Reader Michael appeared to be on a mission on Saturday and sent quite a few links on trade/shipping related matters. They were remarkably consistent in pointing to simply dreadful conditions and no expectation of near-term improvement. Indeed, further deterioration seems entirely possible.
From Lloyd’s List:
Freight rates in the Asia-Europe trades have crashed to record lows as consumer demand continues to crumble, with the crisis compounded by the first signs of customer insolvencies….
A 20 ft container could now be shipped from Hong Kong to Hamburg for as little as $350, excluding surcharges, compared with around $1,400 per teu last summer.
“In all my years in the business, I do not ever remember such difficult trade conditions,” said the trade director of a big Asian line….
“Has it been as bad as this before? No, not in my 20 years,” the trade manager at another global carrier concurred.
Yves here. By definition, that includes the Asian crisis of 1997-1998. Back to the piece:
To make matters worse, lines are coming under pressure to quote all-in prices rather that split ocean rates from currency, bunker and terminal handling surcharges. As rates slide, so they are also starting to incorporate the additional charges that were being levied separately….
Adding to the extreme trading conditions are demands on lines from shippers for extended credit as the banking meltdown hits global commerce.
Late payments are on the increase, and anecdotal reports suggest that non-vessel owning carriers are beginning to be hit by bad debts and bankruptcies among their smaller customers. The fear is that this situation will snowball, with lines now keeping their cashflow under intense scrutiny….
The sense of alarm was apparent at last week’s Box Club meeting when the heads of the world’s biggest container lines held a series of top level meetings, with rumours rife in the Geneva corridors that some newbuilding orders will be cancelled because of the liquidity squeeze.
That does not seem to have happened yet, but ordering activity has come to a virtual standstill as banks demand that owners contribute up to 30% of newbuilding costs from their own pockets.
From a separate Lloyd’s List article:
Dry bulk owners could find themselves in breach of their loan conditions and some may face bankruptcy after a record drop in secondhand values.
The issue of falling asset values that are linked to loans is now a big problem according to brokers.
“As long as secondhand vessel prices continue to fall, which seems likely in the short-term, and equity prices fall or at the very least remain at current levels, our industry has a serious problem,” Imarex frieght options broker Jeffrey Landsberg told Lloyd’s List.
“As the weeks and months progress, I expect more companies will have problems paying back their loans.”
In the last 12 days there has been on average one bankruptcy every three days, which is “just the start”, according to Tufton Oceanic research director Andreas Vergottis.
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Shipping could well be the first industry to experience a deflationary burst.
A vicious and pernicious accelerating spiral downward in pricing that cannot simply be “reflated” away.
Matt Dubuque
Anyone out there think this news confirms a V shaped recession?
How long will shipping companies, the ones that do not go bankrupt, wait after the recession to contract for new ships to be constructed?
This is an excellent example of an industry that, once it grinds to a near standstill, will not be easy or quickly restarted.
It will be closer to an “L” shaped Depression.
Matt
Simply put: too much trade killed the trade.
excess speculation & leverage using inflated assets as collateral has sprung the leak.
Ship building was taken up by China as a solution to its oversupply of steel created by its mills, another central planned economy on the skids.
I’m wondering about the investors in so-called shipping funds (Schiffsbeteiligungen). I don’t know whether these are common elsewhere, but in Germany they have become a common tax dodge in the last few years, reaching a market volume of about 12 billion euro in 2007. They are closed funds, with only a small secondary market, and most of the funds employ leverage as well. So I think some “clever” German lawyers and doctors (the usual tax dodge fools) are going to lose some money.
People who’ve said another Great Depression seems unlikely because we don’t have a Smoot-Hawley tariff nowadays to strangle exports reckon without the global shipping collapse we’re seeing now, courtesy of the credit crunch.
Presumably they’ve been assuming that in the equation Y = C + I + G + NX, NX, the net exports, will provide the extra nitrous oxide for the global economic engine. But if letters of credit remain unavailable and most of the shipping companies default and collapse, we may get the equivalent of modern-day Smoot-Hawley tariff simply because no shipping companies will want to take the risk of carrying cargo in the current credit crunch.
In that event, we’d be back with growing G, government spending, in the above equation, to dig our way out of this hole. That smacks of 1932 and paying people to fill up ditches that other people previously got paid to dig. Double plus ungood, Winston.
Shipping industry balance sheets aren’t the most conservative out there…sort by “LT Debt to Equity” here and you can kinda see why.
A quickly depreciating asset and lots of leverage is the mode, it seems, for quite a few asset classes…
This is classic a shipping depression. Some cycles are deeper than others, but the shipping depression is not simply the result of the global economic crisis. Shipping is a very risky business, and always has been. Fortunes are made more often than not through asset plays and not by simply trading a ship into its 4th or 5th survey.
Europe/Asia Eastbound rates are always lower reflecting the trade inbalance. This long standing trend even more pronounced on US/Asia eastbound market where several years ago the rates were USD 0/20′ and USD/40’+ THC. Winston: Ocean Carriers have a lien against the freight they carry and if a container is discharged on the quay unable to be delivered- the carrier can and will action off the contents of the container to recover freight and demurrage charges, unless the shipper guarantees the costs and either diverts or returns the cargo. It is ironic that the EU just removed anti-trust immunity for shipping conferences. This ‘pro market’ directive will prevent owners/operators from taking steps the bloc exemption allowed for that would reduce serious interrputions to trade.
Overall trade will not stop (liner, dry, or wet). The losses will be taken by the current owners (and their banks). Ships will be arrested and auctioned off, to trade again for new owners.
In my comment above I misread the Hong Kong/N.Europe rates. This does not change my viewpoint, although the consolidation of the liner business will accelerate.
Yves also makes mention of the bigger shippers pushing for ‘all-in’ rates. This has been seen on a less drastic scale in the US since the 1998 OSRA. I think that quite a few lines will unfortanately have to bite the bullet and take the hit for a year or two, but in the long term that is an unworkable commercial environment. I’m not sure about the abuse of credit, but all these deals being carved out by the big multinationals will be made up for on the backs of medium and small sized shippers and is a grave injustice …brought on in part in the pursuit of eliminating ‘market distorting shipping ‘cartels’.
I understand the words, but I am not sure I understand what they mean. From the first article:
“To make matters worse, lines are coming under pressure to quote all-in prices rather that split ocean rates from currency, bunker and terminal handling surcharges. As rates slide, so they are also starting to incorporate the additional charges that were being levied separately”.
The only think I can think of is that they are telling us that the rate drop is not the whole story. Just like homebuilders would throw in a new car with the McMansion as a way to hide the purchase price discount, the shippers are throwing in a lot of benni’s.