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A snapshot on the economic and shipping environment

Monday, 16 January 2012 | 00:00
Before the end of 2011, euro dropped to its lowest levels against the dollar (since September 2010) and Japanese currency yen (in ten years) after Italian bond auction, with European leaders warning for a difficult year ahead. Economic data are suggesting that the eurozone is heading for recession in 2012 with the liquidity of European banks being a critical issue. Credit rating agency Fitch has already signalled possible downgrades for a number of euro countries, including Italy, till the end of January due to hefty sovereign debts.
A large interest has been centred on Italy’s economy that will have to raise a large amount of cash in the market this year, up to EURO 360 billion ($458 billion), despite its relatively low budget deficit according to Fitch. Furthermore, France, the world’s second largest economy, is also in serious financial trouble with a debt burden of over 80% of its GDP. A Reuter’s poll of economists suggests that France will probably lose its top notch credit rating in the next three months, while Belgium, Italy and Spain will suffer further cuts to their ratings. In Germany, economic recovery has stalled but it remains much healthier than the struggling eurozone periphery economies. The Bundesbank is forecasting that growth will slow to 0.6 per cent in 2012 - before re-accelerating to 1.8 per cent in the following year. Chancellor Merkel said that despite Germany's relatively good economic situation, "next year will be no doubt more difficult than 2011". The road to overcome debt crisis remains long and not without setbacks, but at the end of this path Europe will re-emerge stronger from the crisis than it was when it entered in the euro area."
All eyes are still on Greece, where the situation is very bleak with negotiations for the PSI being on the run and estimations that Greek deficit will exceed the target of 2011. The worst is ahead for the eurozone, as German officials saying that it is very possible a new round of turbulence in the eurozone to begin when Greece officially announces that it missed its 2011 deficit targets, while the GDP contraction for 2011 and 2012 is estimated to be deeper than initially expected. Greek Prime Minister has warned that 2012 will be a very difficult year for the country and all austerity efforts will persist to prevent the crisis from heading to an uncontrollable catastrophic insolvency. Germany's Chancellor Angela Merkel stated that an agreement with Greek bondholders must come soon for Greece to receive a vital second bailout. The country needs a second EU-IMF rescue to avoid a default on its debts and possible exclusion from the eurozone. The rescue, worth 130bn euros, would include a voluntary restructuring of Greek debt - meaning bondholders would have to write off 50% of the Greek bonds' value.
Spain is also embattled with huge debt. Mariano Rajoy, prime minister, announced €15bn of emergency deficit-cutting measures and disclosed that the deficit for last year would be about two percentage points, or €20bn, higher than the target of 6 per cent of gross domestic product agreed with the European Union. Luis de Guindos, economy and competitiveness minister said that the 2011 budget deficit might even exceed the new estimate of 8 per cent of GDP as he outlined further plans for stabilizing public finances and reforming the economy. At 8 per cent of GDP, Spain’s 2011 shortfall would be the third largest in the eurozone after Ireland and Greece, but still lower than that of the UK or the US.
In Asia region, the growth outlook is not comforting with emerging economies facing the impact of policy tightening measures to tackle inflationary pressures. Global ratings agency Fitch has cut its 2012 growth outlook for Asia to 6.8 per cent from 7.4 per cent previously. It expects China’s economy to grow 8.2 per cent next year instead of the 8.5 per cent forecast in June, and India to expand 7.5 per cent in the year to March 2013, instead of 8.2 per cent previously estimated. The GDP growth has also been impaired from the slower exporting activity to the crucial European and US markets due the ongoing debt crisis and economic stagnation.
The New Year opened with challenges and opportunities in the shipping environment. Asset prices are in a downward movement for dry and wet units with investors appearing more willing to invest in the secondhand than in the newbuilding market. LNG and offshore segments loom as the most promising segments in the next three years, in terms of remarkable freight earnings, with newbuilding business being inclined in these vessel types. The outlook in the dry bulk and tanker segment appears negative for the year ahead as the gap between supply growth and demand is still big, but it is too early to predict what 2012 will bring under the tight ship financing environment.
In the dry market, the BDI is on the freefall by standing below 1,100 points with the index loosing 43% of its strength from December ending and 38% below the opening of 2011. Chinese iron ore demand is on decline with significant lull in capesizes fixture activity. Capesize time charter average earnings are now less than $10,000 daily, down by 67% from December ending, while the outlook seems vague with the excessive capesize scrap removals of the previous year to pose positive signals for a firmer rebound after the end of Chinese New Year. There seems to be too many ships and lack of demand for cargo transportation that leads the market in one more recession, but it is too early to say that the downward spiral will persist.
In December, China's iron ore import activity was at near 10 month high with steel prices supporting large stockpiles. China imported 64.09 million tonnes of iron ore in December, down just 0.2 percent from a 10-month high in November, according to customs data. Iron ore shipments play a significant revival factor on capesize earnings, but the current large Chinese iron ore stockpiles do not support large buying. According to Commodore Research, approximately 96,6 million tons of iron ore are currently stockpiled at Chinese ports, 1.1 mt (1%) more than a week ago, slightly below the 98,1mt record reached in the middle of November 2011. Furthermore, heavy rain in Brazil has resulted in Vale losing approximately 2 million tons of iron ore production and declaring force majeure on contracted iron ore shipments, which is one more adverse factor in the current slowdown. Overall, the outlook of
earnings for smaller vessel sizes, panamaxes, supramaxes and handysizes, is more encouraging as demand for thermal coal and grain shipments holds at better pace. What is noteworthy is that India’s ban on iron exports to curb illegal mining has pushed China to buy more iron ore from Australia and Brazil, which will benefit the capesize segment also for this year.
