Uncharted Waters for Shipping

Having returned from a lengthy business trip to Europe, one has the feeling that something is different this time with the shipping markets. We all knew that the market has been through some rough seas ever since the monumental collapse in 2008, but there almost always were slivers of hope and optimism, that the market would eventually recover and the market correction would just be a port call that didn't pay well. However, “This time is different” seems to hold water, but in a way that’s promising.

Dry Bulk Hardest Hit

The dry bulk market has been the main culprit of the weak market, and the dry bulk freight market has been below operating breakeven levels for more than a year now. Even when operating at just $1,000 per diem below market, this means the owner has to come up with $350,000 per annum just to keep trading one vessel (there have been cases of Capes losing $5,000 per diem per vessel, so one can imagine the cash drain for a twenty-vessel strong fleet); this calculation does not include routine maintenance and drydocking, which easily can be a multiple of the operating loss. And of course, the interest and principal repayment on the mortgage are still in addition to all that.

For the typical private, independent owner of five dry bulk vessels, it means in the last year alone it burned a $3 million hole in their cash reserves just to stay in business. These losses are HUGE (indeed) since cash reserves were low to begin with, thus now many owners have started scraping against the bottom of their wallet. It’s not only the losses in absolute terms, but also the fact that as one burns their last of their cash reserves, the pain and anxiety and the deathbed confessions start getting the worst of them, and their counterparties, and their friends, and their neighbors. It’s like a summer brush fire that doesn't take much to get out of hand.

Spillover Effect on Banks

And the bankers of such shipowners do not feel especially comfortable seeing their clients getting another level deeper in the inferno, and having even less ability to survive the market. Lower freight rates have also brought down asset prices, which has made the value of the collateral less valuable and likely triggered new loan-to-value covenant breaches.

Thus, the weakness of the freight market has a spill-over effect on shipping banks. And anyone even casually perusing the business press knows that most shipping banks, or banks with shipping exposure in general, have been trying to exit the shipping markets. The present weakness of the market is not helpful or appreciated by the banks trying to dispose of shipping assets and shipping loans. The weakness of the freight market has been shaking, besides the shipowners, the financiers for the shipping industry in a way that allows for little tolerance or additional thoughts to come up with accommodating strategies.

And as strange as this may this seem, the scenario of sustaining only operating losses is that of a ‘good’ dry bulk shipowner; there are several of this type of small, independent shipowners who also have ‘delivery pains’, so to speak, as they were sucked into ordering ‘cheap ships’ in 2013 without having the financing in place. Now that the deliveries are coming due and there is no committed financing, the option set is bleak: either walk away from the newbuilding contracts and forfeit the down-payment (which would be as high as 30-40% of a 2013-quoted contract, or about $10 million for a Panamax bulker), or raise money at any price and live another day to hope for a market recovery. Both choices are very, very painful and both imply value and equity destruction and economic loss.

Other Sectors Suffering Too

While dry bulk with its all-time-low record-setting BDI index and the associated news now on the pages of the mainstream business press, other shipping market sectors are not faring much better. The containership market, dear and close to many a German shipowner primarily, earlier this year was showing signs of a recovery and renewed hope.

Now, almost all segments within the containership market are weak, with the monster ultra-large containerships (ULCVs) making front-page news with their being laid-up (a $180-million piece of equipment getting parked, something one does not see every day) or $1.2 billion capital investment U-turns in just six months by major liner companies, while the Shanghai Containership Index has dropped from $2,500 to $500 in just six months (the actual cost of shipping a container from China to Northern Europe).

And the offshore market, which provided a crucial leg to many a shipowner, has now collapsed on the back of collapsing oil (and commodity) pricing. The offshore market also pertains to certain Jones Act assets active in the Gulf of Mexico (GOM) for drilling and support of offshore platforms, and also to modern drillships and semi-submersible offshore platforms – at last count, there are eight brand-new such drilling assets delivered from the shipyard this year with their owners contemplating cold lay-up (that is $800 million in brand-new assets, apiece, that have no employment and their owners will be spending many millions per annum just to cold-stack them).

Any way one sees it, the options are abysmal. And the brown water assets in the United States have lost trading volumes due to collapsing of commodities (coal mostly comes to mind), which further negatively has been impacting the Jones Act market, a market that just a year ago was making front page news with its $120,000/day charter rates for medium-range tankers trading in the shale oil business.

Bright Star

The international tanker market has been the bright star, so to speak, of the shipping firmament in the last year, but many investors have been having second thoughts. Tanker asset prices have barely improved despite the tanker freight market having doubled over the last year, and many an investor seems keener at selling tanker vessels or stakes in publicly traded shipping companies rather than taking a longer approach to the sector. Even in the bright tanker market, many an observer thinks that the present rally is just an OPEC mirage on the Saudi sands.

All in all, three major shipping sectors are under lots of pain and the bright spot (tankers) seems bright enough mainly because the rest of the sky is hazy and dim. The dry bulk market has a long tail of distribution that affects many more owners worldwide, thus dumping the whole market sentiment by association. And for owners who are active in more than one market segment, they do not seem to benefit at all from fleet ‘diversification.’

We have been told in the past that shipowners are optimistic people by nature. And our own experience socializing and dealing and closing deals with them tends to confirm such sentiments. However, the recent business trip brought to the surface anxiety that has never been seen before or been so patently obvious. They say it’s darkest before dawn, and definitely we sail through dark days. Some want to believe that the dawn is about to break. We certainly hope so. But the smart money seems to think otherwise.