Shipbuilding Torpedoed by Subprime Causes Cost Surge (Update1)
By Todd Zeranski
May 12 (Bloomberg) -- The biggest shipbuilding boom in history collided with the largest credit-market losses ever, undermining forecasts for a plunge in freight rates.
As much as $14 billion in ship orders is threatened by cancellations and delays, equal to 94 percent of annual revenue at Hyundai Heavy Industries Co., the largest shipbuilder. Tightening credit markets mean lenders demand a bigger deposit and shorter terms for financing, said Tobias Backer, the head of shipping for the Americas at Fortis, a merchant banker.
The loss or delay in deliveries of about 250 cargo ships, or 10 percent of orders, will tighten the supply of vessels and support rates when demand from China and India for everything from soybeans to coal has never been greater. Based on the current orders for 2,561 new cargo ships, shipping rates are expected to decline 56 percent during the next three years, futures markets show.
``Cancellations would certainly be bullish for rates because the ships won't be there,'' Natasha Boyden, an analyst at Cantor Fitzgerald in New York, said.
At stake is not only shipping rates but also the profits of shipping companies in an industry that has outperformed the market amid a U.S. economic slowdown due to China's appetite for raw materials. The Bloomberg Dry Ships Index, which includes 12 shipping companies, has gained 69 percent in the past year, compared with a loss of 7.8 percent for the Standard & Poor's 500 Index. STX Pan Ocean Co., a Korean shipping company, gained 62 percent in the last year; DryShips Inc., an Athens-based shipper, has more than doubled.
The stocks have been propelled by shipping rates, which reached a five-month high on May 9 and are 7.3 percent below the record reached on Nov. 13.
Rates Rise
Freight rates have risen as fewer vessels have been delivered. The Baltic Dry Index, a measure of rates, has risen 58 percent in the last year as an index tracking the number of cargo ships under construction has fallen 21 percent in that time, using Lloyd's Registry Fairplay data.
Tighter credit, brought on by the $323 billion in writedowns the world's banks have disclosed since June because of the collapsing mortgage markets, is taking a toll on the record level of ship orders that was expected to increase capacity and rein in rates. The price of steel, which has risen 47 percent since January, and the instability of less established shipyards are adding to the uncertainty.
Sophocles Zoullas, chief executive of New York-based Eagle Bulk Shipping Inc., toured shipyards in China and South Korea in late April, and said he has heard of 100 cancellations this year, enough ships to carry as much as 18 million tons of coal at a time.
Cancellations Predicted
Zoullas predicted 10 percent to 30 percent of orders for cargo ships -- valued at $141 billion at the end of last year, according to Marsoft, a Boston advisory firm, or nearly double the current fleet -- will be delayed or canceled. (A new Capesize ship, one of the largest cargo ships, costs about $155 million.)
``People are looking at gross supply and not looking at the realities of the bottlenecks and the pains these shipyards are having,'' Zoullas said. ``What drives the market isn't gross supply, but net supply.''
Urs Dur, an analyst with Lazard Capital Markets, forecast 10 percent of orders will be canceled or delayed, and Omar Nokta, an analyst with Dahlman Rose & Co., estimated 9 percent.
``One might expect some tonnage not to be delivered and some yards not to get constructed,'' Jeremy Penn, chief executive officer of the London-based Baltic Exchange, said. ``Although it will cause problems for individual businesses, the broad picture may be overall positive.''
Market Dynamics
Jinhui Holdings Ltd., a Hong Kong-based shipper, is a case in point. It canceled an order for two ships in January, and was willing to pay $4 million to get out of the contract.
``When people pay $4 million to get out of a shipyard, it's an interesting dynamic in the market,'' said Backer, the Fortis executive. The tighter credit standards are making it particularly difficult for smaller shippers to expand their fleets and making it more expensive for even the largest companies such as DryShips and New York-based Genco Shipping & Trading Ltd.
A year ago, banks would finance as much as 80 percent of an order, with 12- to 15-year loan terms, Backer said. Now, financing usually doesn't exceed 65 percent, and terms are 10 years or less.
Prices have doubled, with even high-quality credit clients paying about 1 percentage point over the London Interbank Offer Rate, or Libor. Some shippers without a relationship with a bank or that have lower-quality credit would have to pay more.
``We're seeing several smaller shipping companies that ordered in big quantities, and are backing out now,'' said Nokta. ``They're having to cancel, because they're back on their payments or in general have not been able to secure financing.''
Delays a Factor
Larger shipping companies can still get financing.
``We had to pay higher spreads, but in general credit for shipping companies that are big and big customers is there,'' George Economou, DryShips' chief executive, said in a April 24 conference call. ``It's difficult for newcomers to find credit.''
Other reasons behind the bottlenecks in ship construction are delays in getting parts and financing for new shipyards. Zoullas, for instance, said there is more than a four-year wait for main engines, two years for diesel generators and 2 1/2 years for hatch covers. Chinese shipyards not yet in operation are scheduled to build as many as one-fifth of the current orders for ships, says Boyden, the Cantor Fitzgerald analyst.
``There are a lot of new yards that are coming online, but can they get the financing?'' she said. ``If not, those orders can go away. That would be very good for rates, too.''
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