What lies ahead?

It does not appear we are out of the woods yet. Too many people forget
that these recession last longer than just a couple of years.

I just bought another house, but I don't expect to be able to sell
it for another 10 years. Yes, that is correct, in my opinion things will
be bad for another 8-10 years.

From the Journal of Commerce

Forecasting firm says all signs point to weakening economy

The U.S. is headed into new recession, Lakshman Achuthan of the Economic Cycle Research Institute, a forecasting firm known for accurately predicting turns in the business cycle, warned on Friday.

Achuthan sounded the warning in interviews on Bloomberg Radio and CNBC. He said ECRI’s forward-looking indicators provide an “overwhelming message” that an economic downturn is on the way.

"There is virtually nothing that can be done to avert what is going to happen," he said.

ECRI’s U.S. Long Leading Index, which forecasts economic shifts several months in advance, turned downward earlier this year, leading Achuthan to warn the mid-year downturn was more than a temporary blip.

That warning was confirmed by recent weakness in ECRI’s Weekly Leading Index, which signals shorter-term economic trends, fell to 121.9 this week, its lowest level since Sept. 3, 2010. The weekly index’s growth rate declined for the ninth straight week, falling to negative 7.2 percent.

One component of the Weekly Leading index is The Journal of Commerce-ECRI Industrial Price Index, which gauges industrial demand by measuring prices of 18 industrial commodities, some of which aren’t traded on exchanges.

The JOC-ECRI IPI has been on a steady decline since mid-April and fallen into negative territory over the last eight weeks, including an 8.5 percent slide last week.

“The vicious cycle is starting where lower sales, lower production, lower employment and lower income (leads) back to lower sales,” Achuthan told CNBC. He said "contagion in what is going on among those leading indicators. It's wildfire, it's recessionary, it is not reversible."

He said the best-case scenario is for a short recession, lasting about six months but ECRI has seen no indicators pointing to a turnaround yet.

He said the slowdown could affect exports, which have been a rare bright spot in the U.S. economy.

New Supertanker Mothballed

From Bloomberg News

A shipowner will mothball a newly built supertanker for the first time since the 1980s as a glut of the ships erodes earnings to an unprofitable $1,000 a day.

The tanker, capable of carrying 2 million barrels of crude, will be sent to a natural harbor in Malaysia, Arild Johannessen, an Oslo-based spokesman for Wilhelmsen Ship Management, which will oversee the deactivation, said by phone today. He declined to identify the ship because the details are private.

Earnings from this class of vessel, which carry about a fifth of the world’s oil, last week averaged $1,000 a day, according to Braemar Shipping Services Plc (BMS) in London, the U.K.’s second-largest publicly traded shipbroker. Some tankers were contracted speculatively and not secured against long-term charters, according to Holger Romer, spokesman for Hamburg, Germany-based Dr. Peters Group, owner of 19 supertankers.

“If you have a new ship that was ordered in ‘07 and ‘08, it was at a high price and now if you don’t have a charterer, it’s a big problem,” Romer said by phone. Dr. Peters Group owns 19 supertankers, he said.

The largest supertanker fleet in 29 years has cut earnings from the vessels by 96 percent since 2007 when they rose to a record $229,000 a day, according to data from Clarkson Research Services Ltd., a unit of Clarkson Plc, the world’s largest shipbroker.
Orders Surged

Owners ordered the most tankers in about three decades in 2007 and 2008, depressing freight rates to a 14-year low, as the fleet swelled almost three times faster than demand, Clarkson data show.

The last time new tankers were delivered straight from shipyards to anchorages, a process known in the industry as lay up, was in the 1980s, with owners sending the vessels to fjords in Norway, Eleusis Bay in Greece and the waters off Malaysia and Sri Lanka, Hong Kong-based Charles de Trenck at Transport Trackers, an adviser on shipping and trade flows, said today by e-mail.

Prices for new tankers have fallen 35 percent to about $100 million, according to EA Gibson, a London-based tanker broker. Those ordered in 2007 and 2008 require daily earnings of $55,000 to break even, the broker estimated in November.

Running costs, excluding fuel, are $10,645 a day, according to Moore Stephens International, a London accounting firm.
Cold Lay-Up

The mothballing is probably the first time in at least three decades that a new supertanker has been deactivated before trading, according to Halvor Ellefsen, a shipbroker at Galbraith’s Ltd. in London.

