In the blink of an eye, the credit crunch tipped shipping from boom to bust
Julian Bray, Executive Editor of TradeWinds and 2008 Media Award winner, considers the crisis
Photo: Louis Mackay
Everyone in shipping – all the way from the boardroom to the quayside – has learned a harsh lesson, yet again, that the swing from boom to bust occurs with ferocious intensity in an industry where most had wrongly convinced themselves that history could surely not repeat itself.
From boom …
The summer of 2008, at the peak of the markets, saw many start to believe that perhaps a new model for this most cyclical of businesses had now been fixed, with China’s engine of growth set to drive demand for shipping services ever upwards.
Yet as always, when something seems too good to be true, it usually is. That goes for shipping, just as much as for drug-fuelled athletic performances.
The boom, according to economist Martin Stopford, was the greatest the industry had ever seen. For the first time in a generation, good money was made from actually running ships rather than just buying and selling them like maritime real estate, making shipping one of the most profitable businesses in the world.
That in turn helped lift the value of the ships themselves, with the price of a modern capesize bulk carrier, the workhorse of world trade, rising from $24 million in 2003 to $165 million five years later.
… to crunch
The comedown from shipping’s seven years of plenty has been harsh. The crunch, when it came, was brutal. There were a couple of months last autumn where the industry, quite literally, almost came to a standstill as the credit crunch bit hard into shippers and financiers, locking up the wheels of world trade.
Some within shipping had been predicting that the boom would end, most notably in the dry bulk markets, where a vast supply overhang from the huge new-building order book continues to cast a long shadow. Some more experienced shipowners had started to quietly take their profits by selling off vessels towards the market peak. But no one foresaw the meltdown ahead.
Of course, the immediate cause of the crisis was the implosion in financial markets stemming from the US sub-prime mortgage scandal. When overstretched financial institutions suddenly turned off the credit taps, not only were consumers caught short, but commodities traders and shipbuilders alike were left without free cash.
While shipping cannot be held accountable for the dénouement in the financial markets, no one should claim that it was not part of a systemic failure that saw excessive gambles taken with other people’s money. Just as US consumers played a part in driving the shipping boom, by sucking in imported manufactured goods funded by cheap credit, shipping firms happily racked up freight rates with barely a thought as to how those costs would be passed on through the trading system.
And there can be few shipowners who questioned the legitimacy of ordering new vessels with cheap credit from new ‘greenfield’ Chinese shipyards whose capacity is now set to blight the industry for another generation.
When the crunch came last autumn it was sudden and severe. Spiralling chains of charters where vessels had been re-let and re-let, sometimes as many as seven times, with each party taking a cut, suddenly turned toxic – and first one and then more parties defaulted. Slumping resale values of vessels put many owners in default of their banking covenants, adding pressure to recapitalise or cut spending. And the slump soon saw companies having to slash jobs just to survive, turfing experienced and loyal staff out onto the streets.
Rebirth?
Yet as I write this (in late August 2009) the global recession has not yet turned into depression, as some of the prophets of doom predicted six months ago. In fact, just in recent days Japan, Germany and France have all formally exited recession by posting economic growth in the second quarter of the year.
And while times are clearly tough in many parts of the shipping industry, rates are starting to improve in some sectors, and companies have not collapsed like dominoes as had been feared.
Credit for this nascent rebirth can not be found within the industry, however, but in the more powerful forces driving global trade. Government stimulus packages and efforts to prop up the financial system by the world’s central bankers have gone some way to stop the haemorrhage of money and confidence.
It is interesting to note that the flurry of so- called ‘vulture funds’ launched earlier this year to pick over the bones of distressed shipping companies if and when their banks pulled the plug have had little success, as yet.
As falling ship values have led shipowners to breach their loan covenants, banks have preferred to renegotiate the loans at higher margins rather than foreclose and take responsibility to run and ultimately dispose of the assets. It has given many shipping companies time to reorganise and cut costs.
Of course, the vulture funds’ time may still come if banks become more aggressive in their policies, but so far that point has not yet been reached.
A breathing space
Shipping has reacted to gaining this breathing space like a man given temporary pardon from execution. It is trying to mend its ways, and put the industry back into shape. But the challenges remain immense.
Firstly, and perhaps most significantly, the colossal $500 billion ship new-building order book is shrinking sharply. Exactly how fast orders are being cancelled is very hard to establish in detail, since most transactions are conducted in private, and many of the shipyards are not speaking about the problems they may now face with empty slots.
What is clear, however, is that some owners are negotiating exits to contracts, sometimes paying compensation and sometimes just abandoning their deposits. Other owners, perhaps with greater confidence that the markets will rebound at some stage, are negotiating postponement and delays to planned deliveries of between six months and two years, to give them and their markets some breathing space.
Secondly, there is a growing acceptance that more old ships should be scrapped. Many elderly vessels were kept sailing through the boom well past the end of their usual lifespan. Ageing bulkers, as well as the outmoded single-skin tankers, will all be heading for the scrapyards of the Indian subcontinent, especially if economic recovery helps lift the value of scrap steel.
Thirdly, the industry has in some ways been saved from itself by its increased sophistication. Greater numbers of shipping companies are now listed on public stock markets, and although that has led to increased levels of scrutiny those firms have been able to successfully turn to investors for cash to keep them afloat. In past times, some of those firms – if private – might well have gone bust, or at least been forced to sell assets at fire-sale prices.
Further, the role of shipping has become more deeply integrated into the global commodities trading network. No longer is the shipping element just a piece of the puzzle pulled off the shelf. More often shippers, traders and investment banks have close ties to particular owners, and some even have their own fleets. Financing and operating these fleets have also reached new levels of sophistication and complexity.
And lastly, perhaps it has been the role of the regulator – sometimes seen by shipping’s buccaneering entrepreneurs as the scourge of business dynamism – that has helped underpin performance and socially acceptable standards.
Living up to the standards
It must be clear to everyone that for too long until the mid-1990s shipping had been given too much freedom to do as it chose. Its poor environmental and social record up until that point says it all.
But since then shipping has reacted with success to the steady pressure applied by tighter enforcement driven by state control, to actually live up to the standards the industry so likes to proclaim. Ironically, despite the objections of some backward elements in the industry, those regulatory interventions have benefited shipping by driving out poor-quality operators and enforcing the minimum standards now demanded by society worldwide. And those forces are set to increase with growing pressure for control of environmental impacts, especially emissions of greenhouse gases from maritime engines.
All these factors show that shipping is dealing with the present crisis with imagination and alacrity.
However, as many others have said, successfully taming the challenging seas ahead will require business skills and leadership that will be much more demanding than those needed simply to cash in on the bonanza experienced in the earlier years of the decade.