Smoother sailing ahead

Shipping industry is recovering slowly but will need another year to absorb huge excess capacity ordered before the 2008 crash.

The shipping industry is hopeful that 2013 will be the last of five years of rough sailing, although executives concede the wave of bankruptcies among shippers, shipyards and bankers lending to shipping firms is not finished yet.

The downturn started in 2008when the financial crisis erupted in the United States, and has lingered ever since. The economic boom before 2008, driven by demand for commodities such as steel and copper, drove shipping companies around the world to place orders for new vessels like there was no tomorrow. The Baltic Dry Index (BDI), the main gauge of freight rates for dry bulk carriers, reached a record high of 11,793 in mid-2008.

However, a lot can happen between the time a ship is ordered and the time it leavers a shipyard two or three years later. As the impact of the 2008 crash spread, some customers who had placed orders either went belly-up or their shipbuilders went bust. The result was a glut of ships while the global economy continued to wobble along with no sign of recovery.

How low has the industry sunk? The BDI currently is hovering slightly above the 700 mark and has not crossed 1,000 since early December.

Kawee Manitsupawong, vice-president for research with Asia Plus Securities, says the industry will start rebounding in 2014, a notion that most industry players share.

“I base this on the new supply coming into the market. Although conditions are expected to improve next year, it is still uncertain how strong the recovery would be,” said Mr Kawee.

He also forecasts that once the economies of United States and the European Union start to improve, demand for goods will increase accordingly.

Bualuang Securities remains bearish about the 2013 dry bulk outlook, due to the prevailing oversupply. Demand for dry bulk shipping is forecast to expand by 4%, while net new supply based on tonnage is expected to increase by 5%. That figure is encouraging when compared with 2012, when the demand-supply gap was six percentage points.

Despite the declining supply, the broker projects the average freight rate this year to be lower than last year due to the huge capacity additions that took place during 2012.

Bualuang also foresees an upturn in 2014, driven by reduced capacity addition amid rising demand for shipments globally. The net new supply of dry bulk ships is projected to rise by 1% in 2014 when compared with the average of 12% between 2009 and 2012.

Precious Shipping Plc (PSL), Thailand’s largest dry bulk carrier, noted in its annual report that slippage — the difference between the deadweight tonnage of (DWT) of new ships on order at shipyards at the beginning of the year and actual deliveries at the end of the same year —during 2012 came in at 29%, a bit lower than the average for the past four years. The net increase in supply for 2012 was 70.47 DWT for a year-end figure of 692.74. This amounted to an 11.3% net increase in the world dry bulk fleet.

The company said the net increase in tonnage in future years would remain unpredictable. Based on annual slippage at 30% and scrapping at 35 DWT, the net increase may touch a low of 5% or 35 DWT at the end of 2013, with hardly any growth predicted for 2014.

Unlike Thai brokerage houses, India Ratings has maintained a negative outlook for the Indian shipping industry in 2013, and sees choppy waters ahead in 2014 as well, with new supply continuing to pressure dry bulk rates.

Container and tanker rates may show higher stability around the current low levels. This may be driven by relative stability in US demand as well as in manufacturing activity in emerging nations including China.

In 2012, average annual freight rates declined from 2011 by 42% in the dry bulk sector, 32% for container shipping and 8% in the tanker segment.

According to India Ratings, the surge in bunker oil and fuel oil costs last year was the major drag on shippers’ profit margins. Fuel accounts for 40% of operating costs of shippers.

Meanwhile, revenue from freight rates declined continuously. The average decline in earnings before interest, tax, depreciation and amortisation (EBITDA) of India Ratings’ representative companies in 2012 was 6.4%.

Easy credit was another major contributor to the current debacle. During the boom years, ship owners were allowed to over-order ships with little equity and no forward contract coverage. And now banks are struggling because asset values are declining.

Khalid Hashim, managing director of PSL, predicted there would be more bankruptcies among shipping companies, shipyards and bankers lending to shipping firms.

His company has managed to ride out the storm by taking a number of steps. One has been to cut operating costs, which averaged US$4,481 per day per vessel compared with $4,613 in 2011, and about $2,000 below the global market average.

He said PSL for years had tried to manage fleet depreciation expense by purchasing ships at the right time and the right prices. Its depreciation per day per ship is around $2,000, around half of the market average. The cost of ships the company purchased at the lower rate if compared with other shippers is the main reason for better depreciation expenses.

“We outperform the industry. The strategies we have employed have enabled us to survive and reach the break-even point as quickly as we can,” he says.

Mr Hashim predicted that the shipping industry would recover in the second half of 2014 due to a lower net increase of supply compared with the previous four years.

India Ratings said banks globally were lending much more cautiously to shipping companies, making it difficult for them to refinance their rupee or foreign currency borrowings. European banks in particular are facing challenges with exposure to risky assets in their own economies and are not likely to take fresh exposure to a sector such as shipping in markets such as India.

The sour outlook has hurt not only shippers but also shipbuilding. Ren Yuan Lin, CEO of Yangzijiang Shipbuilding in China, said earlier that 2013 would be bloody red for shipbuilding.

Sanko Steamship, a 78-year shipbuilding business, in 2012 filed for bankruptcy protection under US Chapter 11 for the second time in its history. Stephenson Clarke, the oldest shipping company with 283 years of history, filed for bankruptcy as well.

According to Clarksons Research, there were 955 active new-vessel shipyards at the end of 2008 in comparison with 354 in 2000. The number fell to 538 by the end of 2012 and in 2013, which is expected to bottom of the cycle, the figure is likely to drop to 350, similar to the pre-boom level.

In contrast with Thai brokerage houses, India Ratings believes the revival in freight rates is not likely until end of 2014 as new capacity will enter the market until that year. Thus, it does not see a stable outlook for shipping until 2015. Indian shipping companies will be affected directly from lower freight rates for another year given their exposure to low international charter rates as several Indian vessels are deployed on international trade routes.

While the key to revival is the reduction in new capacity, the Chinese government’s policy to spur the domestic economy could be a big factor on the demand side. In the past few years, global freight rates in the dry bulk category were driven by Chinese demand for coal and iron ore. China is the largest importer of these two commodities.

Falling exports of manufactured goods from China in 2012 and the consequent lower demand for iron ore and coal by Chinese steel producers pushed the BDI to its lowest levels in the past six years. Thus, if the Chinese government steps up infrastructure investments, the demand for commodities will bounce back. And this will be good news for the shipping industry as well.

Mr Kawee of Asia Plus agrees that the industry has to keep an eye on China’s economic policy, which is the key to an increase in commodity demand. With the shipping supply increase moderating to 2-3%, additional commodity demand should lift freight rates and the overall outlook in 2014 should be better than this year.

About the author

Writer: Nalin Viboonchart