It might not come as a total surprise to find out that fewer goods are being shipped than before the global financial systems went into meltdown. In August, the UK’s oldest ship owner, Stephenson Clarke, founded in 1730, went into administration. In Germany, around 100 ship funds have been forced to close down, and over 800 more are at risk of the same fate. A combination of slow demand for imports to Europe and a glut of shipping capacity have collided to create the worst shipping conditions in over 25 years, according to some analysts. Simon Bennet, the Director of the International Chamber of Shipping, says the economic downturn has caused a severe imbalance in supply and demand.
“Prior to 2008, ship owners ordered a vast amount of new tonnage, particularly from Chinese, Korean and Japanese shipyards. There are too many ships chasing too few cargos,” he explains. This has driven prices to extremely low levels, making it difficult for ship owners to stay afloat.
Sinking ships
The imbalance has been compounded by the slow demand in southern Europe. Ports have seen a sharp drop in the volume of containers arriving, despite previous expectations that imports would pick up over the summer. North American and European imports have fallen an average of 7.5 percent to nine percent from Asia. The Mediterranean region however, has seen flows drop as much as 16 percent, a direct consequence of the recession in Greece, Italy, Spain and Portugal.
The drop in container volumes arriving in Europe is particularly damaging to German companies that dominate around 40 percent of the container shipping market worldwide. But a further affliction has been gripping the shipping industry, and has contributed to the wave of insolvencies. The European debt crisis has left many top lenders in hot water, accelerating the decrease in vessel values. Several top shipping financiers have complained that liquidity problems have been discouraging banks from financing the purchase of vessels that come up for sale.
The inability to sell pushes the value of the vessels down, and their owners further toward insolvency. In turn, the rapidly dropping value of the vessels is prompting banks to worry about the value of similar ships listed as collaterals on loans. In a vicious cycle, falling values have prompted banks to pressure owners to sell off even more ships to cover their debts. Some banks are closing down their ship funding operations all together.
It is the case with Commerzbank, one of the world’s top financiers which, after being burdened with a fleet of foreclosed vessels, announced it would be closing its €20bn ship funding arm in order to ‘minimise risk and capital lock up.’ The essential reasons are the ‘high capital and rising liquidity requirements under Basel III.’ The global regulatory standard strengthens capital requirements, meaning that banks have to hold 4.5 percent of common equity, and six percent of capital. But the rapid implementation of the convention standards has forced banks to raise capital rations too fast, potentially choking lending into the real economy. The shipping industry has been greatly affected by these new regulations as banks reduce their portfolios, and vessel funding is often the first service to go.
Conditions have been so difficult that some experts are claiming this is the worst time for the industry since a prolonged dry-spell in the mid 1980s. As the Chinese economy is forced to slow down its growth, shipments to and from the country have diminished. There have also been increasing efforts by the Chinese government to focus growth on domestic demand in order to mitigate the economy’s reliance on foreign consumption. “There is a fear that if there is any significant shift in Chinese policy this will have a big impact on demand for shipping services,” says Bennet. “Shipping is very much the servant of world trade, and the demand for shipping services is very much linked to the growth of the world economy, which is driven by China.
Prominent Greek ship owner Nicolas Pappadakis recently said in a maritime transport convention in Xiamen, “Without China there would be no shipping industry.” Emerging as a manufacturing superpower, China relied on foreign shipping companies to carry raw materials there and manufactured goods away, at the cost of billions of dollars annually. But it was not long before the Chinese government started investing in the development of its own shipping industry, building shipyards and producing their own ships. China successfully lowered the cost of freights for its product, but at a much higher, and unforeseeable, cost.
The sheer volume of vessels in operation today is one of the main causes behind many of the industry’s woes. Chinese shipping companies are not exempt from the slow down. The China Ocean Shipping Group has reported a first-half net loss of ¥4.67bn. It is unlikely that there will be a miraculous recovery for the company, as China struggles to keep its growth rate up as foreign demand for Chinese goods slumps, due to the recession in Europe.
Obeying the helm
“If China slows down its economic expansion, this will have a major impact on the ships carrying raw materials into the country. Bulk cargos like iron ore or coal from Brazil and Australia to China, could be very seriously affected.” China is currently home to the world’s third largest shipping fleet, in terms of capacity. Its global capacity has gone up to 10 percent from 6.3 percent in 2006. China also has the world’s largest shipyard capacity, which before 2008 many global shipping companies were buying large and cheap vessels from. This glut of cargo space in the industry is one of the main factors behind the extremely low freight rates, forcing some companies to cease operations. The issue of excess cargo space will not be solved easily, as companies continue to receive new ships ordered before the crisis.
However, some of the greatest developments often occur under times of duress; three of the biggest shipping companies in the world, Cargill, Huntsman Corporation and UNIPEC, have recently taken a step towards making the global shipping business more energy efficient. Between them, the companies haul over 350 million tonnes of commodities annually. The three vessel owners have agreed between themselves to charter only their most fuel-efficient vessels for international cargo transportation. Though a coalition of activist groups have been lobbying for such a move over many years, there is no doubt that the decision to charter exclusively their most cost effective vessels will help the companies maintain a healthier bottom line as the freight prices remain low.
But by all accounts, things are more likely to get worse before they can get significantly better. Shipping experts in Germany estimate that up to two-thirds of the country’s vessel owners are in economic distress. In early October, Torm, a Danish shipping company with a fleet of around 160 vessels was rescued by a coalition of 14 banks and other ship owners. Korea Lines and General Maritime fell under bankruptcy protection in late 2011. But as industrial production picks up again, and countries get their economies back on their feet, there is every chance the shipping industry will revive, perhaps more sustainable and prudent than ever.
