could all this be much ado about nothing?
Thanks
William