They say there is never a boring day in shipping, but, at present, we suspect that there are a few people who could do with just a tad of less excitement in this industry. The overall shipping market, as encapsulated in the Baltic Dry Index, has been on a race to the bottom.
Talking with shipowners worldwide, even with the ever ebullient shipowners in Greece, the mood for the market is of doom and gloom: persistently weak freight rates in the dry bulk market have burned cash reserves, eroded vessel values and brought on charter defaults and unilateral demands for negotiating down rates; filings for protection and announcement for restructurings are daily fodder of the trade press; a relatively young world fleet that may look prematurely old by an approximate 17% outstanding orderbook; mining companies have been warning investors for several years of weak cows in terms of recovery for commodities; anemic world economic growth and bloated balance sheets of central banks – courtesy of the credit boom years of pre-Lehman days – and interest rates in negative territory; and above all, the greatest riddle of all, a Chinese economy that has only been managing to deliver negative surprises of recent.
No doubt, the market is bad.
Volatility is the shipping industry’s daily seascape, and bad days in shipping are nothing unheard of. Low freight markets happened in the 1980’s and 1990’s in recent memory, and actually the downturns in those times were bad enough to bring the undoing of many a ship-owning company and respectable names in shipping. The market collapse in 2008 was also ferocious and precipitous, and caused a few owners to seek protection or even go under. However the present down-cycle seems to be uniquely viciously painful.
For starters, this is the first real down-market that a whole new generation of people in shipping (including ourselves) have ever experienced. In 2008, the market dropped fast and ferociously, but it was a time of great uncertainty overall, and there was a synchronized effort to keep the broader system afloat; young people in shipping only got a chance to see a flash of a bad market. This time in 2015, there are no flashes but only fireworks from every direction, and there seems to be a limited arsenal of options to face this market, especially in a novice’s mind.
Post-2008, shipowners were still cash-rich from the great days of the cycle. Shipping banks only had to ‘extend and pretend’ and buy themselves some time, and central banks and regulators were still easy to accept amended definitions of valuations and performing loans. And, institutional investors and private equity funds were salivating to enter an industry that came down to earth, and plenty of money was on the sides. The collapse of 2008 seems, in retrospect, was a prova generale for a freak show that never arrived, or possibly arrived seven years later.
At present, after almost of two years of negative cash flows, many shipowners have burned a lot of cash just waiting for the market. Many have also bought dry bulk vessels in the interim, which at present, it seems to had been an overly optimistic act as both asset values have been decimated and also these acquisitions turned out to only burn cash, at least so far; thus, there has ‘negative carry’ for both old and newly established positions. While in 2008 shipping banks, for their own reasons, were willing to offer a helping hand, at present, many shipping banks have actively their shipping loans up for sale and they have been sealing their way out of the shipping industry. Shipping banks not only do not offer a helping hand any more, but they have left a huge funding gap behind them, with an immediate impact seen in asset pricing where buyers stay away from new acquisitions, partly due to lack of financing; partially, vessel prices have collapsed further feeding the negative loop. And lack of financing has been affecting newbuilding deliveries and further deterioration of the cash position of shipowners; the undesired result with such deliveries is that while they cost too much money for the owners and likely will cause some owners to default on a project or corporate basis, these vessels will eventually find their way to the market, providing more competition. And this is a market when mining companies warn for several years of weak demand, and a market where the balance sheets of central banks are bloated with assets-of-less-than-stellar quality while experimenting with negative interest rates in a desperate effort to kindle growth.
The presently bad shape of the market will take some time to play out given the structural imbalances in shipping, but also in the commodity and financial markets. Fiscal policies world around have little room to bring around a miracle. The crisis of 2008 that never came has fooled many people and pulled them into aggressively going long on the market. Shipping always has turned around in style, and it will happen again. However, this may be the time for shipowners to think strategically and with a long term in mind; the trading and transactional nature of shipping played well when ‘risk on’ was the theme, but now it’s the time – a bit late actually, but better late than sorry, to minimize risk and position strategically for a market driven by a new set of variables.
This article first published in February 16th, 2016, at Splash 247 under the title: ‘Shipping Reset’.
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