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Dry bulk overcapacity looms but offset factors come in from emerging economies

Monday, 08 February 2010 | 17:06

Most analysts seem to agree that one the biggest hurdles lying ahead for a recovery of the dry bulk shipping sector is the looming oversupply of vessels, as evidenced by the huge global orderbook. In its latest feature interview, Hellenic Shipping

News Worldwide, speaks with Mr. John Cotzias, from shipping consultants and brokers N.Cotzias Shipping Group, a company active in the sector since 1893. According to the company's estimates, 2010 appears rather daunting for owners of Supramax and Capesize carriers, which face an overcapacity ratio of 115% and 88% respectively. In total during this year, there have been scheduled deliveries of 2,263 dry bulk carriers, which represent a total capacity of 120 million tons.
In fact, during the whole year, it is estimated that more than 55% of the total orders are scheduled for delivery. But this prospect, which could prove to be a rather heavy burden for the market, is thought to be offset by the constant improvement of industrial production in emerging and developing economies around the world, which has already surpassed the pre-crisis levels. This demand, coupled with scrapping of older carriers and newbuilding orders cancellations, already thought to be about 10%, according to Mr. Cotzias, could help alleviate pressure on the market.

What lessons did 2009 teach us in terms of dry bulk rates?

We started off the year with the fear of the unknown.Β  Everyone had to "write" his own "instruction book", as there was no literature in the world that could describe even vaguely what we were all encountering!
The common fear that it could be "the end of the world as we knew it", to rephrase the REM song was eminent to everyone on this planet! And was it the end of the world? The answer is definitely not. At least not for our Shipping industry, as it was not even close to the devastation that was predicted and feared.
This time last year, and when the year was just starting, psychologically all of the world was facing a never encountered global and complete market devastation, with the Finance world in a practical and not just a theoretical collapse. Adding to this we stress that world trade was on a mere stop and most exchanges were put on a halt, with the necessary LC's (Letter of Credit's) being out of the question and with liquidity and trust needed to keep the goods flowing and "shipped" being totally non-existent.
Topping to this we had all Banks fearing that not only their portfolios were "killed & shlashed" in value, but mainly their own future existence was primarily in serious doubt. Our Shipping industry was seeing all ship values "hitting the ground" losing up to 75% of their previously peaked highest levels, with actual rumoured ship Charters being reported at even "0" dollars per day just to keep a vessel in the market. It was around the same time that we received some alarming signals from prudent owners of such great magnitude always known to take cautious and timely decisions, that were seen to take a voluntary action of laying-up a great number of new vessels so to minimize daily losses and non-profitable operation/exposure.
With all these negative and alarming signs in front of us we all feared for the worst for 2009. And "luckily" the worst never actually hit us. The question still arises as to will the worst eventually come face to face with us in the new decade? Will our initial fears end up surfacing or in actual fact the worst as expected was just in our minds and was just a direct result of the bad psychology, and the negativity surrounding the world trade as a whole? Did we manage to sweep the dust under the carpet really or have we got rid of some of the choking dust during these 12 months of 2009?

What's to expect during 2010 regarding the course to be charted by the Baltic Dry Index (BDI)?

Plainly thinking we may be sceptical about the direction that the dry bulk market will take during 2010. Just looking at the BDI of today we may easily say that it looks directionless and has very little in its trend that we can predict.
What is encouraging is that the World trade and World Industrial output seem to be recovering from the Oct 2008 crash. Both the volume of world trade and the world trade prices are steadily regaining in numbers, and have been on a constant up-rise.
What is more important for our shipping industry is the fact that the emerging economies' Industrial Output/ Production is not only increasing but has reached the highest figures of the last 19 years. What needs to be pointed out here is that the industrial production of emerging/developing economies is exactly double that of the developed countries/economies. This statistic shows that the effect of the Developing countries is going to be of greater importance during the next 3-5 years, and may well continue to be the driving force behind strong demand and need for seaborne traffic.
What is also a good point to stress out is that the trend and slope of increase of the World Industrial output is now greater than the per annum rate of increase that was existing before the drop that started after June 2008. So we can safely say that business in terms of WIO is back to normal again and it is "business as unusual"!

Maybe the biggest headache right now is a potential oversupply of vessels during the next couple of years. How do you think supply will shape up next year per ship type?

