27 October 2011

Turbulent waters for shipping industry:

They are the superhighways of world trade. About 90% of exports are shipped through the sea lanes that criss-cross the globe. Every day, thousands of huge cargo ships carry a range of products, from Barbie Dolls to BMWs. But as the global economy slows, shipping firms are having to rethink their strategy.

"It is depressed this year," says Captain Ranjan Mookherjee, the managing director of Vega Ships Management in Dubai.

"Cargo movements are less compared to last year and I don't expect the shipping industry to jump up again in the near future."

While the industry is being dragged down by cooling demand for goods, prospects for a recovery are being hampered by a glut of capacity, a lack of financing and the threat of piracy. Tom Arnold spoke about the shipping outlook with Knut Mathiassen, the Middle East head of shipping finance for Standard Chartered, Jasmine Fichte, a maritime lawyer and managing partner of Fichte & Co, a Dubai law firm, and Capt Mookherjee.

What's the outlook for the shipping industry this year and next?

Mr Mathiassen: The general outlook is mixed.In some sectors such as tankers and chemicals, the charter rates are low and are likely to remain low throughout 2013. The market environment for the container shipping industry is also challenging, and the big operators are predicting losses in this sector for 2011. This is due to capacity surplus on the main trade routes: Asia-Europe and transatlantic. However for the dry bulk sector the general consensus market outlook is better but this important shipping sector is also suffering from an overhang of new buildings ordered prior to 2010.

Ms Fichte: There is a huge difference about whether we speak about offshore, tanker, container, liquid natural gas and cargo. Offshore is still doing well and was not that affected by the credit crunch. Container business suffered the worst. Freight rates are still not good and a lot will depend on oil prices. In general the outlook is not good for the next two years.

How do the prospects for the industry (this year and next) compare with the situation during the global financial crisis in 2009?

Mr Mathiassen: The global crisis in 2009 was severe and we are still feeling the effect on the shipping industry from oversupply. If you consider the European crisis, we have the possibility of a double-dip effect on the demand side. One catalyst is the container market which directly and immediately is impacted by a slowdown in economic growth. The new European crisis is negatively impacting European banks which are dominant in ship finance and this will hurt liquidity in the ship finance market.

Ms Fichte: The situation is definitely better now as all companies have adjusted to the situation and many firms have streamlined their operations and cut expenses.

Capt Mookherjee: It's improved. Ship owners have ordered ships. There's no employment for ships, but their order books are full. There's a very tricky balance that needs to be found between availability of tonnage and availability of cargo to fill that tonnage as there's a mismatch at the moment.

Mr Mathiassen: The general consensus seems to be from 2014 in the main shipping segments of dry bulk and tankers.

Ms Fichte: Personally, by 2013 at the earliest.

Capt Mookherjee: I don't have a crystal ball. It's very difficult to tell because there's so many dynamics at play. For example, China's GDP has come down and that's one of the driving forces of demand in the shipping industry.

How big a concern is the excess supply of fleet capacity?

Mr Mathiassen: When we study the new building order book in Asia (South Korea, Japan, China) we find that there is still a serious overhang of vessels yet to be delivered. There is 28% of the world fleet on order, 6,000 vessels, with approximately 40% in the dry bulk sector, 27% in the container ship sector and 20% in the tanker segment. It is considered that the ship-building sector, notably in China, has been quick to react to the financial crisis and actually reduced prices sharply to attract new orders and this has not helped the market balance. The new building price index has reduced by 25% from 2008 at the height of the shipping boom to September 2011. On the other side we are seeing increased scrapping and demolition of old vessels where scrap prices are near record levels.

Ms Fichte: In the worst-case scenario, vessels will go directly from the yard to the break up yard.

Capt Mookherjee: It's a big concern. We've seen that in the early 1980s - from shipyard to graveyard, we saw that again in 2008-09 - many ships were mothballed. Now we are seeing it again, many, many ships are waiting for cargo.

How much of a challenge is shipping finance - either to restructure existing debt or secure new loans?

Mr Mathiassen: The new European crisis will hurt funding for new projects as many of the larger and active shipping banks worldwide are the European banks which are suffering due to the European debt crisis. There is little impact on restructuring I think, it is lending of new money that is the problem. In the GCC region we see an increasing role for Islamic finance and funding in dirhams.

Ms Fichte: It's a heavy challenge. There is no ships finance at the moment and it will take a long time before banks will be prepared to provide loans again.

Capt Mookherjee: It is a big challenge to restructure debt. Many companies are defaulting on their debt. Some are not taking delivery of orders or cancelling them. Even now, many companies are paying fines to the shipyard. Banks are reluctant to provide finance, too.

Is piracy a real threat to the shipping industry or has it been overblown by the media?

Mr Mathiassen: It is an increasing problem and is costing the shipping industry as a whole by increased insurance costs and protection expenses that will reduce net earnings. It is difficult to quantify these costs. I don't think [the] media has overblown it too much although there is obviously press coverage a little out of proportion sometimes.

Ms Fichte: Piracy is a serious, real threat and as long as there is no solution for Somalia it will not stop. Armed forces need to be on each ship or crew is refusing to sail and this does not only impose more costs but lots of other problems.

Capt Mookherjee:Piracy is a real threat as the knock-on effect is very big. If those boys on board carrying the cargo are not willing to come to serve this area there will be serious issues. None of our ships have been attacked and it depends on the ship owners whether they carry armed guards.

Source: The National. By Tom Arnold (tarnold@thenational.ae). 26 October 2011 

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