From the FT's lex blog
Last into the downturn, last out. That could be the fate of the world’s shipping industry. In 2008, when the global financial system was sinking, tanker operators were merrily ordering new ships. These are still being delivered, creating a glut of container ships, tankers and bulk carriers, swamping many operators.
Like the biggest ships, this market can take a long time to turn around.
The result is a financial squeeze. Shipping rates have plunged; large operators are collapsing. U.S.-listed General Maritime sought Chapter 11 protection in November. Very large crude carriers cost roughly $20,000 a day to operate. Yet Frontline, one of the biggest operators, was forced to slash its charter rates to less than $13,000 a day in the third quarter. No public company can burn through cash at this rate for long. The company has since been rescued by its founder, John Fredriksen, while Denmark’s Torm, an oil products tanker operator, has negotiated a debt standstill. The looming year-end provides a deadline for auditors and shipowners to decide on companies’ viability; the chances are many will sink.
Their plight is worsened by the tightening of bank credit. Bank unwillingness to finance ship purchases is creating a downward spiral as prices fall on the lack of buyers. Prices of five-year-old very large crude carriers have fallen by a third since January to $58-million, according to Vesselsvalue.com. Meanwhile, creditors, including banks, are fretting about their shrinking collateral, and are demanding that operators put up more cash or sell ships.
The share prices of Frontline and Torm have fallen by about 90 per cent this year. That makes Torm’s planned rights issue a tough sell; it is hard to argue that the market has reached its bottom. Fears that China will boost ship production to protect jobs, adding to the glut, are among the other factors keeping the market depressed. There is a silver lining: demand for steel in China is keeping scrap prices buoyant. The breaker’s yard beckons for a swath of global shipping.
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