We have been reporting from time to time on the impact of the credit crisis on international trade. The main focus has been on how buyers and sellers of cargos are finding it increasingly difficult and costly to obtain letters of credit. However, a second effect is on shipowners themselves, both directly (via plunging freight rates, in some cases leading them to leave ships idle) and indireclty (via higher financing costs to them).
A new but expected symptom is cancellation of orders for new ships. While ocean transport is a notoriously cyclical industry, some incumbents have said this is the worst market they have seen.
From the Financial Times:
Shipowners are forfeiting tens of millions of dollars to cancel contracts to buy vessels rendered uneconomic by one of the industry’s sharpest downturns.
Last week, New York-listed Genco Shipping announced it was forfeiting $53m in deposits it had placed to buy six new vessels due to cost a total $530m.Hellenic Carriers, listed on London’s junior Aim market, said it was forfeiting a $6.97m deposit and making a further $1m payment to abandon a $69.7m contract sealed in July to buy a dry-bulk carrier.
At the same time, Oslo-listed Golden Ocean told Lloyd’s List, the shipping daily, it was reviewing its ship orders, although none had yet been cancelled.
The cancellations follow a collapse in the short-term, spot market rates for dry-bulk ships carrying iron ore, coal, bauxite, wheat and other commodities. The fall – of 71.9 per cent in October alone – has sent ship values tumbling. Consequently, it is often more worthwhile for shipowners to forfeit their deposits and pay compensation than to go through with deals on which they would never earn a reasonable return.
Quentin Soanes, managing director of Braemar Seascope, a London shipbroker, said that, for the worst-hit sizes of dry-bulk carriers, 40-50 per cent of existing orders could be cancelled. Braemar’s current estimate of the world order book of dry bulk ships stands at 3,920 vessels.
he said: “It’s going to be very, very messy, I think,”.
By cancelling orders, the shipowners rfelease badly needed cash they would otherwise have to put towards future payments on ship purchase…
Shipyards, meanwhile, are struggling to secure the guarantees that will refund shipowners if they fail to complete their orders. Without such guarantees, orders become void.
Stamatis Molaris, chief executive of Excel Maritime Carriers, told investors he no longer expected to receive four large dry-bulk carriers ordered for $311m from Korea Shipyard in Mokpo, South Korea.