“More than anything else, it just shows how many ships there are,” said Ellefsen, who has been a broker since 1987. “Even if this happens on a meaningful scale, it’s hard to see it saving the tanker industry as ships that get laid up will just come back into the market when freight rates jump.”

The particular kind of mothballing for this ship is called cold lay-up, which involves anchoring the vessel in a protected area for a “long period of time,” and shutting all systems, with a minimum crew on board, according to Johannessen.

Warm lay-up means the ship can return to trading more quickly.

The supertanker, along with another of the same type already trading, will join another 15 ships already managed at anchor at Labuan, Malaysia, Johannessen said.

There are 152 supertankers contracted to be built at Asian shipyards, and 570 in the fleet trading today, according to Clarkson. A record 55 of the tankers, also known as very large crude carriers, began trading in 2010, and 41 have joined so far in 2011, Clarkson data show.

There was an overhang of 50 VLCCs, Jens Martin Jensen, chief executive officer of the management unit at Frontline Ltd., the largest supertanker operator, said on a conference call Aug. 26.

Fed Ex as "bellweather"

FedEx is considered a good indicator of how the economy is doing. It use
to be just the U.S. economy, but because they have become so big in the
global market, it appears they are also a good indicator for the entire
global economy.

This just reported.

"The U.S. and global economy grew at a slower rate than we anticipated during the quarter," said Chief Financial Officer Alan B. Graf. "While FedEx Ground and FedEx Freight achieved improved operating results despite lower than expected growth, the more rapid decline in demand for FedEx Express services, particularly from Asia, outpaced our ability to reduce operating costs."

Click here for rest of story from Journal of Commerce

Who will own Hapag-Lloyd?

TUI would really like to sell the rest of their stake in Hapag-Lloyd.

Problem is, once again the economy is not favorable, and their talks
with investors have gone nowhere.

I suspect that in Jan. 2012 the Albert Ballin consortium will end up with the rest of TUI's shares.

From The Journal Of Commerce

Report quotes majority shareholder saying clarity on ownership structure needed

Hapag-Lloyd is ruling out an initial public offering in the next 12 to 15 months, according to the German ocean carrier’s majority shareholder.

“As long as we don’t have clarity about the final ownership structure, an IPO is not going to come. I don’t see it in the next 12-15 months,” Karl Gernandt, CEO of Kuehne Holding, told the Financial Times. Kuehne is member of the Albert Ballin consortium that controls 61.6 percent of container ship operator.

German tourism group TUI holds the remaining 38 percent stake in Hapag-Lloyd, which it wants eventually to divest. It sold an 11.3 percent stake to the Albert Ballin investors in May.

Gernandt, chairman of Kuehne+Nagel, the Swiss global logistics group, said talks with Oman and Chinese investors about acquiring TUI’s remaining stake have fallen through. But there have been talks with several US private equity companies.

“Our discussions with potential investors are very difficult as there have been different interests … TUI wants to sell and some investors presented their ideas, but unfortunately it was not possible to realize a deal.”

TUI likely will exit Hapag-Llloyd through a private deal rather than an IPO, Gernandt said. TUI says it has three options for its stake: a trade sale, share floatation or exercising a put option to sell it to the Albert Ballin consortium in January 2012.

Hapag-Llody scrapped plans for an initial public offering in 2004, saying it coudn't get "fair value" for Germany's biggest container shipping line.

Maersk struggles to raise rates

Maersk is having difficulty to raise rates because of all of the new
ships coming in, increasing capacity.

They don't mention where all these new big vessels are coming
from, but at least some of them belong to Maersk.

This is their web-site about the new Triple E vessels.

From 27 June 2011

Today, at a signing ceremony in Tokyo, Japan, Maersk Line exercised its option with Korea’s Daewoo Shipbuilding & Marine Engineering Co., Ltd. to build an additional 10 Triple-E ships, the world’s largest and most efficient container vessels.

The event follows Maersk Line's order in February this year for 10 Triple-E vessels with two options - each for an additional 10 ships.

“I am very excited to have signed a contract with Daewoo for 10 more Triple-E ships. We now have twenty Triple-E on order. They underline our strong commitment to the Asia-Europe trade and fit well with our current ambitions and expectations for the future development of the trade. We believe the Triple-E ships with their record capacity and energy efficiency will enable us to deliver on the commercial and environmental expectations of our customers and also give us a significant competitive advantage in the market,” says Eivind Kolding, CEO of Maersk Line.

