Business / Industries

Shipping sector sailing toward crisis

By Alfred Romann (China Daily) Updated: 2014-08-18 11:14

Even as new ships are delivered over the next year or two, a lot of old ships that have been sidelined or operating at reduced capacity are being brought back online.

European shipping companies are getting ready to deal with this extra capacity. Two of the largest shipping lines in the world, Maersk Line of Denmark and Mediterranean Shipping Company of Geneva in Switzerland, reached a deal on July 10 to share capacity in container ships.

The partners are calling the deal 2M. Vessels that are part of 2M will share capacity on 21 routes between Europe, Asia and the United States. The companies expect to save a significant amount of money by sharing capacity.

This alliance could be the first of many around the world as shipping companies prepare to deal with the inevitable downturn in prices.

Even the resurgence in the availability of financing for new ships could create a problem for the industry in the medium term.

Banks are getting back into the business of financing ships after years of conspicuous absence. More severe risk environments and drastically diminished cash flows for shipping companies had kept them away until a couple of years ago.

In the years after the bankruptcy of Lehman Brothers in 2008, the European banks that dominated ship finance turned inwards, looking to shore up their own balance sheets and capital needs. And they left a big gap, said Nigel Anton, global head of ship-ping finance at Standard Chartered Bank, speaking during a Marine Money conference in March in Hong Kong.

Orders for new ships rose before the global financial crisis, much as they rose last year, and that led to huge amounts of overcapacity in most categories of dry and wet shipping just as demand for shipping services plummeted along with global trade in 2009 and 2010.

In 2007, banks were carrying as much as $94 billion of debt related to ship finance on their books. By 2010, that number had dropped to $38 billion, Anton said.

That created a vacuum. Even in a recession, goods still have to move around the world and shipping companies need to buy ships to keep their fleets up-to-date, but it became harder to tap the banks for the money to make those purchases.

"Automatically, we had a big gap to fill. How was that gap going to be filled?" Anton asked.

The answer was a combination of demand curbs, meaning that shipping companies cut down or canceled orders for new ships, and the emergence of new sources of financing.

On the demand side, many orders were canceled. That made it possible for companies to continue operating in an environment of severely curtailed financing. But it also made it hard for shipyards to stay afloat. Many of them went bankrupt, particularly smaller shipyards in the Chinese mainland that produced ships with older technologies.

But the continuing need for funding also created an opportunity for finance companies and private equity funds to get into the shipping business on their own terms. Private equity funds in particular stepped in after 2011 with funds to acquire ships, but trading those funds for stakes in the companies they supported.

Tiger Group Investments of Hong Kong estimates that private equity funds and hedge funds have invested more than $10 billion in shipping in the past few years.

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