China Raises Ship-Scrapping Subsidy 50% to Trim Overcapacity
By Jasmine WangDec 10, 2013 3:35 AM ET
Photographer: Qilai Shen/Bloomberg
Shipyard workers sweep the ground at an assembly area at the Dalian shipyard in Dalian,... Read More
China, the world’s biggest
shipbuilding nation, will increase cash subsidies for scrapping
obsolete ships by 50 percent to help cut overcapacity and
emissions.
The government will grant 1,500 yuan ($247) per gross ton
for shipping companies to replace obsolete ships, according to a
statement on the transport ministry website yesterday. The award
applies to vessels scrapped in the years 2013 through 2015.
Chinese shipbuilders also stand to benefit from the
subsidy, half of which is awarded only after replacement orders
are placed. China Rongsheng Heavy Industries Group Holdings (1101), the
nation’s biggest shipyard outside state control, rose 8.9
percent to close at HK$1.22 in Hong Kong. China Shipping
Development Co. (1138), a Shanghai-based commodities shipping company,
gained 0.9 percent to HK$5.35. The city’s benchmark Hang Seng
Index fell 0.3 percent today.
“The program will be positive for the shipbuilding sector
in the long term,” said Lawrence Li, a Shanghai-based analyst
at UOB Kay-Hian Holdings Ltd. “In the near term, it may not be
material for the shipping industry, as the incentive is not
attractive enough and many cash-strapped shipping firms may not
be able to place new orders amid a bad market.”
New Orders
Under the new program, ship operators get half the money
upon completing scrapping and the rest after placing new
building orders, according to the statement. By comparison,
under a 2010 rule, they had to complete scrapping and place new
ship orders before getting any of the subsidy.
The program is “somewhat disappointing” as it didn’t
lower the age requirement for ships that can be scrapped, which
means less tonnage is eligible, according to a note published
today by Credit Suisse Group AG analysts led by Davin Wu.
The Baltic Dry Index (BDIY), the benchmark for commodity-moving
rates, has slumped 41 percent in the past four years. The
monthly index that tracks prices for all types of vessels
dropped 31 percent in November from its peak in September 2008,
when the global financial crisis caused orders to slump,
according to Clarkson Plc, the world’s biggest shipbroker.
To contact the reporter on this story:
Jasmine Wang in Hong Kong at
jwang513@bloomberg.net
To contact the editor responsible for this story:
Vipin V. Nair at
vnair12@bloomberg.net
Up until now, those involved in owning ships have been individuals or families,
mainly in Europe.
The world is changing, and private equity funds in the U.S. have decided
now is a good time to start buying ships, especially tankers.
There is a lengthy article in Bloomberg, highlighting this, as well
as how the demand for oil and oil products will change, due to
refineries being built in China, and the waning of the European and
U.S. economies.
As I have stated before, the U.S. economy will soon be overtaken (if not
already) by China and India.
From Bloomberg
Billionaire Wilbur Ross is betting that the slump in shipping which drove oil-tanker returns to a 14-year low and rates for commodity carriers to the cheapest in a decade is ending.
The 73-year-old, whose New York-based WL Ross & Co. manages about $10 billion in assets, is part of a group spending $900 million on 30 ships hauling gasoline, diesel and other refined products. It is Ross’s first shipping investment and deploying “another few hundred million” in the industry “is certainly easy to do,” he said in interviews on Aug. 5 and Aug. 12.
That outlook contrasts with the pessimism of John Fredriksen, the founder of Frontline Ltd., the biggest operator of the largest crude carriers. The 67-year-old billionaire said in May it would probably be another year or two before ship values collapse and he can start adding to his fleet.
“The history of the industry is one that goes from immense prosperity to immense poverty and back again, and we think that’s going to continue,” Ross said by telephone. “We’re not necessarily at the exact bottom of the cycle, but we think we are relatively close to it.
Demand for shipping will strengthen because new refineries are being built in China and India, increasing the distance that vessels have to travel to deliver crude and pick up refined-oil products, Ross said. That will compensate for a “lackluster” U.S. economy, Europe “in much the same condition” and “very modest” growth in Japan, he said.
Question-What was going on with the Baltic Dry Index this summer? It kept rising monthly all the way through to Nov. and is now falling like a rock?
I remember when it went up dramatically. I thought it was a bit crazy, but didn't say anything. It was when China was stocking up on commodities.
Honestly, I am getting a little concerned about the integrity of the BDI in general. It's a bit of an art, getting comparable rates, as there can be so many variables.
Anyway, I started to do some research, and ran across this in the blog section of Lloyd's List (which is free).
A two-day conference on dry bulk shipping was almost entirely dominated the topic of how much iron ore would China import next year. With China’s huge spike in iron ore demand this year seen as almost entirely responsible for the unexpected recovery in dry bulk shipping rates, the hope is the country’s appetite for iron ore will continue to grow to keep the industry buoyant.
click here for link to complete article. It's worth the read.
Some of the other dry-bulk carriers have been saying things are picking up. And maybe they are, considering how bad it got.
However, the biggest one, Cosco, expects 2009 will be bad as a whole.