Maersk Line expects demand on the Asia to Europe trade to increase 5-8% per year during 2011-2015. By introducing the Triple-E vessels from 2013, Maersk Line will be able to meet the increasing demand as well as maintain its market share. The first 10 vessels will be delivered 2013 and 2014; the second 10 vessels are scheduled for delivery in 2014 and 2015.

And now, less than 3 months later, this appears in Bloomberg News

A.P. Moeller-Maersk A/S, the No. 1 container line, said it’s struggling to raise peak-season rates on the Asia-Europe shipping route, the world’s second-busiest, as an influx of new vessels leads to a glut in capacity.

The Danish company’s Maersk Line unit imposed a “pretty ok dividend” on most other routes, with the exception of Asia-North America, the busiest global flow, where expansion has been “very modest,” Chief Executive Officer Eivind Kolding said in London.

“Most of the new big ships actually go to northern Europe, so this is where you have the bigger problem,” the CEO said in an interview. “It’s difficult to make a decision to pull a lot of capacity, especially if hypothetically one line should decide to do it, then actually the rest of the market will benefit.”

Maersk has implemented rate increases on some Mediterranean routes since the start of the peak season, which began on Aug. 15 and runs until Nov. 30, Kolding said, and trade in emerging markets and some regional routes is showing “double digit” growth. Still, the CEO said he’s concerned that “nervousness” in financial markets could spill over into the wider economy.

“We have a much more mixed picture than in 2009, where we saw a collapse basically across the board,” he said. “We’re slightly concerned because we did see a good momentum of recovery, not a fast, but a fairly fast, recovery.”

Holiday Stockpiles

Europe usually imports more goods in the third quarter as shops stockpile for the Christmas and New Year holidays, a gain that may be curbed as retailers anticipate that concern about economies and jobs will hurt consumer spending.

For the moment, fleet utilization remains at more than 90 percent on Asia-Europe routes, matching the global average, Kolding said, giving shipping lines little incentive to slash capacity, especially with new vessels arriving later this year.

While growth in container volumes has slowed for four consecutive quarters, declines are nowhere near the 22 percent contractions seen in the first half of 2009. Only a drop of a similar magnitude will force all container lines to conclude that pulling capacity is the right strategy, he said.

The industry may lose $2.5 billion to $3 billion this year, according to Philip Damas, director of liner shipping and supply chains at Drewry Shipping Consultants Ltd. in London. Owners and operators lost $20 billion in 2009, when the global container trade contracted for the first time ever, Drewry says.

“People are definitely more concerned today than they were, say, around the end of June,” Kolding said. “We definitely hear some concerns from our retail customers as well. It’s Europe, North America and Japan that are negative. The rest of the world is doing very much more nicely.”

Kolding spoke Sept. 12 after Maersk said it will deploy 70 ships on the first guaranteed daily sailings between Europe and Asia in a bid to win market share as demand stutters. The Copenhagen-based company will also offer fixed cut-off times and a discount of at least $100 for delayed containers.

Maersk has deep pockets, and maybe the new "guaranteed daily sailings" will be
the trick that will put them at the top of the heap. Also, their new
ships are energy efficient, which certainly helps.

Ship Hijacking Continues

The hijacking of ships by Somalian pirates has become old news.

But that doesn't mean it's no longer a problem. In fact, it
is worse than ever.

Shipping companies finally gave up on expecting to be protected
by the various Navies, and put armed guards on their ships. Now
they are asking the UN to provide the armed guards. I doubt the
UN will do this, and shipping companies will just have to accept
that putting armed guards on their ships is required for sailing
in the Indian Ocean.


From the Journal of Commerce

Associations liken the Indian Ocean to the Wild West

Four international shipping associations, representing most of the world's maritime industry, called for the creation of a United Nation armed force to tackle the worsening piracy crisis in the Indian Ocean.

The Indian Ocean resembles "the Wild West,” 
stated a letter to UN Secretary-General Ban Ki-moon from the International Chamber of Shipping, the Baltic and International Maritime Council, INTERTANKO and INTERCARGO.

