Shipping sector sails toward crisis
Updated: 2014-08-15 09:23
By Alfred Romann in Hong Kong(China Daily Europe)
A ship built by Chinese shipbuilder Yichang Jiangsen Ship Building Co at a shipyard in Yichang, Hubei province. Liu Junfeng / for China Daily
Builders are doing what they know best, but they may be building problems for the future
The shipping industry may have planted the seeds of its next crisis, even as it works to finish recovering from the last one, with a rise in the number of ships now being built in Asia.
Many new ships are being built, most at Chinese or South Korean shipyards. When these hit the water over the next year or two they will create a glut that could hurt prices and push the industry into a new crisis.
Chinese shipyards have been the biggest beneficiaries of this surge in new orders, says Ralph Leszczynski, head of research at shipping services group Banchero Costa.
Last year, there were a reported 968 new orders for dry bulk carriers of almost all sizes. The largest supramax vessels were in particularly high demand, amounting to 390 of those orders. Reports of new orders in the first few months of this year - 155 in January and February alone - suggest this year may be just as busy.
The vast majority of new ships are coming from China, which built 591 dry bulk ships last year compared with 237 in Japan, 60 in South Korea and another 46 elsewhere in the region. In 2012, Chinese shipyards built less than a third compared to 2013.
The number of orders for tankers also rose last year, to 317 new ships from just 121 in 2012. The global tanker fleet is expected to grow 5 percent this year and 7 percent in 2015 to 160.
While Chinese shipyards are building most of the world's dry bulk carriers, shipyards in South Korea are building the largest number of tankers. And there, orders have also spiked. The number of orders for product tankers, the ships that carry such commodities as natural gas, skyrocketed to 237 in South Korean shipyards from just 69 in 2012. Most of those ships will be launched in 2015.
Oil tankers are typically counted separately and 53 of them were ordered throughout last year, 21 from yards in South Korea and 23 from yards in the Chinese mainland.
Given that the lag between the moment when a ship is ordered and the moment it is commissioned - or put into active service - is between 18 and 24 months, all those new orders could create a serious problem for shipping companies and ship owners.
A sudden rise in the amount of available shipping capacity would hurt prices and profits at shipping companies, many of which are still struggling to recover from the last huge downturn in the industry following the global financial crisis in 2008.
"In two years' time there will be a lot of tonnage coming online," says David Cheng, honorary chairman at Credit Agricole Ship Finance Asia.
The global dry bulk fleet should grow by 7 percent this year with more than 700 ships of more than 20,000 deadweight tons. The fleet is projected to grow by another 5 percent next year and a further 3 percent in 2016 to approach 800 ships.
"Interest for new bulk carrier buildings really started to pick up exponentially throughout last year, reaching a peak of almost 13 million deadweight of new orders in November," says Leszczynski.
Something similar is happening with tankers, where capacity is climbing back to what Leszczynski calls dangerous levels. The 317 orders last year were almost three times as many as in 2012.
Even as new ships are delivered over the next year or two, a lot of old ships that have been sidelined or operating at reduced capacity are being brought back online.
European shipping companies are getting ready to deal with this extra capacity. Two of the largest shipping lines in the world, Maersk Line of Denmark and Mediterranean Shipping Company of Geneva in Switzerland, reached a deal on July 10 to share capacity in container ships.
The partners are calling the deal 2M. Vessels that are part of 2M will share capacity on 21 routes between Europe, Asia and the United States. The companies expect to save a significant amount of money by sharing capacity.
Maersk and MSC announced 2M after the collapse of P3, a similar deal between the two companies and French company CMA CGM that broke up after objections from Chinese regulators.
China said the P3 arrangement would give the three European firms too much control of international trade routes. China was supported in its objections by smaller shipping outfits and other logistics companies, which also feared the united trio would become overly dominant in the global industry.
The 2M agreement will still allow Maersk Line and MSC to share capacity and cut costs, as the two companies look to streamline their operations and boost their bottom lines.
This alliance could be the first of many around the world as shipping companies prepare to deal with the inevitable downturn in prices.
Even the resurgence in the availability of financing for new ships could create a problem for the industry in the medium term.
Banks are getting back into the business of financing ships after years of conspicuous absence. More severe risk environments and drastically diminished cash flows for shipping companies had kept them away until a couple of years ago.
In the years after the bankruptcy of Lehman Brothers in 2008, the European banks that dominated ship finance turned inwards, looking to shore up their own balance sheets and capital needs. And they left a big gap, said Nigel Anton, global head of shipping finance at Standard Chartered Bank, speaking during a Marine Money conference in March in Hong Kong.
Orders for new ships rose before the global financial crisis, much as they rose last year, and that led to huge amounts of overcapacity in most categories of dry and wet shipping just as demand for shipping services plummeted along with global trade in 2009 and 2010.
In 2007, banks were carrying as much as $94 billion of debt related to ship finance on their books. By 2010, that number had dropped to $38 billion, Anton said.
That created a vacuum. Even in a recession, goods still have to move around the world and shipping companies need to buy ships to keep their fleets up-to-date, but it became harder to tap the banks for the money to make those purchases.
"Automatically, we had a big gap to fill. How was that gap going to be filled?" Anton asked.
The answer was a combination of demand curbs, meaning that shipping companies cut down or canceled orders for new ships, and the emergence of new sources of financing.
On the demand side, many orders were canceled. That made it possible for companies to continue operating in an environment of severely curtailed financing. But it also made it hard for shipyards to stay afloat. Many of them went bankrupt, particularly smaller shipyards in the Chinese mainland that produced ships with older technologies.
But the continuing need for funding also created an opportunity for finance companies and private equity funds to get into the shipping business on their own terms. Private equity funds in particular stepped in after 2011 with funds to acquire ships, but trading those funds for stakes in the companies they supported.
Tiger Group Investments of Hong Kong estimates that private equity funds and hedge funds have invested more than $10 billion in shipping in the past few years and that this rather large pool of money could be less productive than many investors expect.
Another new source of funds that emerged in the post-crisis years was the policy banks, most notably China Development Bank and the Export-Import Bank of China.
Leasing companies in the Chinese mainland - often owned by well-capitalized state-owned banks but operating at arm's length - also stepped into the fray.
Sources of finance from South Korea also upped their game, and smaller regional banks in Asia, once sidelined by their larger European or global peers, were suddenly interested in providing financing for ships.
By the end of last year, the amount of debt in the market linked to ship finance had recovered to $56 billion, still short of the 2007 peak but much higher than in 2010. And this year the amount of debt should be even higher, Anton said.
"There is a lot of activity right now," he said. "The banking sector has changed a lot recently. Banks are coming back."
The improving fortunes of the shipping industry, which typically follows the fate of global economic growth, has brought the banks back into the business but with caution. Greater understanding of the industry and larger capital coffers is making it easier for them to finance ship owners, but they are also less likely to work with firms they do not know, says Cheng. And while they are willing to lend, they are rarely willing to lend as much as before.
Worse, there is a danger of history repeating itself, says Leszczynski.
"Most of the problems across most sectors were coming from excessive orders and excessive deliveries," he warns.
"It is very, very important that we don't make the same mistakes again."
For China Daily
(China Daily European Weekly 08/15/2014 page14)