The
downturn in shipping is hitting the industry so hard that some of the world's
biggest vessels are now worth little more than their scrap value, new figures
show.
Shipyards
have been turning out new vessels at a pace designed to service global demand
that has simply failed to materialise, meaning the industry is now sinking
under massive overcapacity.
As
owners have seen the rates charged to carry freight plunge, demand for their
ships has collapsed to the point that selling them for scrap makes financial
sense much earlier in a vessel's life.
In
the worst hit sectors, the fall in the ships' value and the rise in the price
of steel - driven by rapacious demand from China as it builds itself anew -
means that the difference between the prices fetched if vessels are sold on to
keep sailing and those if they are broken up for scrap is now minimal.
Cargo
ships as a general rule are built to sail for 25 years, yet in the volatile
VLCC or "very-large crude carrier" sector, which comprises the
world's biggest oil tankers, scrap and resale prices reached parity in recent
months for the average 15-year-old ship, according to prices tracked by
industry information provider VesselsValue.com.
A
typical 15-year-old VLCC achieved an average resale price of about $78m (pounds
49m) at the peak of the market in July 2008, its research shows. That figure
has since plunged to $23m.
Adrian
Economakis, lead research analyst at VesselsValue.com, said that ship prices
have in the main been heading in only one direction.
"There
was a bit of a 'dead cat bounce' in the middle of 2010 when there was a small
recovery, but the general trend has been quite horribly downward," he
said. "From the second half of 2010 to today, it has looked like a ski
slope."
Meanwhile,
the same ship's scrap value has moved in the opposite direction, climbing
sharply in recent years. From a low of $12m back in June 2009, when the scrap
market was at its worst, the same VLCC ship would now achieve close to $20m if
it were sold for its metal.
While
that is not the $31m it could have achieved back in 2008, when combined with
the slide in resale values, it does signal that the gap between scrap and
"floating" prices has narrowed markedly.
Many
ship owners, however, are refusing to scrap their ships in the hope of a shock
which could resuscitate the market - perhaps some global upheaval which would
push up rates against a backdrop of broadly flat global demand for oil.
A
serious flare-up around Iran, for example, still at loggerheads with the West
over its nuclear ambitions, could boost the VLCC market, as the disruption to
oil supplies would require ships to carry fuel further around the world.
Admittedly,
there are differences in performance throughout the shipping industry, with the
market for smaller "medium range" tankers, which carry refined oil
products, holding up better than that for the super-sized crude carriers. But
nor is the problem confined to VLCCs.
A
similar oversupply of container vessels operating on the Asia to Europe trade
lanes has pushed freight rates to "unsustainably low levels",
operator Maersk Line warned earlier this year, as it announced it was taking
9pc of its capacity on the route out of service.
More
cutbacks and rebalancing will be needed to put the industry back on a
sustainable path, observers warn, since a flurry of new ship orders placed in
2008 means that a large number of vessels are expected to enter world fleets
this year and the next.
The
downturn is also being compounded by funding issues as banks, under pressure to
boost their own capital buffers, pull back from financing, notes rating agency
Fitch. It expects impaired loans and impairment charges relating to ship
finance to continue at heightened levels or even "increase somewhat".
Fitch's estimates show that Lloyds Banking Group has already reduced its
exposure to shipping from around 1.5 times its total equity in 2008 to just
50-75% currently.
Little
reason for cheer lies ahead, according to Fitch, which expects the industry's
overcapacity to continue until 2014, when increased scrapping rates, shrinking
ship order books and an improvement in global demand should bring the market
closer to equilibrium.
"Our
perception now is it should start improving in 2014, for two reasons,"
said Jens Hallen, an analyst at Fitch. "On the one side, we expect that
the new number of ships coming into the market is reducing, [so] effectively
you have a lower supply of ships. Equally important is that world demand and
trade globally will start picking up."
In
the meantime, the only people who might benefit are those willing to take a
risk on a very shaky looking market.
Economakis
said: "There's a lot of people losing a lot of money and people going bankrupt,
so the vultures are circling."
Source:
DNA India. By Emma Rowly. 10 April 2012
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