We have developed the overcapacity indexes for various segments of both dry and tanker markets. These indexes very simply show us the possible quantitative threat of the currently active fleet, from the expected and scheduled new building orders. These orders are balanced and recalculated every month and give us a monthly comparison figure that enables a viewer to easily see over a period of time how this potential overcapacity threat is developing. This proprietary model our company has developed takes into consideration the ships scrapped the ships that have been removed from service by means of casualty and/or total loss, and the New contracted vessels that have either been cancelled or aborted or postponed indefinitely. These figures have been then converted into a ratio or index number that shows the degree of overcapacity every sector/size segment/type of vessel will face. The results are as follows:
Supramax 810 vessels current fleet, 930 scheduled, overcapacity ratio 115%
Capes 822 vessels current fleet, 725 scheduled, overcapacity ratio 88%
Panamax 1530 vessels current fleet, 560 scheduled, overcapacity ratio 37%
Handymax 1430 vessels current fleet, 245 scheduled, overcapacity ratio 17%.

In terms of newbuilding cancellations do you have some estimate as to their course so far and in the future?

In the dry bulk sector we have become aware of around 4300 NB orders of a total of 270mil DWT! Out of these we have seen about 450 cancelled orders. This is very roughly 10% of the actual order book.
2010 has scheduled 2,263 units of Dry bulk ships, of a total 120mil carrying capacity dwt.Β  2011 has scheduled 1262 units of Dry bulk ships, of a total 93mil carrying capacity dwt 2012 has scheduled 487 units of Dry bulk ships, of a total 43mil carrying capacity dwt. 2013 has scheduled 104 units of Dry bulk ships, of a total 9mil carrying capacity dwt. 2014 has scheduled 13 units of Dry bulk ships, of a total 2mil carrying capacity dwt. 2015 has scheduled 2 units of Dry bulk ships, of a total 0.4mil carrying capacity dwt.
It is crucial to see how 2010 will progress as more than 55% of the total orders are scheduled for delivery during this current year. Some 2010 deliveries are including postponements or deferments from 2009. Our interest and concerns is strong as to how the yards will tackle some of these orders.

Will the end of the recession in many countries be enough to assist commodities' demand, thus limiting the ever so ruling "China factor', which was more than ever before the determining factor of dry bulk rates during 2009?

Growth and Industrial production were the key issues that had to be secured. With the financial markets shaken, economic growth was at stake and seaborne trade was feared to follow that standstill. However it is a fact that some commodities demand and consumption are partly inelastic. Although we had a slump with the letters of credit (LC's) freezing the trading of these, early during the first quarter of 2009, these goods started shipping again.
We can clearly say analysing the trade figures, that the trading volumes of most commodities have been slowly and steadily increasing during 2009, and have eventually reached satisfactory levels. China is and will always be the driving force behind the shift of gear of our shipping industry. However we may expect Brazil to become a smaller but significant part of boosting shipping. Infrastructure for the Olympic Games of 2016 will be necessitated, and also some prior works for the Fifa World Cup of 2014. Definitely we will not see the extent of growth we had seen with China, but some geographical shifting of the focus of attention will move to South America.
According to OECD's Chief Economist, Jorgen Elmeskov, prediction is that advanced economies will perform a slow recovery because of considerable headwinds from the need to adjust the balance sheets of households, enterprises and financial sectors. Outside of the OECD, things are more buoyant, especially in Asia, as the non-OECD countries weren't affected by asset-price meltdowns as much and up to the downturn ran sensible economic policies.

How do you foresee future cargo demand for dry bulk carriers to shape up?

We expect according to the data we have studied from the Organization for Economic Cooperation and Development (OECD) that China, Developing Asia, Emerging and developing countries will remain the drive force behind our industry. Their projected growth for the next 3-4 years is estimated to be substantial, and on average well above 6%. China is already meeting the predictions with a growth of 9% p.a. and the rest of the developing Asian Countries follow with 7.5%.
Adding to this the positive data we received from the US economy that their GDP results for Q4 was 5.7% and that was 1% above the positive prediction. This Growth in US GDP was the sharpest and greatest quarterly growth of the past 6 years. This is a clear indicator that the US economy despite all its fiscal problems is well on the recovery track. A stronger dollar will assist our industry also to perform.

As was expected in 2009, there were very few newbuilding orders for dry bulk carriers, given the huge orderbook and in many cases a lack of financing. Do you think that 2010 will be different in terms of new investments? Will resale newbuilding contracts be the most popular option among ship owners?

