Maritime Transportation and Global Economic Health

Stephen DeAngelis

November 12, 2009

News about recovery from the current recession remains mixed. Emerging market countries seem to be recovering more quickly than developed countries but international trade (as reflected in improvements in the maritime transportation industry) is still deep in recession. Since most of the world’s international trade in goods and commodities travels by sea, the health of the shipping industry an important indicator of how long the recovery is going to take. This morning there were reports that European banks holding significant amounts of loans with shipping companies are growing increasingly concerned [“As Shipping Slows, Banks and Carriers Fear Loan Defaults,” by Landon Thomas, New York Times, 12 November 2009]. Thomas weaves his article around the bankruptcy of a small shipping company named Eastwind and how Eastwind is symbolic of broader troubles facing both shippers and institutions that lend to them. He reports:

“Banks with large shipping industry portfolios — among them Royal Bank of Scotland and Lloyds, and HSH Nordbank and Commerzbank in Germany — could face meaningful write-downs as ship owners confront plummeting charter rates from a 25 percent drop in global trade. … Most vulnerable is HSH Nordbank, which is exposed to the industry’s weakest segment, container ships. It has $50 billion in shipping loans, or about seven times its equity. The exposures of other major ship lenders include Commerzbank, with $37 billion; R.B.S. with $25 billion; and Lloyds TSB with $23.9 billion, according to estimates made by ING Bank. With the exception of HSH Nordbank, the shipping industry loans of the other banks represent a small percentage of their overall loan books — not enough, taken on their own, to make a balance sheet buckle. But the fact that shipping industry debts are concentrated in some of Europe’s weakest banks suggests that the loans may well cause more problems than bankers are now willing to admit. … In one case, a ship belonging to Eastwind lacked the money to pay for fuel, according to the company’s bankruptcy filing. Another even lacked sufficient funds to provide food and water to its crew. While the ships eventually found their way to port, it may well be their bankers that soon find themselves at sea.”

Last quarter “two of Asia’s biggest shipping lines announced major losses … in a further sign of the unprecedented severity of the crisis battering the industry” [“Asian shipping lines suffer further losses,” by Robert Wright, Financial Times, 30 October 2009] Wright continues:

“Singapore’s Neptune Orient Lines, which operates the world’s fifth-largest container ship fleet, said that it would lose money at least for the first half of 2010 as it announced $139m net losses for the three months to September 30. Hong Kong-listed China Cosco, the world’s second-biggest dry bulk shipowner and number eight container line, announced third-quarter losses of Rmb691m ($101m) on revenues down 52.4 per cent on the same quarter last year to Rmb15.8bn ($2.32bn).”

Wright notes that it is not just Asian shipping companies that are hurting.

“Container shipping is by far the worst hit of any major shipping segment by the economic downturn, with volumes of the manufactured goods it ships slumping. Rates per container shipped have plummeted as the sector’s huge excess supply of ships depresses prices. Several lines – including France’s CMA CGM, Germany’s Hapag-Lloyd, Israel’s Zim and Chile’s CSAV and CCNI – are all either in the course of negotiating restructurings to avoid collapse or have already had bail-outs. Companies that lease container ships to operators have suffered still more as shipping lines hand back large numbers of unneeded vessels. At least one of the Hamburg-based companies that dominate the segment has sought help from Germany’s federal government.”

In an earlier article, Wright reported on the financial crisis in Germany that the downturn in international shipping has sparked [“Funds facing shipping crisis,” by Robert Wright, Financial Times, 19 October 2009]. He wrote:

“A growing number of Germany’s shipping investment schemes look set to collapse after more than 100 announced plans to ask investors for cash to survive one of the worst-ever shipping recessions. Some surviving schemes also look set to rely on specialist investors in distressed shipping assets after private German middle-class investors declined to provide all the cash some schemes – which are a popular form of tax-efficient investing – requested. … The problems of the Kommanditgesellschaft – or KG – funds are exacerbated by their heavy exposure to container shipping, in which a third of the world’s fleet has German owners. The sector is suffering its worst-ever downturn after falling cargo volumes and excess ship supply created a collapse in ships’ earning power. The funds are part of the investment portfolio of tens of thousands of independent German professionals such as doctors and lawyers.”

I first reported on the sorry state of maritime transportation industry in a post entitled Shipping Woes. That post was primarily about the hard times that have fallen on the shipbuilding segment of the industry. That segment continues to suffer because of the excess shipping capacity noted by Wright [“Lossmaking shipyards seek increased investor interest,” by Neil MacDonald, Financial Times, 4 November 2009]. MacDonald reports that troubled shipyards are looking for any opportunities that can help them stay afloat. His article focuses on a shipyard in Croatia and the dim hopes it has for the future.

