Friday, March 6, 2009

The container market has seen an unprecedented drop in transported volumes as the economic crisis took a grip, with January 2009 business plunging 20% year-on-year. Overall development for 2009 is expected to be negative. Around 5% of the existing container ship fleet is currently lying idle in order to save costs for the owners/operators. This surplus of vessels is not only adding stress to current charter rates, but there is also the pain inflicted by deliveries of new vessels being felt to a greater extent these days as more mega post panamax vessels are being delivered. Under these conditions, a major liner company failure would cause a chain reaction of defaults in the industry.

The container business was an ongoing love affair with institutional investors for many years. Riding the export boom in emerging Asian markets, the sector seemed to have an insatiable demand for tonnage. Financiers liked the business because of the easy availability of long-term charters with major liner companies. German KG's are heavily invested in this sector. US investors like Fortress also backed the sector.

Yet there have been margin declines in the business for some time now. In the boom years operating expenses outpaced hire levels in longer-term charters and created pressures on profits. Cargo volumes on the US West Coast started to wane even two years ago. Last year huge increases in bunker expense caused havoc with the large liner operators, who were obliged to put tonnage on slow steaming to contain fuel costs.

Generally the industry faced these problems trying to improve earnings by greater revenue volume in massive fleet expansion plans with larger and larger vessels. It got to a point that there was an issue about port facilities able to cope with the envisaged cargo volume from the all the massive fleet expansion plans.

Many container shipping companies have orderbooks equal or larger than their existing fleets. These orders cannot easily be pushed out or renegotiated with the ship years, albeit some companies like Seaspan have had some limited success. A majority of containership owners are struggling to pay South Korean shipbuilders after their refusal to countenance demands for delays, price reductions or cancellation of newbuilding contracts.

The issue is how their counter party charterers will be able to take on and absorb these vessels when a part of their existing fleet is already in lay up and they rolling up operating losses. Many shipowning companies are suffering losses, too. Seaspan, for example, saw their losses widen from US$10.4 mio in 2007, while revenues increased to US$229.4 mio against $199.23m the year before as six newbuildings were delivered. Fourth quarter losses were US $241.9 mio. Their parent company was obliged to bail them out by pumping in US$200 mio through a preferred share deal in January this year.

Some of the major liner companies are State-owned as in China. Others like Maersk have a strong balance sheet. The question is how long will they be willing to subsidize the losses and how soon they will start to take measures to contain the losses? Many are redelivering vessels. Will they continue to support the shipping owning companies and take delivery of their new tonnage? Will there be rate renegotiations and defaults on existing charters?

Relief depends on a pick up in the US, which has been the lead consumer market and secondarily in the EU. Despite mounting losses and parent company bail-out, Seaspan CEO Gerry Wang recently said: "During 2008, Seaspan achieved strong growth in both its contracted revenue stream and cash flow for distribution, a testament to its stable business model.” Wang has always maintained that his business was a virtually risk-free money printing machine.

Since the whole industry is already quite overextended, a major liner company bankrupt or reorganization would be the beginning of an irreversible hard landing.

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