Vincent Wee talks to industry players to find out the challenges facing this sector during this global downturn
Vincent Wee 4 March 2009
The unprecedented scale of the current economic downturn makes the dry bulk market outlook for the rest of the year challenging, said IMC Corp chairman Frank Tsao.
‘The outlook remains challenging as the economic downturn is far from over. This recession is of a scale never seen before with all sectors affected. With volume of international trade affected, shipping gets affected as well.
‘We expect the drop in the total dry bulk demand to last through 2009 despite the massive fiscal stimulus packages announced in China and the US as private consumption and investment fall.’
Mr. Tsao warned that the drop may in fact be longer than one or two years, and could possibly last longer as the weak demand is coupled with additional tonnage coming out of shipyards. He pointed out that in the case of dry bulk, the global total is about 400 million tonnes, and is expected to increase by over a quarter while world trade is shrinking and needs time to recover.
‘The additional tonnage from shipyards is more than 25 per cent. There is a serious imbalance between demand and supply. Hence, it will take quite some time before it stabilises.’
Kenneth Koo, chairman and CEO of Tai Chong Cheang Steamship, said: ‘Many factors here but all in all, don’t get caught up in any early euphoria just because the BDI rebounds. When an entire shipping sector (dry bulk) depends upon one country (China’s iron ore demand) for its salvation, something’s not right.
‘An order book of almost 500 capes (capesize bulk carriers) coming out between now and 2011, plate grain harvest at a significant low spelling trouble for panamax/supramax/ handymax and increasing signs of panic selling from owners of bulkers. It’s better to just accept the fact that 2009 is a write-off and move on.’
Mr. Tsao and Mr. Koo will be among a distinguished panel of speakers who will be sharing their views on the major bulk trades at the Sea Asia 2009 Conference on April 21-23. Other panelists include Pacific Basin Shipping deputy CEO Klaus Nyborg, SK Shipping CEO Lee Jeong-Hwa, Varun Shipping managing director Yudhishthir Khatau and The Baltic Exchange CEO Jeremy Penn. The session will be chaired by BW Shipping managing director Andreas Sohmen-Pao.
But all is not doom and gloom for the sector. ‘Handysize can recover better in the long term as nowadays, shipowners prefer to build a large ship as running cost is almost the same; it is more flexible with better income upside. Few build smaller ships,’ said Mr. Tsao.
In fact, as these older small ships are scrapped, there will be a lack of additional supply for this market niche.
The other bright spot is in the intra-Asia trades, he said. ‘The Intra-Asia trade is getting much bigger than before. With the economic downtown in the West, Asia is given the opportunity and is forced to stand up on its own, as it cannot rely on the US.’
Mr. Koo, however, is somewhat less optimistic. ‘Again, don’t harbour any hopes for any segment of bulkers shining through. The truth is dry bulk performance in all sectors has always been domino-effect based. That is to say, when capes are bad, panamaxes will not fare well and on down.’
But he conceded that the handysize segment may see some light, giving a qualified glimmer of hope. ‘Yes, maybe handys look better because they’ve never really caught onto the stratospheric levels of freight during the last boom. This is a sector that is versatile and pretty resilient. But don’t even think they will come shining through for this crisis.’
The massive order book clearly weighs heavily on the minds of owners and they are naturally guarded in their responses. ‘As of February 2009, total dry bulk order stands at 296 million dwt which represents 71 per cent of total dry bulk fleet which is at a historic high,’ said Mr. Tsao.
Mr. Koo, meanwhile, said: ‘Like every shipowner in the world today, we are concerned about the massive order book coming onstream.’
Mr. Tsao said: ‘Scrapping has increased rapidly since October 2008 due to the current depressed freight rate (about 7.9 million dwt so far since the last quarter of 2008 compared to 0.06 million dwt in the first nine months of 2008). We expect 20 to 30 million dwt of scrapping per year in the next two years. However, it is unlikely that the number is significant enough to offset the increase of supply from new vessel delivery.’
Still, he offered the hope that cancelled or delayed orders may alleviate the situation somewhat, quoting a HSBC Research report last month showing that 31 million dwt of (about 22 million dwt confirmed) orders had been cancelled or were ineffective in the dry bulk order book.
Based on IMC’s estimates, of the 22 million dwt confirmed, about 8.4 million dwt will have an impact on supply, mostly from the greenfield yards. The rest will not as the orders are taken over either by other owners or yards.
