Banker: Wall Street crisis to squeeze shipping
The crisis roiling Wall Street is likely to affect the shipping industry by both reducing the amount of cargo they need to carry and by squeezing credit at a time when many ship owners are planning huge outlays for fleet expansions.
“The international situation is far worse in a quick period of time than even I thought it would get,” said Paul Slater, chairman of First International Corp., a ship financier based in Naples, Fla., who said that even before the current crisis he thought shipping was “heading to a deep, severe correction” (See September 2007 American Shipper, pages 75-78).
Freight rates have been plunging in recent months. The Baltic Dry Index, a market basket estimate by brokers of freight rates for commodities like coal, iron ore and grain on 26 different routes for different size ships, has plunged dramatically.
Wednesday it was set at 3,025, only about a quarter of its all- time high of 11,793, set on May 20.
Shipping stock prices have also plunged, with many dry bulk stocks at or near 52-week lows.
The Claymore/Delta Global Shipping exchange traded fund, listed on the New York Stock Exchange, was launched Sept. 9 to track an index of 30 shipping stocks. Since it began trading at $22.66 it has fallen, this week trading as low as $16.71 and closing at $17.25 Wednesday.
Stocks like DryShips, which trades on the Nasdaq, have seen spectacular drops in their share prices — from a high of $131.34 about a year ago to a close at $35.45 on Wednesday.
Yet analysts like Urs Dur, vice president at Lazard Capital Markets, who is lowering earnings estimates for dry bulk ships not covered by term charters, said yield outlooks for many stocks are attractive. He is recommending shareholder hold stocks of companies such as Genco, Eagle Bulk, Navios and Diana Shipping.
“Near term will be weak and may get weaker still, but fundamental valuations may become attractive swiftly,” Dur wrote in an investment note on those companies this week.
“Should the macroeconomic outlook improve (a positive reaction to congressional action, for example) and should the dry bulk freight markets improve partly due to such, our outlook could become more bullish swiftly,' he said.
“Shipping is a service industry that lives off of world trade and world trade is in decline now in every sector,” Slater said. “The reason it hasn’t fully manifested itself is that there is always a delay with shipping — charters get fixed and don’t expire for a year or ships get ordered and don’t get delivered for three years.”
Many shipping companies “are highly leveraged and have very expensive new ships. They paid twice, nearly three times what they would have paid for the exact same ship at the beginning of the decade,” Slater said. “It was only sustainable if you believed the peak markets that were achieved from 2005 onward would continue, which I have maintained for several years was unsustainable unless China would concrete itself over and then put up a tin roof over the top.”
Slater said he is concerned that some shipping companies may be subject to loan covenants that they may not be able to meet because of the collapse of their share values.
He also believes carriers may walk away from contracts with shipyards for new vessels, rather than build vessels that would lose money if freight rates remain weak. But he questions whether this strategy will really cure the oversupply situations.
“Shipyards will desperately try to build the ship,” he said, either by trying to find other buyers or even by modifying the vessel and converting a half completed hull into a different sort of vessel.
Slater points to one silver lining in the gathering gloom.
“I don’t see anything like the scale of problems domestically as I do internationally because there is a barrier entry into domestic American shipping and American-flag shipping. Barring the potential for overtonnaging in the tanker and tank barge area, which I think has been pointed out by others, it is a relatively stable environment compared with the turmoil internationally.” ' Chris Dupin
Banker: Wall Street crisis to squeeze shipping