The index closed today at 1,053 points, down by 22% from last week’s closing and down by 27% from a similar week closing in 2011 when it was 1,439 points. The highest rate decline has been in the capesize segment, BCI down 25% w-o-w, BPI down 18% w-o-w, BSI down 13% w-o-w, BHSI down 4.6% w-o-w.
Capesizes are currently earning $9,116/day, a decline of $6,361/day from a week ago, while
panamaxes are earning $10,075/day, a decline of $2,197/day. At similar week in 2011, capesizes were earning $9,692/day, while panamaxes were earning $15,341/day. Supramaxes are trading 11% higher than capesizes by earning $10,154/day, down by $1,469/day from last week’s closing. At similar week in 2011, supramaxes were getting $14,570/day, up by 50% than capesize earnings. Handysizes are trading at $ 7,779/day; down by $336/day from last week, when at similar week in 2011 were earning $11,129/day.
In the wet market, Iran tensions have showed a positive effect on VLCC rates, while there are fears for a potential closure of the Straits of Hormuz, which will impact the tanker trading. Owners are seeking higher rates to trade in the Middle East as a reaction to the growing US-Iran tensions. According to data from the IEA, about 17 million barrels/day of crude is transited through the Strait of Hormuz. Exports through the Strait are sourced from Saudi Arabia, Iran, Iraq, the UAE and Kuwait, which will suffer from any disruption. The potential closure may increase floating storage as oil traders may seek to take advantage of a potential spike in oil prices due to crude availability. Although the Iran tensions seem to be a positive effect on the already struggled VLCC market, a prolong closure of the Strait of Hormuz will
mean a further collapse for the freight rates along with new spikes in crude oil prices and lower cargo loadings.
In the gas market, rumors circulated in the market that the Greek player ALMI Tankers is planning to enter in the LNG market by having discussions with Daewoo Shipbuilding and Marine Engineering to convert its two very large crude carrier newbuilding orders into a single LNG of about 160,000 cu.m. The movement imitates the decisions of other Greek traditional tanker operators to enter in the LNG market and underlines the negative sentiment in the VLCC segment with owners starting to loose their confidence in these vessel size units as LNG freight market promises remarkable earning, near to $200,000 daily for the year ahead and the next two years. The oversupply issue in the VLCC segment halts the prompt recovery of freight earnings. According to estimations from the U.S. investment bank, Dahlman Rose, the crude tanker fleet has been set for a huge growth in the next 12 months despite hopes for a significant wave of scrapping and newbuilding delays. It estimates about 38,7m dwt of crude tanker tonnage to hit the water in 2012, increasing capacity by 11.9% or 2,6 million barrels per day.
In the container market, the New Year opened with a positive closing for the Shanghai Container Freight index, up 2.9% from the end of December, standing at $975/TEU with positive gains in all major trading routes. There are expectations for a continued strength in the container rates till Asian factories shutdown for Chinese New Year in late January. Notable was the spike of rates in the Shanghai-North Europe route with rates fetching $730/teu, from $490/TEU on December 9th. However, oversupply is still a pressing concern for liner operators with Alphaliner estimating supply growth to hit 8.2% in 2012.
Cellular containership deliveries are expected to reach 1,47 Mteu this year, in comparison with a 7.9% growth in 2011 and deliveries of 1,23 Mteu. The 8.2% fleet growth expected for 2012 presents a serious challenge for the industry, as the demand growth is expected to weaken to 6.5%, against an estimated 7.7% growth in 2011. Of the expected deliveries, 49% are concentrated in ships of above 10,000 teu.
Most of these large ships are earmarked for deployment on the Far East-Europe routes, where the competition will be tougher in the year ahead as carriers are restructuring their networks and reshaping their alliance partnerships. Consolidation will be the key for survival in order liner operators to cope with sluggish demand and high vessel operating costs during the year.
In the shipbuilding industry, Chinese shipbuilding suffered in 2011 from a fall in newbuilding activity, whereas South Korean shipyards are facing the threat of newbuilding cancellations. According to Kyobo Securities, South Korean shipyards will lose about 7% of their orders in 2012 from cancellations, but the impact of shortfall will be minimal for the nation’s shipbuilding industry. Furthermore, South Korean and Chinese yards are facing a potential major decline in newbuilding activity for the next 12 months due to owners’ unwillingness to place new contracts under the distressed oversupply picture. Daewoo Shipbuilding and Marine Engineering Co., the world’s second largest shipbuilder, expects new orders to drop 23% next year as shipping lines struggling with oversupply issues and falling freight rates.
In the shipping finance, syndicated lending for the top 20 bookrunners in the industry fetched $68,4 billion in 2011 for 244 deals, an increase of 26% from $54,2 billion for 204 deals in 2010, according to analyst Dealogic. DnB Bank retained its position as the number one bookrunner of syndicated shipping loans. According to Dealogic figure, the bank sealed worth some $9.2bn, or 13.5% of the total $68.4bn market with Nordea Bank being the closest competitor with 33 deals worth $8,1 billion. Despite the increase of syndicated lending in 2011, the rate of growth halved year-on-year. In 2010, syndicated loans were 55% higher than in 2009, when loans reached $34,8 billion. Furthermore, syndicated lending in 2011 was well below its 2007 peak, when banks lent $115,7 billion in 383 deals, while in 2008 syndicated lending fell to $98,1 billion, as per data from Dealogic.
Under the tight ship financing conditions and the distressed outlook of dry bulk and tanker segments, ship financial institutions are more willing to favor LNG and offshore projects.
In terms of ship financing deals, new tanker market player Diamond S Shipping completed successfully a $720mil syndication loan with DNB and Nordea, including seven more banks. The loan is said to underpin Diamond’s last year acquisition of 30 product tankers from Cido Shipping.
Source: Maria Bertzeletou – Golden Destiny Research Department
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