Mr. Tsao added: ‘Cancellation may be limited as governments in Korea and China have introduced shipbuilding aids beneficial to viable yards. However, some greenfield yards may be at risk and we are expecting some cancellation from this sector. Since building of vessels for 2009 would have started, we are expecting more cancellation to occur in 2010, mostly from greenfield yards. However, even if all the 2010 orders from the greenfield yards are cancelled, it will only reduce 18 per cent of the 2010 order book.’
He conceded that the other potential catalyst may come from delivery delays. ‘We have seen 20 per cent of the 2008 order book delayed and estimates from Clarksons showed that January 2009 delayed was in the range of 45 per cent.’
Having gone through many shipping cycles in his career, Mr. Tsao had some advice for shipowners in tough times like these. ‘Good cash position is the most important factor in any downturn. Don’t over-leverage, never borrow too much money from any bank. With sound financials, there is sustaining power.’
Reviewing expenses, supplier deals and projects; investing in R&D to stay ahead of the competition; training staff to upgrade themselves to better take advantage of opportunities when the economy improves; maintaining good cash flow and taking advantage of opportunities to expend surplus cash in undervalued assets or businesses that provide strong cash flow were other important steps to take, he added.
Mr. Koo, the next chairman of the Hong Kong Shipowners’ Association, said: ‘Shipping is not rocket science, it’s not an investment banking product or derivative. Cashflow and bottom line will always be the name of the game. Make sure you can see ahead around five years cashflow-wise.
‘We are a traditional family business of almost a century in existence. We’ve always believed in being a commercially and technically hands-on owner, concentrating on a medium sized fleet of vessels and operating them on a foundation of long-term relationships with blue-chip charterers.
‘Know your own ships, your own crew and navigate slowly but surely. It’s nothing new and it’s not rocket science. But it’s a formula that has worked. Look at us traditional Hong Kong shipowners, multi-decade, multi-generation enterprises based upon this simple if somewhat boring formula.’
Mr. Tsao also backed opportunities for networking and gaining knowledge despite the difficult conditions. ‘Staff are always encouraged to network, attend conferences to get different perspectives and enhance marketing efforts by visiting prospective customers.’
Likewise, Mr. Sohmen-Pao said: ‘Dialogue between industry players is critical at a time when there is great risk and uncertainty in the market. Gatherings which bring together the right individuals can facilitate the exchange of ideas and understanding which may help the industry to resolve its challenges faster.’
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Dry bulk sailing in choppy waters
Vincent Wee talks to industry players to find out the challenges facing this sector during this global downturn
Vincent Wee
4 March 2009
The unprecedented scale of the current economic downturn makes the dry bulk market outlook for the rest of the year challenging, said IMC Corp chairman Frank Tsao.
‘The outlook remains challenging as the economic downturn is far from over. This recession is of a scale never seen before with all sectors affected. With volume of international trade affected, shipping gets affected as well.
‘We expect the drop in the total dry bulk demand to last through 2009 despite the massive fiscal stimulus packages announced in China and the US as private consumption and investment fall.’
Mr. Tsao warned that the drop may in fact be longer than one or two years, and could possibly last longer as the weak demand is coupled with additional tonnage coming out of shipyards. He pointed out that in the case of dry bulk, the global total is about 400 million tonnes, and is expected to increase by over a quarter while world trade is shrinking and needs time to recover.
‘The additional tonnage from shipyards is more than 25 per cent. There is a serious imbalance between demand and supply. Hence, it will take quite some time before it stabilises.’
Kenneth Koo, chairman and CEO of Tai Chong Cheang Steamship, said: ‘Many factors here but all in all, don’t get caught up in any early euphoria just because the BDI rebounds. When an entire shipping sector (dry bulk) depends upon one country (China’s iron ore demand) for its salvation, something’s not right.
‘An order book of almost 500 capes (capesize bulk carriers) coming out between now and 2011, plate grain harvest at a significant low spelling trouble for panamax/supramax/ handymax and increasing signs of panic selling from owners of bulkers. It’s better to just accept the fact that 2009 is a write-off and move on.’
Mr. Tsao and Mr. Koo will be among a distinguished panel of speakers who will be sharing their views on the major bulk trades at the Sea Asia 2009 Conference on April 21-23. Other panelists include Pacific Basin Shipping deputy CEO Klaus Nyborg, SK Shipping CEO Lee Jeong-Hwa, Varun Shipping managing director Yudhishthir Khatau and The Baltic Exchange CEO Jeremy Penn. The session will be chaired by BW Shipping managing director Andreas Sohmen-Pao.
But all is not doom and gloom for the sector. ‘Handysize can recover better in the long term as nowadays, shipowners prefer to build a large ship as running cost is almost the same; it is more flexible with better income upside. Few build smaller ships,’ said Mr. Tsao.
