Everywhere you look, you see prices of commodities falling. Due to the general economic slowdown in China and Europe, prices of metals such as ore, platinum and uranium have crashed. Slowing demand for these commodities is one reason rates for “dry bulk shippers” – which carry cargo like coal, iron ore, and grain – have cratered. The Baltic Dry Index (BDI) , the bellwether index for dry bulk shipping rates has crashed from a level of 11,000 points back in 2008 to a level of less than a 1,000 points today. This means that the cost of leasing a cargo ship today is about 10% of what it used to cost just a few years ago. Very few companies can survive such a sharp drop in earnings.
From peak to trough
The much more important reason the shipping sector is suffering is plain cyclicality. Like the commodity business, shipping is highly cyclical. When times are good, shipping companies order lots of new tankers. Because it takes years to build new tankers, these companies usually end up receiving them at the worst time – after the good times have passed. Eventually, a glut of supply occurs and day rates plummet. In March, for example, there were 20% more vessels than cargoes – the largest glut since the early 1980s, according to Clarkson Plc, the world’s largest ship-broker.
Eventually, shipping companies scrap older ships and idle their existing fleet. Tankers trade for less than half their original cost. Day rates slowly recover. Demand for new ships increases. And it starts all over again. In other words, the cure for low prices is low prices.
Have we seen bottom yet?
I believe that we might be finally approaching the bottom of the cycle in shipping. As of now, earnings for many companies in the sector can’t even meet operating costs.
Erik Stavseth, an analyst at investment bank Arctic Securities, told the Financial Times, “There’s [no ships] making money and no ability to pay the banks what they owe them.” He said rates had been at best just covering operating costs since the beginning of the year. Average rates for the largest dry-bulk ship were $6,976 on Friday – under the approximately $10,000 operating cost. But some very know distressed investors are finally entering the shipping arena. Billionaire investor Wilbur Ross is one of them. Ross and a consortium of investors purchased a fleet of 30 tankers that haul gasoline and diesel for $900 million two years ago. His investment firm, WL Ross & Co., also has a majority stake in Navigator Holdings, which controls one-third of the world’s mid-sized liquefied petroleum gas carriers.
“We’re going to do a lot more in shipping even than we have,” Ross told Bloomberg in May. “Shipping has a great oversupply of vessels that came from over-ordering a few years back. We think 2014 may be when it turns around.”
The immediate suspects
Until the shipping sector will stage its turnaround, a few leading shippers will likely file Chapter 11. Excel Maritime, a large dry-bulk shipper, announced plans to seek bankruptcy on June 11. Korea’s largest dry-bulk shipper, STX Pan Ocean, sought bankruptcy protection on June 7. Two other companies, Genco Shipping & Trading Limited (NYSE:GNK) and Eagle Bulk Shipping Inc. (NASDAQ:EGLE), are on the verge of default. On May 1, Genco Shipping & Trading Limited (NYSE:GNK) had to restructure its debt to short-term to comply with its loan covenants. Eagle Bulk Shipping Inc. (NASDAQ:EGLE) said it could breach its covenants by next March if rates don’t improve.
