Shipping into a changing world
The International Shipping Industry still remains the only way to move the majority of minerals, energy products and manufactured goods between the nations of the world.
Indeed it is still estimated that shipping carries 90% of World Physical Trade.
However given the huge changes that have occurred in many countries there is concern that the demand for shipping services may not grow but in fact decline.
As the various conferences that meet annually at this time of year discuss the economics and operational issues of the shipping industry it is concerning that the shipping companies that are publically traded in a few stock markets represent the worst performing sector in those markets.
Furthermore the banks that have historically financed shipping have mostly withdrawn and a few of the remaining German banks are showing billions of dollars of losses and provisions.
Private equity and hedge funds looking to buy these banks are not showing support for shipping but the ability to liquidate the portfolios over the next few years at a profit.
Meanwhile the biggest financiers of shipping today are the huge Chinese Leasing companies which together with the Chinese and Korean Exim banks are financing new ships being built in China and Korea with the objective of keeping freight rates down for the benefit of Chinese and Korean industries that rely on ships for the import of raw materials and export of manufactured goods.
The arrival of the speculative equity and hedge funds at the beginning of this decade changed the way shipping companies had traditionally operated, namely as the service industry to world trade. The security of longterm time charters with major cargo interests whose own credit standing supported the cash flow was discarded in favor of the spot markets enabling the ships to be sold as soon as their values generated a profit.
The longer this speculative period went so the cash flow problems worsened as the spot markets failed to produce constant income while the operating and financing costs continued.
Furthermore the major charterers became reluctant to charter these speculative ships or allow their charters to be included in any sale. This was clear evidence of the importance of the relationships between shipowners and charterers which have always been important given the issues that always exist in operating ships in the oceans of the world.
Shipowners and particularly those that appeared in the equity markets, were encouraged to order new ships in the false belief that the Chinese would continue to pay high freight rates as their manufacturing economy continued to expand.
It took some 5 years for the cargo interests to react to the high freight rates which for instance had caused the shipping cost of a ton of iron ore from Brazil to China to reach 60% of the landed price of the cargo.
The cargo interests understood that by encouraging more newbuildings in both the raw material imports and the finished goods so the freight costs could be minimized. Thus the Chinese have got the shipping cost of iron ore from Brazil down to 10% of the landed price.
The same applies to the container sector with the giant ships pushing rates lower and the owners facing huge operating losses
Add to this the Korean and Chinese Exim bank financing and the involvement of huge Chinese leasing companies and we continue to see the orderbook grow while few shipowners show any profits.
False optimism that “dry bulk markets look positive” or that “the USA exporting crude oil will be good for the VLCC markets” simply encourage new orders for ships and will not improve the operating profits for these sectors.
Thus it is the cargo interests that control the economics of the shipping industry today and ship values will continue to depreciate if they continue to trade in the spot markets.
Consolidation of shipping companies will have no effect unless it enables the shipowners to secure period charters and improve their income streams, fully maintain the ships, employ quality crews and afford the new costs of ballast water treatment and cleaning up the engine exhausts.
Source: Paul Slater, First International Corp.