THE biggest shipbuilding boom in history has collided with the largest credit-market losses ever, undermining forecasts for a plunge in freight rates.
As much as US$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 Asia 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 US economic slowdown. 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 South 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 November 13.
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 US$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.
Broad picture
Zoullas predicted 10 percent to 30 percent of orders for cargo ships ¨? valued at US$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 US$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."
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 US$4 million to get out of the contract. "When people pay US$4 million to get out of a shipyard, it's an interesting dynamic in the market," said Backer, the Fortis executive.