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Thursday, October 18, 2012

Shipping News – and a bit more

 

 

I spoke with a fellow who owns vessels and happens to be be Greek. Some of the business and social/economic threads of our conversation:

He discussed (with some obvious anger) a poor investment he had made two years ago. He purchased a ship for $6Mn. This was a 28 year old vessel (that still had some life) that fell into the (aptly named) category of “Handy Sized” vessels. In the good times (2000-2005), this ship might have gotten charters that earned $15,000 a day versus fixed costs of $8-10K. At that rate the cost of the vessel would be returned in about four years (includes down time and  deadheading). Not a bad deal.

It didn’t work out. Cargoes for this vessel now pay a rate that no longer cover fixed costs. Layup times between cargoes has increased. Insurance companies charge more to cover shipments in older vessels; so this ship is shunned for newer ones. The final straw is that the ship needed repairs. A layup of three months, and another $1mn down a rat hole was necessary.

He cut his loss. The ship went from Singapore to India on its final voyage. There, it was run aground and chipped into pieces for scrap steel. In a month or two the ship will be converted to re-bar.

If you put this ship on a scale (empty) it would weigh 6,500 tonnes. All of this (nearly) is steel. The going rate for scrap steel is $425 a tonne; so he got $2.8Mn back on his original investment.

 

I bring this up as an example of how excess capacity is being worked off in commercial shipping. The story he told is being repeated daily. His loss on this ship is part of the healing process.

The good news is that freight rates are up a bit, and longer-term contracts are being written for vessels that are under twelve years old.

The bad news is that he doesn’t expect the recent improvement to last. There are more and more ships coming to market, and there are not enough cargoes to fill them all up. He reckons another down tick by June of next year.

He discussed China’s role in the shipping industry. It is the stated goal of the Chinese government to own 70% of the vessels that carry Chinese imports/exports. Today, that number is closer to 20%. This implies a huge transition in the ownership structure of the global shipping industry. It means that China, at one point, will have tremendous pricing power over global shipping costs.

China has purchased some vessels in the secondary market to achieve its goals, but the country’s strategy is to build its own vessels. This will keep the steel mills and shipyards humming. It supports dozens of other industries that provide components. Financing is available from the banks. Insurance is provided by Chinese companies that favors the Chinese vessels. Chinese crews (non-union) are much cheaper than crews from Greece.

He said that this was playing out in slow motion. It will be another decade before the Chinese economic hegemony in shipping is really felt. He also said that the trend toward Chinese dominance was irreversible, and that there would be casualties. Think of a steady stream of rusty old ships headed for the scrap-yards of India. Each one means China gets stronger.

Note: The USA is not a factor in global shipping. US flagged dry cargo ships exist because they primarily carry A.I.D. cargoes of grain. Without this subsidy, the country would have next to no fleet at all.

 

++

 

We talked about Greece. The country is grinding to a halt. He described the situation in rural areas that have been very hard hit. The social infrastructure is falling apart. The young people are leaving the islands looking for work. The old people are left. There is no money to pay bills.

Greeks with ties to these communities, who now live outside of the country, are aware of the hardships. They have been providing a steady stream of assistance. A family from London will pay the heating bill for the old age home. Another, from NY, will see that the soup kitchens have food to prepare and serve. Someone in Australia will pay to keep the clinic going. Without this uncoordinated support system, people would be cold, sick and hungry.

He reminded me that the Greek people are very proud. They will accept assistance, but they will not beg. Relying on ex-Greek nationals for essentials is not sustainable. But there is no alternative in sight. Not a pretty picture at all.

 

 

 

 

Comments

  1. “He reminded me that the Greek people are very proud. They will accept assistance, but they will not beg.”

    Oh please. The Greeks have many fine qualities but pride and stoicism are not among those. To the (limited) extent that any such sweeping characterisation is valid, the Greeks are shrill leechers who have always gotten by on their wits. Resourceful? Yes. Proud? Not so much…

    • Try saying that in Greece and see what happens.

      • The Greeks are great people, they just were used as the pawn on fhe currency and debt chess board..

        They like everyone else took the cheese that was laid out there by the German, American and European banks…

        It’s kind of interesting that Ireland and Greece, the countries that were backbones for thinking and democracy are now flat broke…

  2. You may have read this book already . . . if not, maybe worth taking a look:

    The Outlaw Sea (Chaos and Crime on the World’s Oceans) by William Langewiesche.

  3. Conscience of a Conservative says:

    Spoke to a co-worker about Chinese ship building. The leadership of the country wants to build ships and it doesn’t care if they get built at a loss. They want dominance in shipping to overtake the South Koreans and others and don’t care how much money they lose in the short term in achieving that goal.

  4. Interesting info.

    Wish i could figure out all the implications of it. Seems that there will be a lot of them.

    • Conscience of a Conservative says:

      I think it’s all about controlling the price where one’s goods are sold at.

      • Conscience of a Conservative says:

        Also ships sell for a pretty penny. Under price the competition , put them out of business and then sell the product later on for a higher price. Ships are high price goods that greatly contribute to GDP

  5. Building ships at a loss is probably still a better plan than buying UST at a loss, long term.

  6. The poor conditions for the habitants of the greek isles speaks volumes to why they should leave the EURO completely. The welfare state of greece has shown us that public debt spending discourages economic sustainability. Exports eventually have to pay for imports, which was the topic of my blog this week: http://sevnty3stingray.blogspot.com/2012/10/44-billion-month-united-states-trade.html

  7. America is technology independent thanks to our resourcefulness. We need to take that technology and apply it more than we do already to the food and energy industries so that we become independent there too. Then the Chinese can build as many ships as they want, but the US only needs so many China dolls (and maybe a few rare earth minerals). Looks like we have 10 years to get it together.
    Greeks are proud in their minds only. I don’t think the rest of the Eurozone shares the same sentiment.

  8. Is Hutchinson Whampoa Ltd. still operating the Panama Canal? How long before Chinese vessels get priority passage?

  9. Sorry, to ruin your article, but EVEN TODAY there are certain type of ships, that can be bought today and make 10-15%.

    There are 100′s of ship-owners but very few where running their fleet conservative before 2008…
    in order to make a descend living during this down turn.

    I hope that your friend made only a small bet couple years ago…but still has a few bucks remaining on the side…if he was conservative or lucky…!!!

    As far as the Chinese, YES they want to be #1…are they going to accomplish it…NO but it will take a lot of time and lost funds to find out…(i.e. check out what happened to the Germans that wanted to do the same).

    Bruce I really enjoy your site, but Shipping is a little bit different story.

  10. Gee, China sounds like America 100 to 150 years ago, with Britain and much of Europe griping about America then. Patent and copyright infraction, low cost base, can-do mentality, manufacturing powerhouse etc.
    The big difference is that North Americans won’t be emigrating to China.

  11. matthew rambusch says:

    I need some good gold stocks that are around 3 to 4 dollars a share

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