“It has become abundantly clear to shipping companies that the current situation, whereby control of the Indian Ocean has been ceded to pirates, requires a bold new strategy. To be candid, the current approach is not working,” the letter stated.

There were 36 percent more international pirate attacks in the first half of 2011 compared to the same period in 2010, but Somali pirates’ hijacking success has fallen, according to the International Maritime Bureau’s Piracy Reporting Centre. Somali pirates currently hold 16 vessels and 301 hostages.

The four shipping industry organizations, which together represent more than 90 percent of the world merchant fleet, say they support the UN's long-term measures on shore aimed at helping the Somali people but are concerned that these "may take years, if not decades, to have a meaningful impact on piracy."



While they expressed regret about the need to post armed guards aboard ships, the four organizations asked the UN to bring the concept of a UN force of armed military guards to the attention of its Security Council.

“We believe that an important element in this approach would be the establishment of a UN force of armed military guards that can be deployed in small numbers onboard merchant ships,” the letter said.

The associations said such a UN force would help stabilize the situation and restrict the growth of unregulated, privately contracted armed security personnel. The force would also allow those UN member states lacking maritime forces, including those in the region most immediately affected, to make a meaningful contribution in the area of counter-piracy.


Bad News for CMA CGM

I saw a headline the other day touting how well CMA CGM is doing...but I
thought that might just be a P.R. move.

It probably was.

This is what Bloomberhttp://www.blogger.com/img/blank.gifg News reports

Bonds and derivatives tied to CMA CGM SA, the third-largest container line, are signaling that the company has a nine in 10 chance of defaulting as the slowing global recovery pushes freight rates to about zero.

Penalized by the U.S. last month for breaching trade sanctions with Iran, Cuba and Sudan, CMA CGM has seen the price of its $475 million of 8.5 percent notes due 2017 plunge to 47.25 cents on the dollar since they were sold April 14, Bloomberg Bond Trader prices show. Credit-default swap prices signal a 90 percent probability of the Marseille-based company being unable to meet its obligations within five years.

Freight charges collapsed on the Asia-to-Europe lines, the world’s second-busiest route, as a capacity glut combines with the slowest growth in trade since 2009. Rates excluding fuel surcharges were “practically” zero in July and little changed last month, the worst run ever, according to Menno Sanderse, an analyst at Morgan Stanley in London.

“Shipping and logistics is a pretty beat-up sector,” said Louis Gargour, who owns the bonds as the chief investment officer at LNG Capital LLP, a London-based hedge fund he co- founded in 2006. “The good side is everybody I know is very interested in this company at 50 cents on the dollar, although it’s a gamble.”

CMA CGM was founded by Jacques Saade in 1978 after he fled to France from Lebanon’s civil war. It employs more than 17,200 people and runs a fleet of 394 vessels, according to its website. The company grew from five employees and a rented boat into a global operator, ranking behind Copenhagen-based A.P. Moeller-Maersk A/S and Mediterranean Shipping Co. SA in Geneva.

Debt, Earnings

The company posted an 8 percent increase in first-half sales to $7.3 billion and had $675 million of cash at the end of July, according to a statement on its website. CMA CGM said it had $5.3 billion of net debt at the end of June and recorded $685 million of earnings before interest, tax, depreciation and amortization in the first half of the year.

That means debt is more than three times Ebitda, compared with a ratio of about less than one time at Maersk, according to that company’s earnings report on Aug. 17.

CMA CGM also issued 325 million euros ($459 million) of 8.875 percent bonds maturing in 2019 in April, which were quoted at 49 percent of face value, Bloomberg Bond Trader prices show.

Default swaps on the company’s debt cost 4.8 million euros upfront and 500,000 euros annually to insure 10 million euros of debt for five years, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. The contracts have risen from 800,000 euros upfront on June 6.

Bonds ‘Whipsawed’

“We are surprised to see the value of the debt drop so much,” said Michel Sirat, the container line’s chief financial officer based in Marseille. “Our bonds are whipsawed because of prevalent fears in financial markets and questions about our liquidity, but we have a strong cash position and are fully compliant with our debt covenants.”

The drop in its bonds prompted the company to issue a statement on Aug. 3, saying it’s taking the “poor performance very seriously,” and that it doesn’t plan major new investments this year and next.

