"The seizure of the credit markets has lead to a tightening of the credit available for the day to day operation of the sector," he observes. "Letters of credit, or trade credit, required to finance individual cargos, has dried up because of the financial sector crisis."
Even before the collapse of freight rates, he says questions were being asked about the bankability of the new building order book. As noted in a previous GlobeSt.com article, the UK's Drewry Shipping Consultants report some 65 new ships in excess of 8,000 TEUs will launch in the next two years, despite slowing demand. The economic impact will be felt not just by ship owners, says Luke, but also by the shipyards.
"Some might have viewed [the excess shipbuilding] as a necessary release of the supply side pressure that has built up during the 'super cycle'," says Luke. "Whilst deposits would be lost and no doubt contractual disputes generated in the shipping sector, the pain would inevitably be shared with the yards."
But more worrying than all of this, Luke continues, is the descending gloom around the "real" economy. "The first to fall was demand on the box trades from the Far East as the western economies slowed," he says. "The cost of shipping a container from China to Europe has fallen from $1,300 to less than $400 as the liner companies fight to fill space in a market where the conferences can no longer influence supply."
The next to crumble has been the dry bulk market, he says, noting that the Baltic index is at a five-year low. "Having hit close to $250,000 per day earlier in the year, the daily cost of chartering a capesize vessel (above 150,000 long tons of deadweight) is now around a tenth of that, and still falling. With crude oil price and demand under pressure that sector may be next.
This slump in demand has caused announcements of container ship and dry bulk lay-ups from some owners and applies more doubt on the demand for future deliveries of new build.
So the super cycle may well have ended and yards, owners and operators are again facing tough times. The fact that you might buy a brand new capesize now for less than half the price payable a year ago, or for the equivalent of an ageing VLCC (oil tanker) conversion, shows how the economics and asset values have changed. Volatility and uncertainty have returned and only the most astute and best resourced players will continue to prosper, or survive. Whether in the paper (derivatives) or physical market, or in the financing or delivery of new builds, counterparty risk is back.
Those with strong balance sheets and limited commitments, plus a healthy time charter balance to credit worthy charter parties will survive. All should be addressing the efficiency of their supply chain (including tax cost) and their management of working capital – and not necessarily counting on the availability of their undrawn facilities."
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