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NEW YORK—The
biggest shipbuilding boom in history collided with the
largest credit-market losses ever, undermining forecasts
for a plunge in freight rates.
As much
as $14 billion in ship orders is threatened by
cancellations and delays, equal to 94 percent of annual
revenue at Hyundai Heavy Industries Co., the largest
shipbuilder.
Tightening credit markets mean lenders demand a bigger
deposit and shorter terms for financing, said Tobias
Backer, the head of shipping for the Americas at Fortis,
a merchant banker.
The loss
or delay in deliveries of about 250 cargo ships, or 10
percent of orders, will tighten the supply of vessels
and support rates when demand from China and India for
everything from soybeans to coal has never been greater.
Based on the current orders for 2,561 new cargo ships,
shipping rates are expected to decline 56 percent during
the next three years, futures markets show.
“Cancellations would certainly be bullish for rates
because the ships won’t be there,” Natasha Boyden, an
analyst at Cantor Fitzgerald in New York, said.
At stake
are not only shipping rates but also the profits of
shipping companies in an industry that has outperformed
the market amid a US economic slowdown due to China’s
appetite for raw materials. The Bloomberg Dry Ships
Index, which includes 12 shipping companies, has gained
69 percent in the past year, compared with a loss of 7.8
percent for the Standard & Poor’s 500 Index. STX Pan
Ocean Co., a Korean shipping company, gained 62 percent
in the last year; DryShips Inc., an Athens-based
shipper, has more than doubled.
The
stocks have been propelled by shipping rates, which
reached a five-month high on May 9 and are 7.3 percent
below the record reached on November 13.
Freight
rates have risen as fewer vessels have been delivered.
The Baltic Dry Index, a measure of rates, has risen 58
percent in the last year as an index tracking the number
of cargo ships under construction has fallen 21 percent
in that time, using Lloyd’s Registry Fairplay data.
Tighter
credit, brought on by the $323 billion in writedowns the
world’s banks have disclosed since June because of the
collapsing mortgage markets, is taking a toll on the
record level of ship orders that was expected to
increase capacity and rein in rates. The price of steel,
which has risen 47 percent since January, and the
instability of less established shipyards are adding to
the uncertainty.
Sophocles Zoullas, chief executive of New York-based
Eagle Bulk Shipping Inc., toured shipyards in
China
and South Korea in late April, and said he has heard of
100 cancellations this year, enough ships to carry as
much as 18 million tons of coal at a time.
Zoullas
predicted 10 percent to 30 percent of orders for cargo
ships—valued at $141 billion at the end of last year,
according to Marsoft, a Boston advisory firm, or nearly
double the current fleet—will be delayed or canceled. (A
new Capesize ship, one of the largest cargo ships, costs
about $155 million.)
“People
are looking at gross supply and not looking at the
realities of the bottlenecks and the pains these
shipyards are having,” Zoullas said. “What drives the
market isn’t gross supply, but net supply.”
Urs Dur,
an analyst with Lazard Capital Markets, forecast 10
percent of orders will be canceled, and Omar Nokta, an
analyst with Dalhman Rose & Co., estimated 9 percent.
Jinhui
Holdings Ltd., a Hong Kong-based shipper, is a case in
point. It canceled an order for two ships in January,
and was willing to pay $4 million to get out of the
contract.
“When
people pay $4 million to get out of a shipyard, it’s an
interesting dynamic in the market,” said Backer, the
Fortis executive.
The
tighter credit standards are making it particularly
difficult for smaller shippers to expand their fleets
and making it more expensive for even the largest
companies such as DryShips and New York-based Genco
Shipping & Trading Ltd.
A year
ago, banks would finance as much as 80 percent of an
order, with 12- to 15-year loan terms, Backer said. Now,
financing usually doesn’t exceed 65 percent, and terms
are 10 years or less.
Prices
have doubled, with even high-quality credit clients
paying about 1 percentage point over the London
Interbank Offer Rate, or Libor. Some shippers without a
relationship with a bank or that have lower-quality
credit would have to pay more.
“We’re
seeing several smaller shipping companies that ordered
in big quantities, and are backing out now,” said Nokta.
“They’re having to cancel, because they’re back on their
payments or, in general, have not been able to secure
financing.”
Larger
shipping companies can still get financing.
“We had
to pay higher spreads, but in general, credit for
shipping companies that are big and big customers is
there,” George Economou, DryShips’ chief executive, said
in a April 24 conference call. “It’s difficult for
newcomers to find credit.”
Other
reasons behind the bottlenecks in ship construction are
delays in getting parts and financing for new shipyards.
Zoullas, for instance, said there is more than a
four-year wait for main engines, two years for diesel
generators and two-and-a-half years for hatch covers.
Chinese shipyards not yet in operation are scheduled to
build as many as one-fifth of the current orders for
ships, says Boyden, the Cantor Fitzgerald analyst.
“There
are a lot of new yards that are coming online, but can
they get the financing?” she said. “If not, those orders
can go away. That would be very good for rates, too.”
(With reporting from London and Seoul Bloomberg) |
