Monday, May 11, 2009

Shipping shows early signs of recovery

The sharp drop in world trade which followed the credit crisis in the middle of 2007; and particularly, the decline in economic growth during the second half of 2008 amongst developed and developing economies, has sent shockwaves throughout the Greek shipping community. The demand for chartering, which is increasingly used to transport commodities such as coal, steel, cement and iron ore to the fast-growing economies of China and India, has experienced a steep decline.

Exacerbating the problem has been the oversupply of new ships which are only now coming onto the market. Some firms are already cancelling orders. But some Greek shipowners, accustomed to downturns, have taken a long term perspective. For example, Diana Shipping cancelled its dividend recently but said it was saving cash to acquire ships at low prices during the downturn.

Also, the lack of credit has made banks reluctant to lend to shipowners and provide financial guarantees to allow ships to sail. Local lenders such as Piraeus Bank have stated they are relatively comfortable with their loan exposures. However, analysts question whether foreign banks such as the Royal Bank of Scotland - which has experienced problems related to the credit crisis generally not encountered by Greek banks - has apparently over 75% of Greek shipping debt, are more nervous. The number of ships asking to idle off Piraeus has risen and Greek officials say traffic at the port has been down sharply.

Greece owns a fifth of the world's shipping fleet. At 170 million tonnes, the Greek merchant fleet is the largest in the world, ahead of Japan. After tourism, it is the second largest contributor to Greece's 240 billion euro economy, accounting for around 7% of output. Nicholas Magginas of the National Bank of Greece recently estimated the slowdown in shipping will take around 0.5% off GDP.

Although, shipping accounts for just over 1% of Greece's 4.5 million workforce, its economic influence is much higher because shipowners and shipping executives invest heavily in other sectors of the Greek economy such as banks, real estate, construction/development and tourism. Just as importantly, they provide much needed funds for educational endowments, cultural centres and social infrastructure.

More recently there has been some positive news. An important indicator of chartering prices and one of the most popular leading indicators of global economic growth, the Baltic Dry Index (BDY), has rebounded almost as rapidly as the crash that occurred from levels of 12000 to 600 in late 2008.

The BDY is a daily average of prices to ship raw materials using Dry Bulk Carriers. It represents the cost paid by an end customer to have a shipping company transport raw materials across seas on the Baltic Exchange, the global marketplace for brokering shipping contracts. Therefore, it is a good indicator of the supply and demand for commodities across the world. However, it is imperfect as prices are driven by other forces than the supply and demand of raw materials such as fleet supply, weather, bunker oil prices and port congestion.

The reason for the sharp increase in the BDY since December seems to have been caused by mainly Chinese manufacturers trying to rebuild their inventories. It is doubtful that the index will continue to increase given the global economic recession.
Some potential investors may consider investing in shipping company stocks as they usually have a high correlation to increases in the BDY; however, it is probably too late at this stage as most of them have already rebounded around 40% since December.
Source: Ship Chartering, Bespoke and Antipodes

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