Although we could answer yes, an option of both yards or owners not willing to take delivery of new ordered vessels would be to resell them at discounted prices, the fact is that end of Dec 2009, and early Jan 2010 we saw some new orders being placed at good prices, so it could well be the case that a mixture of both resales at good prices and new orders will start to emerge. Expectations of an upturn of the cycle will determine the strategies of the investors, and it is not surprising to see some big names especially from the Greek market like Polemis, Frangou, E. Nomikos, have moved into NB contracts early this year. This could lead to others "copying" them, as strong names can become the market setters.

Do you think that prices for second hand dry bulk carriers have reached their bottom?

If we could answer yes to this question we would either have the ability to become very rich soon, or we would be very bad liars!!! The truth is what the figures say, and what we have seen so far. Dry bulk second hand ship prices slumped from Oct 2008 onwards around 67-75% depending on the size segment. These prices reflected at that time the bottom as we saw in 2009, a 5-15% increase and in some particular cases increases of up to 25% from the low levels of late 2008 and early 2009. This can be seen by some as moving away from the bottom. But is that so? What makes us so optimistic that prices will not and won't go down again? Purely using the basic economics theory of supply/demand and the natural equilibrium that is achieved in a market without manipulation, we can say that when the supply of ships with a great number of new building deliveries is increased then the demand for these will go down, and that will have an immediate effect on their price levels. Fro the time being we can say that we have moved away from the bottom and that given the freight market that is oscillating around the same levels for more than a month now, we can estimate that prices for second hand ships will oscillate accordingly. Opportunities will surely arise and definitely some forced sales will be seen in the market at below market level prices, but those will be the odd exceptions.

Is this the correct timing for cash-rich owners to return to the market?

We are given with the fact that Bank finance will take more time to return to some better levels that all potential investors would appreciate and by the way, we never expect ship finance to return as aggressive and as abundant as it had become before the financial crisis, inevitably we will have to live in a new era of ship finance with new terms that we will all have to come to terms with. Less money, more securities and a true business plan that makes sense"¦ so it is back to basics"¦ Cash rich owners have the advantage that can act quickly. Good ships will be caught easier, and cash rich investors have the advantage of being able to sustain a vessel that presently does not make a profitable return. Investors can seek for the right ship, with the right specs, and the acceptable condition, get it quickly with a cash offer, enjoy the freight rates that are acceptable and well above "survival levels. At the same time a cash rich investor, has no loan servicing costs, and therefore can operate cheaper on a daily basis, while his foregone opportunity cost is only the US dollar interest rates that are presently nearly negligible"¦
We believe that even if we don't consider that prices are at the market bottom they are still at a level that they allow for a good return on investment, while keeping relative risks to lower levels.

Despite this challenging business environment which prevailed during 2009, we actually witnessed very few cases of bankruptcies of dry bulk shipping companies. Which were the determining factors which kept owners afloat?

We have seen some bankruptcies, mainly large setups, with bad cash-flow management and bad buying and selling decisions. A good seller has sold high, a bad seller has sold low, and a good buyer buys low, while a bad buyer does the opposite. The cases of companies that have gone down, so far, were mainly ship owners that had not done their homework right. They had bought at the high days, and were suffering with high leverage costs. Adding to this their overall inability to repay or reschedule their loans, this led them to a foreclosure. More foreclosures will be expected during 2010, not so much because banks will pull the carpets, but because of bad cash management.
We strongly believe that this shipping crisis is blessed that it is not alone"¦!!! It is blessed because it is a smaller part of a larger financial crisis, which banks are facing. This means that shipping portfolios of most banks are part of their headaches and not THE HEADACHE they have to face. This means that despite the crash in ship asset values and loan to value ratios being slashed, Banks and Owners are aligned and share the same interests to work situations and maneuvered a workable solution for both. Ship loans have the advantage that they have some safety net of 10-15 years payout (at least for the more modern units). This safety net allows at least for some time for the bank to make sure the deal survives and the owner survives through this down cycle. A restructuring for the deal is essential and to a realistic level that the owner's cash flow can support. So far freight levels have assisted a good number of restructured deals to perform and some debt-to-equity conversions have been performed with the bank becoming part-owners of the business that they are backing.
The main reason for few bankruptcies so far despite bank's positive and supportive stance is that our Industry has come out of a period of 3-4 even 5 years of a very good freight level market. This means that most, well to be more frank we expect that a substantial number of prudent ship-owners should have stored up some level of liquidity and that is adequate to ride them through some of the difficult days ahead.

Nikos Roussanoglou, Hellenic Shipping News Worldwide

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