CMA CGM is rated B+ by Standard & Poor’s, which said in a May report that the company’s rankings are constrained by its “high operating risk in the cyclical, capital-intensive, and competitive container-shipping industry.”
Covenants Breached

The container line has about $4 billion of loans, according to data compiled by Bloomberg. Covenants on most of its borrowings were breached in 2009 after a slump in world trade amid the deepest financial crisis since the 1930s.

CMA CGM received $500 million from Turkish family-owned company Yildirim in November in return for a 20 percent stake as it sought to restructure about $5 billion of debt. In May, Yildirim agreed to buy 50 percent of Malta Freeport Terminals from CMA CGM for 200 million euros.

Analysts are increasingly bearish on what slowing trade growth means for shipping company earnings. Maersk, the world’s biggest container-shipping line, will report a 25 percent slump in net income to 19.71 billion kroner ($3.8 billion) this year, the mean of 16 estimates compiled by Bloomberg shows.

The industry may lose $2.5 billion to $3 billion this year, said Philip Damas, director of liner shipping and supply chains at Drewry Shipping Consultants Ltd. in London. Owners and operators lost $20 billion in 2009, when the global container trade contracted for the first time ever, he said.

‘Risk of Default’

“A lot of companies run the risk of default if freight rates remain at such a low level,” said Jacob Pedersen, an analyst at Sydbank A/S, Denmark’s third-largest publicly traded lender. “Companies have been taken by surprise this quarter because just a few months ago they were all sure there would be a lack of capacity and that would be positive for freight rates.”

Risk aversion has wiped out $5 trillion of global equity market value since July and brought high-yield bond sales to a halt. A Labor Department report on Sept. 2 showed the world’s largest economy added no jobs last month while a contraction in European manufacturing and plunging business and consumer confidence suggest the slowdown in growth may continue into the third quarter, members of the so-called shadow European Central Bank council said last week.

Sanctions Violated

Confidence in CMA CGM was also dented after the company’s U.S. unit paid a $374,400 settlement to the Department of Treasury’s Office of Foreign Assets Control last month following allegations it violated sanctions in exporting goods to Sudan and accepted payments for shipping services in connection with Cuba and Iran.

The alleged violations of sanction programs took place between December 2004 and April 2008 and there was no finding of fault, according to a company statement.

CMA CGM’S MV Victoria container ship was seized by the Israeli Navy after the shipper of three containers falsely described cargo contents as lentils when in fact they contained weapons, the company said on June 1. An Iranian company used one of its vessels to illegally transport arms to Lagos after labeling them as “packages of glass wool and pallets of stone,” the company said in October.

CMA CGM isn’t alone in dealing with maritime disputes. China Cosco Holdings Co., the state-controlled sea-cargo group, had at least three vessels arrested in the past two months as shipowners sought overdue payments, according to court filings in the U.S. and Singapore.

CMA CGM is counting on routes to emerging markets such as Latin America and Russia to drive growth as Europe stands on the brink of another recession. The company held a conference call with more than 150 bond investors on Aug. 31 to allay their concern about the company’s financial position, Sirat said.

“We see strong trades in Latin America, Russia, the Black Sea region and India, bringing in new avenues for growth besides the traditional routes of Asia to Europe and Asia to the U.S.,” Sirat said. “I hope our bond prices will recover after we explained our position to bondholders, because we intend to continue to access the bond market.”

To contact the reporter on this story: Patricia Kuo in London at pkuo2@bloomberg.net David Goodman in London at dgoodman28@bloomberg.net

To contact the editors responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net; Faris Khan at fkhan33@bloomberg.net

CSAV looking for money

The Journal of Commerce details some of the problems
CSAV is experiencing.

This is one of the carriers I thought would go under a couple
of years ago. I don't want to say now if they will or won't.

Time will tell.

From the JOC

Financially ailing CSAV says it will seek a $1.2 billion capital injection in October after the Chilean ocean carrier sank deeper into the red in the second quarter.

CSAV blamed lower freight rates on most routes and high oil prices as it swung to a $333 million second quarter loss from a $69 million profit a year earlier. This bloated the first half loss to $525 million against a $30.4 million profit in 2010's first half. Revenue in the first six months rose to $2.95 billion from $2.48 billion.

CSAV, which forecast a “very significant” full-year loss, also is seeking a strategic ocean carrier partner.

