In Dry Bulk the Baltic Dry Index (BDI) averaged just 920 points – its lowest annual average since 1985 and 1986 when it started. These levels equate to daily time-charter equivalents of around $7,500 for a capsize vessel (versus break even of around $15,000 to $20,000). This situation was largely self-inflicted – global seaborne demand for dry bulk grew by almost 25% since 2008, but the fleet’s capacity grew by more than 65%1.
The prolonged recession in the Tanker market took its toll with a long casualty list of big names: Torm, OSG, General Maritime, Eitzen, Omega and Berlian Laju Tankers to name a few of those undertaking some form of restructuring. Even Maersk and Frontline returned to losses in the later quarters of the year. Suppressed demand recovery and over tonnage had the same impact on freight rates as the dry sector. The consequent impact on asset values can be seen in the graph below. It tracks the aggregate market value of the 400 Very Large Crude Carriers (VLCCs) less than 10 years old.
John Fredriksen is quoted as saying there are 200 tankers with values only $10m above their scrap2. Managing overcapacity in this sector is further hampered by the fact that the major oil corporations are reticent to use equipment that was previously laid up, and are in fact themselves contributing to overcapacity by ordering more now whilst yard prices are suppressed.
The Liners sector recovered somewhat from the rate wars of 2011 by cooperating to better manage capacity and resisting the temptation to drive prices down by chasing market share. They are also undergoing a major restructuring of the global fleet in the face of uncertain demand for manufactured goods in Europe and the US. Responding to suppressed rates and increased bunker fuel costs, they have embarked on a drive for bigger, more fuel efficient vessels, with 110 new ships over 10,000 Twenty-foot Equivalent Units (TEU) expected to be delivered over the next three years3. However as demand faltered in the run up to Christmas, 6% of the global container fleet lay idle4 and some lines pulled more Asia-Europe sailings from their schedules at the very time they should have been at their busiest.
Overall in 2012, the world’s shipyards produced more tonnage – 168 million Dead Weight Tons (DWTs) – than ever before and a further 100 million DWTs could hit the water this year5.
Unlike many previous downturns in the shipping cycle, running alongside these sector woes since 2008 has been a continued shortage of capital from the European banks. For so long they have been the main source of shipping capital. However, their own sector woes and restructurings have forced a rethink amongst the biggest – 2012 saw Commerzbank announce its intention to withdraw and significant portfolio sales by Lloyds and Societe Generale. In Germany, banks have significant amounts advanced to the sector.
The European banking sector has been forced to consider where to allocate its sparse dollar capital and with limited debt servicing and sliding asset values, dollar intensive shipping no longer appeals in the same way it did when a Capesize could earn $200,000 per day. Having waived loan to value covenants for some time, banks have been forced to respond to individual stress caused by prolonged cash losses, new build stage payment commitments and refinancing requirements. Increasingly they should also react to the flight to bankruptcy protection by owners and operators seeking to recalibrate their businesses whilst maintaining control.
Banks are also reappraising their portfolios to understand which core long term businesses they wish to pursue, and those which can be packaged and sold on without inflicting too much damage to the income statement. Asia – particularly Chinese and Korean Export-Import banks – have to some extent increased lending, but generally to date only for new ships under construction in their own yards or for deployment in their own carriers’ fleets. Private equity has also shown an interest but, beyond buying very cheaply, struggles to see the 20%+ returns and probable exit opportunities over their usual investment horizons.
These are depreciating assets and the risk of obsolescence is probably higher than it has been for a long time. Moving forward Whilst there is scope for corporate restructuring and consolidation in certain areas, such action rarely addresses the fundamental sector issue of overcapacity – there are currently too many ships. There is some evidence that scrapping will increase – driven by increased Asian capacity for scrapping, a decent steel price and of course the limited prospects of employment for older less efficient tonnage. What’s more, despite the reconfiguration drive for more efficient tonnage and the availability of Asian capital, the overall order book has stopped growing and hence the rate of fleet growth should moderate across the sector.
Of course some bright spots of demand exist. The prolonged high oil prices of recent years (a fourfold increase in the last ten years) may have dealt a blow to bunker costs. However, it has also driven an unprecedented demand in offshore (often deepwater) exploration and production. This is good news not only for the rig and drill ship sector, but also for off shore supply vessels, shuttle tankers and the like. Indeed whilst high oil prices may suppress demand for the commodity, shifting patterns of production, consumption and, most importantly, refining, are changing shipping patterns for both crude and product.
The tonne mile demand for crude being shipped eastwards from the Atlantic Basin to the Chinese and Indian refineries in the Pacific is one of the few forecast bright spots in the wet sector for 2013. In containers, the continued development of the Intra-Asian and North-South trades is acting to some extent as a counter to depressed trans-Pacific and Asia-Europe trades. However the extent to which tonnage can cascade to different trades once replaced by modern ships remains to be seen.
Ports and land side infrastructure continues to attract investment despite the over-congestion of the period to 2008 having now abated in many areas. Significant investment is needed in developing areas such as Brazil, Africa and Asia to increase capacity (both containers and commodities) and in Europe and the US on new quays, cranes and dredging to handle the new mega carriers.
Marginal improvements in all of these factors could see the worst of shipping’s overcapacity soaked up as early as 2014. However few investors appear ready to back that bet. Perhaps of more significance will be the actions of the banks and their willingness to continue funding or to exit a price at which the capital can recycled. Moreover, restricted capital for new buildings is probably not a bad thing given the current overcapacity. Either way, we expect to see yet more financial and operational restructuring throughout 2013.
1 Baltic Exchange http://www.balticexchange.com/
2 Lloyd’s List Intelligence http://www.lloydslist.com/ll/ 3 Clarksons http://www.clarksons.com/ © 2013 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the
3 KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity.
4 Lloyd’s List Intelligence http://www.lloydslist.com/ll/ 5 Clarksons http://www.clarksons.com/