28-09-2016

Shipping companies eye second-hand dry bulkers; lenders cautious

Drybulk

Shipping companies are smelling an opportunity in the slump in prices and expanding their dry bulk fleet, particularly by grabbing second-hand tonnage despite lower earnings in the near-term.

“It makes sense for a company to expand into dry bulk if it is willing to bleed for sometime,” Andreas Sohmen-Pao, group chief executive of Bw Maritime said on the sidelines of the Marine Money Asia Conference in Singapore last week.

Bw Group, that has a fleet of more than 150 ships, including new buildings, ventured into the dry bulk segment in March this year. It now controls five such bulkers of 61,200 dwt or 82,000 dwt each, the typical size of an Ultramax and Kamsarmax carrier, respectively.

“If the balance sheet of a firm is strong and it does not have a big exposure to dry bulk shipping, then it is good to consider venturing into it; but many companies that are already big in the sector are already suffering from cost overruns,” a maritime finance executive said.

Returns in the dry bulk sector are expected to remain subdued for sometime, but prices of second-hand ships have declined by around 40%-50% in the last two years, Sohmen-Pao said. Purchase prices of these ships has declined at a time when bunker prices were low as well, thereby reducing the operating costs.

“We will definitely invest in more ships — an investor’s timing for purchase and raising debt is critical,” Edward Buttery, CEO of Taylor Maritime, a manager of bulk carriers, said on the sidelines of the conference.

The company has invested in around nine dry bulk carriers in a little over a year, all of them second-hand and Handysize ships, between 28,000 dwt and 32,000 dwt.

The average age of these ships is around 11 years, he said.

Buttery said the company is focusing on Japanese-built Handysize.

“Even though the earnings are low, the [medium-term] fundamentals are best in Handysize ships, because the orderbook is shrinking,” Taylor said.

The lower value of ships is translating into more sales as investors get enticed to buy cheaper tonnage.

The total number of bulk carrier second-hand sales so far in 2016 is already estimated at 427 units, compared with 430 last year, according to estimates of Vessels Value, a UK-based ships valuation and database company. However, the sales this year are valued at $3.92 billion, down 27% from the estimated $5.38 billion for 2015.

Such second-hand sales are coming at a time when new building orders are slowing down, and even cancelled.

“One of our clients who had earlier ordered four dry bulkers of 200,000 dwt each from a Chinese shipyard has recently cancelled two of them,” a Singapore-based marine finance executive said.

The cancellation comes because the back-to-back long-term time charter from a South Korean company is available for only two of the ships, the executive said.

Hardly 29 new building orders for dry bulkers have been made this year, for a cumulative 6.44 million dwt, down from 404 for 33.3 million dwt in 2015, according to Vessels Value data.

The lack of new orders amid the stressed financial environment globally is also adding to the difficulties of shipyards that are finding it hard to deliver on their existing orders in a timely manner. In the last 12 months, Bangkok-listed Precious Shipping has canceled close to a dozen new building contracts for Ultramaxes with China’s Sainty Marine Corp.

The shipyard did not deliver the vessels within the contracted timeframe and in compliance with the technical specifications, the company’s Managing Director, Khalid M. Hashim said.

Hashim said his company plans to buy more Ultramaxes from the second-hand market. A five-year-old dry bulk carrier is almost 50% cheaper than a new ship, he said.

According to industry estimates, five-year-old Handysize ships are quoted at around $11 million, compared with close to $20 million for a newbuild.

ECONOMISTS, BANKERS CAUTIOUS

Even as existing ships change hands more frequently now than in the past, economists and financiers are cautious.

“Global economic outlook continues to be in a difficult phase, and it will take some time for the shipping industry to get its issues sorted out,” Arjen van Dijkhuizen, an Amsterdam-based senior economist for emerging markets at ABN-Amro said.

Even if economic growth picks up in 2017, it will be modest and increase in global trade would not be of the pre-crisis levels, van Dijkhuizen said.

Global trade growth is the primary driver for the shipping industry.

The World Trade Organization Tuesday slashed its trade growth forecast for this year to the slowest level since the onset of the global economic crisis.

World trade in 2016 will grow slower than earlier expected, expanding just 1.7%, well below the April forecast of 2.8%, according to the latest WTO estimates released Tuesday.

The forecast for 2017 has also been revised, with trade now expected to grow between 1.8% and 3.1%, down from 3.6% forecast previously, WTO said.

Banks are also careful in lending to shipping companies and giving their thumbs-up to the existing fleet.

“New ships are bad news for the market, and therefore better to focus on the second-hand tonnage,” said Klaus Stoltenberg, Hamburg-based managing director and the global head for shipping coverage with Deutsche Bank.

Banks, should they issue shipping loans, need to be at least 200 basis points above the average of the recent years, so that they can cover all the losses made during the crisis, he said.

Deutsche’s shipping loans portfolio is stable year on year, at around 5.5 billion euros, he said.

The bank has placed its clients under three categories, the priority clients who are strong, the one-offs who borrow once in a while, and those whose portfolios the bank wants to exit, Stoltenberg said.

Both the lenders and the shipping industry agree that it will be a while before the sector recovers.

It is a challenge “to get approval from investment committees to put money on an asset which can’t deliver profits from day one,” said Edward Buttery of Taylor Maritime.

The industry should aim at “scrapping as much as it can, starting with older ships, but owners find it difficult to do so because they only get a fraction of the book value and have to write-off the rest,” said Bw Group’s Sohmen-Pao.

Source: Platts 

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