The carrier will seek approval for a $1.2 billion share issue at an extraordinary shareholders meeting in Santiago on Oct. 5. Two large shareholders, Quinenco de los Luksic (18 percent) and Marinsa (20.2 percent) agreed to provide additional credit of $350 million through the end of the year. Quinenco will subscribe to $1 billion of new stock and Marinsa will buy another $100 million.

CSAV has been pruning its services in recent months to stem mounting losses and has struck vessel-sharing agreement with rival carriers including Geneva-based Mediterranean Shipping Co. and France’s CMA CGM.

The carrier cut its charter fleet by 100,000 20-foot equivalent units up to the end of August, according to industry analyst Alphaliner.

CSAV received a cash bailout of $770 million in 2009 from German shipowners that acquired a minority stake in the company in exchange for lower charter rates.

Carriers in financial trouble

When the global recession hit a couple of years ago I predicted a lot
of carriers would go out of business.

I was wrong. Some of them were saved by government intervention,
as was Hapag-Lloyd by the German government. Others were saved
by banks or various investors.

Once again shipping companies are in trouble. I hesitate to make
predictions this time around, but here is a little bit of
what is going on.

From Lloyd's List

CSAV seeks partner as losses soar

Monday 05 September 2011, 13:36

STRUGGLING Chilean container line CSAV is actively looking for a strategic partner and has already held talks with other leading carriers as it takes action to stem mounting losses.

The rest is available to paid subscribers.


As for Hapag-Lloyd, this was published in the Journal of Commerce on Aug. 11

Weak rates, fuel costs hit German carrier's second quarter results

Hapag-Lloyd’s second quarter profit tumbled to 26 million euros ($37 million) from $294 million in the second quarter of 2010 as declining rates and higher fuel costs offset a 3.3 percent increase in container volume.

The German container line said its results also were affected by soft demand for transport services in Japan following the March earthquake and tsunami, and the dollar’s weakness against the euro. Revenue for the quarter totaled $2.1 billion, down 9 percent after conversion into euros.

Hapag-Lloyd said it expects continued growth for container shipping in the medium to long term but “short-term results will be influenced by high crude oil prices and pressure on freight rates as a result of tougher competition, particularly in the Asia-related trades.”

Hapag-Lloyd’s average freight rate fell to $1,531 per 20-foot-equivalent unit from $1,563 in the first quarter. For the year’s first half, a 4.4 percent increase in average rates to $1,546 was offset by bunker costs that surged from $480 per metric ton in January to more than $630 in June.

Container volume rose 3.3 percent to 2.5 million TEUs. Regional totals included the North Atlantic, 582,000 TEUs, up 1.5 percent; Latin America, 559,000 TEUs, up 7 percent; the Far East, 549,000 TEUs, down 2.6 percent; the trans-Pacific, 560,000 TEUs, up 8.3 percent; and Australasia, 284,000 TEUs, up 2.9 percent.

For the first half of the year, earnings before interest and tax totaled $60 million, down 80 percent from $310 million in the first half of 2010.

TUI, the German tourism group that is Hapag-Lloyd’s largest shareholder, said its quarterly loss widened to $56.4 million from a loss from $17 million a year earlier because of unrest in North Africa, foreign exchange effects and high fuel prices.

TUI has been trying to sell its stake in Hapag-Loyd. A plan for a public listing of the container line was postponed earlier this year.

There are mixed reports as to the strength of international container transport.

The next 6 months will be very crucial for many companies in this business.

Know the Regulations

Gibson Guitar, a U.S. maker of famous guitars, has been raided twice.
The U.S. government thinks Gibson has broken laws meant to
protect endangered woods.

My first reaction as a U.S. taxpayer is, "is this any way to spend
our tax dollars"?

My second response is "as either an importer or an exporter, be sure
you know all of the regulations, and follow them closely, checking
and rechecking. Be sure to double check the paperwork BEFORE
a shipment is made."

From Wallstreet News

Gibson Guitar Corp., a big user of ebony and other scarce woods, for years has allied itself with Greenpeace and other environmental groups to show it was serious about preserving forests.

That didn't stop the Nashville-based company, whose guitars are used by such musicians as B.B. King and Angus Young of AC/DC, from running afoul of U.S. authorities over allegedly illegal imports of wood. Though no charges have been filed, Gibson factories have been raided twice, most recently last week, by federal agents who say ebony exported from India to Gibson was "fraudulently" labeled to conceal a contravention of Indian export law.

