Malaysia hunts for pirates after tanker hijacking
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The shipping recovery that never arrived
Private equity and hedge funds are gambling on ship values and not the long-term revenue streams from operations, says Paul Slater
As we approach the middle of 2014, shipping’s economics remain stuck in the doldrums will little or no recovery in sight.
The surplus capacity of ships to cargoes requiring transportation has been aggravated by the delivery of a massive orderbook of new ships that followed the boom markets of the middle of the last decade.
This surplus is not limited to a few markets but, with the possible exception of gas, both liquefied natural gas and liquefied petroleum gas, it has affected the rest and in particular the wet and dry bulk, and the container markets.
The effect has been severe as few ships in these markets generate a profit after operating expenses, debt interest and amortisation.
Numerous public companies have gone bankrupt, as have many private ones. The German KG funds have been almost completely wiped out and have created huge losses for the German shipping banks.
The average age of the world fleet is at a historic low, meaning the surplus will be around for at least another decade.
Unfortunately when companies go bankrupt or when their ships are arrested and sold, they do not go away but continue to trade with lower capital costs, thereby prolonging the depressed freight markets.
Furthermore, a majority of the fleets in most sectors trade in the spot markets without any period charter cover, in the false expectation that markets will recover or secondhand values will increase.
This, however, ignores the facts that shipyard capacity remains high and in countries such as South Korea and China has now become a strategic industry supported with domestic banks funding the construction period and government funds backing export credit.
All without any secure operating income from charters.
This rush to order new ships has been fuelled by an influx of new money, both equity and bonds from private equity and hedge funds that are gambling on ship v ... More>>