They cannot pay for vessels on order due to record decline in hiring costs
Bloomberg 24 October 2008
(LONDON) Lines that ship commodities will begin to collapse within the next six months and ‘significant’ numbers may fail within two years, according to Fearnley Fonds ASA.
Record declines in hiring costs for ships to carry coal, ore and grain mean that owners will not be able to pay for outstanding orders for new vessels, Rikard Vabo, an Oslo-based analyst at the bank, said on Wednesday. Lower ship values will also push companies’ collateral on loans below minimums agreed with banks, he said. ‘There are so many ships that will be delivered, we will need another China to cope with all the deliveries by 2010,’ said Mr Vabo at Fearnley, a specialised maritime investment bank. ‘We will see a significant number of bankruptcies, that’s for sure’, given rental rates forecast by freight derivatives.
The Baltic Dry Index fell 66 per cent in the three months to Sept 30, the largest quarterly drop since the exchange began compiling the data. The measure of commodity shipping costs is down 60 per cent so far this month at 1,220 points, after rising to a record high of 11,793 points on May 20. Carriers, expecting a surge in demand in emerging economies, spurred the biggest shipbuilding programme in history before a world economic slowdown began shrinking demand for coal, iron ore and steel.
Industrial Carriers Inc, a Ukrainian operator of about 55 vessels, filed for bankruptcy protection last week. ‘It will take a little while for them to go belly up just yet,’ said Natasha Boyden, an analyst at Cantor Fitzgerald in New York. ‘I think, certainly looking out over the next six to nine months, we do have some concerns.’
Shipping rates have also been hurt by frozen credit markets and a reduction in banks’ willingness to provide the letters of credit that traders use to fund purchases of cargoes.
‘With higher-end products such as steel and agricultural commodities, you’re hearing more evidence of the inability of customers to secure letters of credit from the banks, creating a problem moving those cargoes,’ said Doug Mavrinac, an analyst at Jefferies & Co in Houston.
Traders who hired ships for a year or more at the market’s peak may now be losing about US$140,000 a day for each vessel they lease out in the single-voyage, or spot market, Mr Vabo said. Rental rates have slumped to less than US$10,000 a day, he said.
Zodiac Maritime Agencies Ltd, the shipping line managed by Israel’s billionaire Ofer family, may idle 20 of its largest vessels after the biggest drop in rental rates on record, the company said last week. The removal of 20 capesize vessels from the spot market will eliminate as much as 5 per cent of capacity, said Susan Oatway, a London-based analyst at Drewry Shipping Consultants Ltd.
Freight derivatives contracts, known as forward freight agreements, indicate that capesize vessels which haul coal and ore will make US$24,500 a day next year and US$23,000 a day in 2010. The price of ships has also declined 47 per cent to US$81.8 million, from as high as US$153.8 million on July 28. Daily running costs including crew, maintenance, insurance and lubricants, and excluding interest payments, are about US$6,000 a day.
‘If things stay how they are for a year, that will be pretty problematic for these companies,’ said Omar Nokta, an analyst at Dahlman Rose & Co. Shippers are likely to consider cutting their dividends starting next year to preserve cash, he said. The cost of borrowing is falling, which may help prop up the freight market and encourage more lines of credit, he added.
The London Interbank Offered Rate, or Libor, that banks charge each other for such loans dropped 29 basis points to 3.54 per cent, the British Bankers’ Association said. The Libor-OIS spread, a measure of cash scarcity, narrowed to 250 basis points for the first time since Sept 30.
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Commodity Carriers Will Collapse in 6 Months
They cannot pay for vessels on order due to record decline in hiring costs
Bloomberg
24 October 2008
(LONDON) Lines that ship commodities will begin to collapse within the next six months and ‘significant’ numbers may fail within two years, according to Fearnley Fonds ASA.
Record declines in hiring costs for ships to carry coal, ore and grain mean that owners will not be able to pay for outstanding orders for new vessels, Rikard Vabo, an Oslo-based analyst at the bank, said on Wednesday. Lower ship values will also push companies’ collateral on loans below minimums agreed with banks, he said. ‘There are so many ships that will be delivered, we will need another China to cope with all the deliveries by 2010,’ said Mr Vabo at Fearnley, a specialised maritime investment bank. ‘We will see a significant number of bankruptcies, that’s for sure’, given rental rates forecast by freight derivatives.
The Baltic Dry Index fell 66 per cent in the three months to Sept 30, the largest quarterly drop since the exchange began compiling the data. The measure of commodity shipping costs is down 60 per cent so far this month at 1,220 points, after rising to a record high of 11,793 points on May 20. Carriers, expecting a surge in demand in emerging economies, spurred the biggest shipbuilding programme in history before a world economic slowdown began shrinking demand for coal, iron ore and steel.
Industrial Carriers Inc, a Ukrainian operator of about 55 vessels, filed for bankruptcy protection last week. ‘It will take a little while for them to go belly up just yet,’ said Natasha Boyden, an analyst at Cantor Fitzgerald in New York. ‘I think, certainly looking out over the next six to nine months, we do have some concerns.’
Shipping rates have also been hurt by frozen credit markets and a reduction in banks’ willingness to provide the letters of credit that traders use to fund purchases of cargoes.
‘With higher-end products such as steel and agricultural commodities, you’re hearing more evidence of the inability of customers to secure letters of credit from the banks, creating a problem moving those cargoes,’ said Doug Mavrinac, an analyst at Jefferies & Co in Houston.
Traders who hired ships for a year or more at the market’s peak may now be losing about US$140,000 a day for each vessel they lease out in the single-voyage, or spot market, Mr Vabo said. Rental rates have slumped to less than US$10,000 a day, he said.
Zodiac Maritime Agencies Ltd, the shipping line managed by Israel’s billionaire Ofer family, may idle 20 of its largest vessels after the biggest drop in rental rates on record, the company said last week. The removal of 20 capesize vessels from the spot market will eliminate as much as 5 per cent of capacity, said Susan Oatway, a London-based analyst at Drewry Shipping Consultants Ltd.
Freight derivatives contracts, known as forward freight agreements, indicate that capesize vessels which haul coal and ore will make US$24,500 a day next year and US$23,000 a day in 2010. The price of ships has also declined 47 per cent to US$81.8 million, from as high as US$153.8 million on July 28. Daily running costs including crew, maintenance, insurance and lubricants, and excluding interest payments, are about US$6,000 a day.
‘If things stay how they are for a year, that will be pretty problematic for these companies,’ said Omar Nokta, an analyst at Dahlman Rose & Co. Shippers are likely to consider cutting their dividends starting next year to preserve cash, he said. The cost of borrowing is falling, which may help prop up the freight market and encourage more lines of credit, he added.
The London Interbank Offered Rate, or Libor, that banks charge each other for such loans dropped 29 basis points to 3.54 per cent, the British Bankers’ Association said. The Libor-OIS spread, a measure of cash scarcity, narrowed to 250 basis points for the first time since Sept 30.
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