Federal agents with the U.S. Fish & Wildlife Service shut down the Gibson Guitar factory in Memphis Aug. 24 to serve search warrants.

Henry Juszkiewicz, chief executive officer of the closely held company, said in an interview that a broker probably made a mistake in labeling the goods but that the sale was legal and approved by Indian authorities.

Gibson's predicament, which raises concerns for musical instrument makers and other importers of wood, illustrates the pitfalls of complying with U.S. law while dealing with middlemen in faraway countries whose legal systems can be murky.

The law ensnaring Gibson is the Lacey Act of 1900, originally passed to regulate trade in bird feathers used for hats and amended in 2008 to cover wood and other plant products. It requires companies to make detailed disclosures about wood imports and bars the purchase of goods exported in violation of a foreign country's laws.

Leonard Krause, a consultant in Eugene, Ore., who advises companies on complying with the Lacey Act, is telling clients they should hire lawyers in countries where they obtain products. "How many people know the statutes in India?" Mr. Krause said. "The net effect is that it raises everybody's cost of doing business."

Federal agents first raided Gibson factories in November 2009 and were back again Aug. 24, seizing guitars, wood and electronic records. Gene Nix, a wood product engineer at Gibson, was questioned by agents after the first raid and told he could face five years in jail.

"Can you imagine a federal agent saying, 'You're going to jail for five years' and what you do is sort wood in the factory?" said Mr. Juszkiewicz, recounting the incident. "I think that's way over the top." Gibson employees, he said, are being "treated like drug criminals."

Mr. Nix hasn't been accused of any wrongdoing. He couldn't be reached for comment.

Gibson models include Les Paul and the Flying V. Above, testing and tuning in the Memphis, Tenn., factory.

A Justice Department spokesman declined comment. While Justice Department officials pursue what they say is a possible criminal case against Gibson, they and the company are battling in federal district court in Nashville over whether materials seized in the 2009 raid should be returned to Gibson. That civil fight provides indications of the case the government is trying to make against Gibson.

Mr. Nix went to Madagascar in June 2008 on a trip organized by environmental groups to talk to local officials about selling responsibly harvested wood to makers of musical instruments. Afterward, in emails later seized by the government, he referred to "widespread corruption and theft of valuable woods" and the possibility of buying ebony and rosewood from Madagascar on "the grey market."

In a June 4 court filing, Jerry Martin, U.S. Attorney for central Tennessee, quoted the emails, and said "Nix knew that the grey market meant purchasing contraband."

Gibson has denied the allegation and said Mr. Nix's emails were quoted out of context.

The government has focused on a March 2009 shipment of ebony from Madagascar intended for guitar fingerboards. Madagascar law bars the export of certain unfinished wood products, according to both Gibson and the government. Gibson says the ebony had been cut into pieces and that local officials approved the export as a legal sale of finished goods.

U.S. officials described the wood as "sawn timber" and said Madagascar officials were "defrauded" by a local exporter about the nature of the product.

Gibson says the government is trying to "second guess" the Madagascar government. "The U.S. government's startling position smacks of something from an Orwell novel," Gibson said in a July 15 court filing in federal district court in Nashville.

After the 2009 raid, Gibson stopped buying wood from Madagascar. Gibson continued to use suppliers in India for ebony and rosewood.

As for last week's raid, the government said it had evidence that Indian ebony was "fraudulently" labeled in an attempt to evade an Indian ban on exports of unfinished wood.

"It is very possible that a broker made the mistake in filling out a form," Mr. Juszkiewicz said. Gibson says the ebony was partially finished for use as fingerboards and that Indian officials have endorsed such exports as legal. A spokesman for India's commerce ministry had no immediate comment.

After the 2009 raid, Mr. Juszkiewicz resigned from the board of the Rainforest Alliance, which seeks to preserve tropical forests. He said he didn't want to tar the nonprofit with bad publicity. A Rainforest Alliance spokeswoman said he wasn't pressured to step down, and the group continues to praise Gibson's efforts to promote responsible harvesting of wood.

Scott Paul, a Greenpeace official in New York responsible for forestry issues, said Gibson for years has done "great work" to promote better forestry practices. The question, he said, is whether Gibson did everything possible to avoid buying wood from dubious sources. "We have no idea," he said.
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