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April 2009 At our last IMIF Dinner in November 2008 a good member friend came up to me and said “Well, Jim, what are you going to say to us tonight…. ‘I told you so’?” On the basis that there is nothing more wearisome than a self-admiring know-all chattering about his exceptional hindsight I managed at least then to avoid that temptation. However I am drawn to what I wrote in previous letters, for instance May 2007: “We have all been enjoying a splendid market – past its peak perhaps, but good nevertheless. The high rates have been accompanied by a mass of ship deliveries and new orders. Container ships are entering the market at a pace far exceeding the market demand forecast. Dry bulkers are changing hands at a brisk old pace ($47m reported recently for a 1998 built Panamax) and lots of newbuildings. Some brokers are reporting an acute shortage of capesize bulkers giving rise to record charter rates until 2010! All this sounds splendid news but let us remember that this activity relies on World trade continuing at its present breathless pace. But will it, or are there signs of a major slow down?” “I write this on a weekend when the Baltic Dry Index has rocketed to a record 7319. In simple terms this means that a Cape-size can earn a princely $118000 a day; evidence that the world demand for commodities and indeed manufactured products remain unabated. But the remarkable feature of this new freight market high is that it takes place after a near unique roller coaster ride in the world’s stock markets. The banking system globally is somewhat shaken by the apparent over-supply of credit to what are known as “sub prime” borrowers. As a result easy credit is no longer available, at least for the time being, while banks and investors reappraise their potential liabilities. Some commentators have labelled the stock market fall as a “useful correction”. Personally I have no idea of what these neat little words actually mean.” For the last fast moving two years the sadly predictable crash has occurred. The marine industries are courageously squaring their shoulders to clear up the new situation that has emerged. So much has been written that I shall only touch on the various sectors. Financing Bank lending and the availability of credit has, for the moment, simply ceased, unless by exception. The heavily involved banks are reviewing their portfolios of loans, while concurrently rebuilding their battered balance sheets. Government entreaties to recommence lendings are, for the moment, being ignored. Some banks are intimating that they will no longer be involved in maritime finance. (I personally consider this to be a predictable “knee-jerk” reaction which will in time be countermanded.) Whatever, credit is at an all time low with predictable discomfiture to shipowners and shipbuilders. Shipbuilding The unprecedented quantity of ships of all types under construction and on order is mind boggling. There are the twin prospects of cancellation and deferments solidly looming. Shipyards are unhappy with both of these. Some, as in the case of Korea, have the added problem of major fluctuations endangering forward currency dealings. Shipowning The collapse of freight levels has had obvious immediate effect. Bulkers have suffered most, tankers rather less. Two very bleak categories are container trades and auto carriers. The principal liner (container) routes Asia-Europe and Asia-US have plummeted in volume and rates. Already the major players are trying to balance supply :: demand by withdrawing and laying up ships. Auto carriers are for the moment in an even worse predicament. Many new ships are entering into an already crowded market and nobody needs reminding that new-car sales have near-completely dried up. The huge US car manufacturers – the very symbol of American capitalism and Yankee manufacturing know-how – are floundering and even the super-efficient Japanese with their most popular product range are suffering. Consequently cars are piling up from Bremen to Southampton, New York and Los Angeles and these new 4000+ car carriers are being used either as floating garages or are merely being laid up. What gloom! That being said there must be light at the end of the tunnel. Indeed there is, but it will not be a return to the good old days of the past two decades. All the involved industries must gear themselves – as must the banks – to a more measured, duller, environment. It will take, in my view, around 18 months from now for a better equilibrium in the maritime industries to be gained. Thus there may well be numerous casualties and the strong alone will survive. One unapproached area in this little homily is the ultimate future of shipbuilding. Will the Chinese Government simply prop up their emerging greenfield as well as established shipbuilders by building for their own account and thus becoming far and away the greatest entity in shipping as well as shipbuilding, effectively submerging all others? That is however a topic for future debate and some informative IMIF lunches.
Jim Davis |