“One of Croatia’s main shipbuilding companies hopes to receive an unusual, and highly specialized, order before long. Brodosplit, a state-owned shipyard in financial trouble, could provide the crucial mechanical input for ‘Europe’s first rotating hotel’, a UK-designed resort structure to be built on Solta, an island 15km away. The £70m (€78m, $115m) project, due for completion within three years, calls for a giant steel turntable to rotate at a snail’s pace, so that hotel guests can enjoy different views from their rooms throughout the day. ‘It’s an attractive idea,’ says Tanja Jadresic, public relations manager for the Split-based shipyard, a leading maritime construction center. ‘Brodosplit is one of the few companies in the region that could carry out this type of construction.’ The turntable would be made in separate pieces and transported to the hotel site for final assembly. Ms Jadresic would not speculate on how much the shipyard stands to earn from the contract.”

The problem, of course, is that there are too few specialized projects for them to save the shipbuilding industry. MacDonald continues:

“The Solta hotel plan no doubt attests to enduring local prowess with casting and welding. However, Brodosplit’s suitability for such a contract is primarily a result of location. Unfortunately, such one-off projects can never save an ailing industry that drains millions of euros from the state budget each year and has largely failed to attract private buyers.” The European Union, which Croatia hopes to join by 2012, insists on shipyard privatization before membership.”

Although location helped Brodosplit win the hotel contract, MacDonald notes that its location attracting shipbuilding contracts may not be so advantageous.

“Since ships are inherently mobile, the competition to construct tankers, container ships and bulk cargo carriers spans the world. To survive, Croatian shipbuilders – whose yards mostly originated as Austro-Hungarian naval bases in the late 19th century – must find an edge over the large, cost-effective and increasingly productive shipyards of east Asia.”

According to MacDonald, “the order books have dried up.” The culprit is once again the excess capacity currently available worldwide. When the shipping industry does improve (and I’m confident it will as the economy once again starts to grow), Croatian shipyards, MacDonald claims, are not likely to enjoy a resurgence in business.

“Local wages are too high to compete with China, and excess workers have stayed on the payroll. The Union of Metal Workers – buoyed by patriotic sentiment about the time-honored industry – has resisted lay-offs. The six main state-owned sites employ about 15,000 people, with tens of thousands directly or indirectly dependent on shipbuilding. Financial losses have mounted with each new ship launch.”

Even though I’m confident that the shipping industry will eventually regain its profitability, analysts assert that the recovery is likely to be slow [“No Quick Fix for Container Shippers’ Woes,” by Ainsley Thomson and Art Patnaude, Wall Street Journal, 9 October 2009]. They report:

“A pickup in global trade will have to last some time before the container-shipping industry can overcome the burdens it took on during boom times. Since the second half of 2008, the shipping industry has experienced a spectacular downturn as charter rates collapsed alongside the rest of the global economy. Container-shipping rates even dropped to zero in January on the Asia-to-Europe route as brokers waived fees and charged only for fuel costs. Rates have risen for other kinds of shipping, such as tankers, but are expected to stay depressed for container-shipping companies for at least the next year. That crimps the companies’ ability to make payments on ships they ordered when shipping rates were high. At the same time, the value of the ships they already own has fallen. … Even though there are signs trade is picking up, depressed ship prices and low rates are likely to continue to weigh on container-shipping companies. … While shipping companies that transport raw commodities saw rates rebound in the first half of 2009 as a result of demand from China, containers filled with manufactured goods experienced no such reprieve.”

When flush times do return, one country that is planning to take advantage of them is South Korea. That is if its academics can sell their dreams to the politicians. The Korea Advanced Institute of Science and Technology (KAIST) is keen to promote a project it has been exploring: “mobile harbors, an idea that the scientists believe has the potential to transform the world’s transport networks” [“New drive for creative thinking,” by Christian Oliver, Financial Times, 13 August 2009]. Oliver reports:

“The mobile harbors could dramatically change the world’s shipping lanes, reducing the need for huge container ships to dock in deep-water ports to be unloaded. Instead, the shipping lanes could be designed to accommodate shallow-water ports that would send floating quaysides out to the cargo ships.”

Such mobile harbors could a boon to many coastal cities that are currently not a part of the global maritime transportation system. With the current state of shipping, however, their development is likely to be decades away (if ever).