In fact, as these older small ships are scrapped, there will be a lack of additional supply for this market niche.
The other bright spot is in the intra-Asia trades, he said. ‘The Intra-Asia trade is getting much bigger than before. With the economic downtown in the West, Asia is given the opportunity and is forced to stand up on its own, as it cannot rely on the US.’
Mr. Koo, however, is somewhat less optimistic. ‘Again, don’t harbour any hopes for any segment of bulkers shining through. The truth is dry bulk performance in all sectors has always been domino-effect based. That is to say, when capes are bad, panamaxes will not fare well and on down.’
But he conceded that the handysize segment may see some light, giving a qualified glimmer of hope. ‘Yes, maybe handys look better because they’ve never really caught onto the stratospheric levels of freight during the last boom. This is a sector that is versatile and pretty resilient. But don’t even think they will come shining through for this crisis.’
The massive order book clearly weighs heavily on the minds of owners and they are naturally guarded in their responses. ‘As of February 2009, total dry bulk order stands at 296 million dwt which represents 71 per cent of total dry bulk fleet which is at a historic high,’ said Mr. Tsao.
Mr. Koo, meanwhile, said: ‘Like every shipowner in the world today, we are concerned about the massive order book coming onstream.’
Mr. Tsao said: ‘Scrapping has increased rapidly since October 2008 due to the current depressed freight rate (about 7.9 million dwt so far since the last quarter of 2008 compared to 0.06 million dwt in the first nine months of 2008). We expect 20 to 30 million dwt of scrapping per year in the next two years. However, it is unlikely that the number is significant enough to offset the increase of supply from new vessel delivery.’
Still, he offered the hope that cancelled or delayed orders may alleviate the situation somewhat, quoting a HSBC Research report last month showing that 31 million dwt of (about 22 million dwt confirmed) orders had been cancelled or were ineffective in the dry bulk order book.
Based on IMC’s estimates, of the 22 million dwt confirmed, about 8.4 million dwt will have an impact on supply, mostly from the greenfield yards. The rest will not as the orders are taken over either by other owners or yards.
Mr. Tsao added: ‘Cancellation may be limited as governments in Korea and China have introduced shipbuilding aids beneficial to viable yards. However, some greenfield yards may be at risk and we are expecting some cancellation from this sector. Since building of vessels for 2009 would have started, we are expecting more cancellation to occur in 2010, mostly from greenfield yards. However, even if all the 2010 orders from the greenfield yards are cancelled, it will only reduce 18 per cent of the 2010 order book.’
He conceded that the other potential catalyst may come from delivery delays. ‘We have seen 20 per cent of the 2008 order book delayed and estimates from Clarksons showed that January 2009 delayed was in the range of 45 per cent.’
Having gone through many shipping cycles in his career, Mr. Tsao had some advice for shipowners in tough times like these. ‘Good cash position is the most important factor in any downturn. Don’t over-leverage, never borrow too much money from any bank. With sound financials, there is sustaining power.’
Reviewing expenses, supplier deals and projects; investing in R&D to stay ahead of the competition; training staff to upgrade themselves to better take advantage of opportunities when the economy improves; maintaining good cash flow and taking advantage of opportunities to expend surplus cash in undervalued assets or businesses that provide strong cash flow were other important steps to take, he added.
Mr. Koo, the next chairman of the Hong Kong Shipowners’ Association, said: ‘Shipping is not rocket science, it’s not an investment banking product or derivative. Cashflow and bottom line will always be the name of the game. Make sure you can see ahead around five years cashflow-wise.
‘We are a traditional family business of almost a century in existence. We’ve always believed in being a commercially and technically hands-on owner, concentrating on a medium sized fleet of vessels and operating them on a foundation of long-term relationships with blue-chip charterers.
‘Know your own ships, your own crew and navigate slowly but surely. It’s nothing new and it’s not rocket science. But it’s a formula that has worked. Look at us traditional Hong Kong shipowners, multi-decade, multi-generation enterprises based upon this simple if somewhat boring formula.’
Mr. Tsao also backed opportunities for networking and gaining knowledge despite the difficult conditions. ‘Staff are always encouraged to network, attend conferences to get different perspectives and enhance marketing efforts by visiting prospective customers.’
Likewise, Mr. Sohmen-Pao said: ‘Dialogue between industry players is critical at a time when there is great risk and uncertainty in the market. Gatherings which bring together the right individuals can facilitate the exchange of ideas and understanding which may help the industry to resolve its challenges faster.’
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