China Cosco is in talks to delay or cancel orders for new vessels as it anticipates a 44 percent drop in dry-bulk traffic this year
The Baltic Dry Index, a measure of commodity-shipping rates, tumbled 80 percent in the year ended March as China pared iron-ore imports and new vessels entered service.
I've been questioning the financial viability of DryShips for quite some time now, so I do not find any of this information surprising.
In a research note moving DryShips to ‘Sell’, an analyst at Dahlman Rose said that on a charter-free basis, DryShips’ current loan-to-value was beyond 100%.
DRYSHIPS’ ... admitted that $752m of its debt was in breach of covenants with two of its leading banks.
In addition, the George Economou led company was “in communication” regarding breach of loan covenants with a third lender holding $650m of debt.
The disclosure, along with news that three bulker sales the company negotiated last year have unravelled, was contained in a new shelf registration with market regulators to cover the possible issue of up to $500m in new shares.
In a similar exercise launched last November, DryShips filed for 25m shares but although most of the offering was sold its proceeds amounted to $167m rather than the $500m initially expected.
and DryShips is also having some problems with a dispute regarding a cancellation of a ship purchase
GEORGE Economou’s DryShips has been given extra time by a US district judge to present its side of the story in a maritime attachment dispute involving Canadian shipowner Fednav.
Fednav brought a Rule B attachment complaint in New York two weeks ago, naming DryShips associate Kerkyra Traders as the main defendant.
Fednav’s complaint, had it been granted on an ex parte basis, would have allowed it to attach DryShips assets in the US without informing DryShips.
However, Judge Leonard Sand of the US District Court for the Southern District of New York said in an order dated January 22, that “this question is too close to be resolved based only upon ex parte submissions by plaintiff”.
Lloyds List reports DryShips has cancelled orders for ships. However, I think the more interesting news is they have suspended their dividend payments (which is why most people bought this stock), and also announced a substantial loss in the 4th quarter of 2008. Wonder what this will do to their total 2008 performance.
... the company has suspended dividend payments on its common stock, beginning with the last quarter of 2008, in a bid to retain capital.
The “corrective measures”, as the company termed them, were revealed as DryShips also disclosed it expects to make a substantial loss for the last quarter of last year.
Though preliminary and unaudited, the company said it expects to post a net loss of between $380m and $431m after provisions to cancel ships, including a previously announced disposal of four panamaxes, as well as $177m in unrealised interest rate swap losses.
There is more gobbledygook in the article about how the monies for cancellations will be handled. What is really worrisome is they might issue more stocks to pay for the cancellations.
The company said the cancellation fee for that deal would include 6.5m shares issued to “entities unaffiliated with the company nominated by third-party sellers which will be subject to a six month lock-up period”.
Entities controlled by Mr Economou will only get 3.5m “out of the money” warrants, each entitling the holder to purchase one DryShips share.
It is understood that these will vest in three tranches over 18 months with strike prices of $20-$30 per share.
“In each transaction, counterparts are willing to take either some or all of their consideration in the form of DryShips equity securities,” said Mr Economou. “We believe these transactions enhance shareholder value, as the value recaptured from the cancelled transactions is dramatically higher than the consideration to be delivered by us for the cancellation.”
For the other three capesize disposals, about $36m in deposits would be forfeited, as well as $30m paid to an undisclosed buyer. Two further tranches of $25m may be paid in cash or by issuing 2.6m shares, the company said.
I need to look at the pictures, but I would guess that Mr. Economou's nose grows with each one of these announcements.
I've been harping about how bad it is and will be for dry bulk carriers, but the stock prices have gone up, which made start to wonder if I was correct.
“ANAEMIC” demand will see dry bulk spot rates only rise slightly above break-even levels in the first half of 2009, according to US investment bank Oppenheimer & Co which has downgraded forecasts for the troubled sector
.
Mr Burk also said bankruptcy risks were greater in the dry bulk sector with the potential for listed dry bulk companies to face charter renegotiations and the “violation of collateral coverage loan agreements”.
“Management teams on the dry bulk side may begin considering the potential implications of one or two years of day rates at cash break-even levels,” he said, urging them to cancel or delay newbuilding orders and repay debt if possible.
He cited anecdotal evidence that between 100-200 larger bulk carriers were currently anchored without employment, and a further 500 smaller ships also idle and awaiting better charter rates.
Maybe we can retrain the Somali Pirates from capturing ships for ransom, to maintaining them during lay-ups.
The Baltic Dry Index (BDI) closed at 774 on Dec. 24th. I expect this will be the last figure for the year. This is bad, but it was worse in early Dec., somewhere around 660 if I remember correctly.
I think I read when it went below 800, that was the lowest since 1986, but I can't find stats to back that up.
Well, ships are being layed up, and probably the owners are realizing maybe nothing really is better than something, especially if they have to pay extra P & I (insurance) premiums for all the pirate business in the Gulf of Aden.
I expect it will be quite bad through 2009, but I really think this is probably the bottom, as far as the BDI goes. That doesn't mean carriers are making money at these rates. I'm quite sure they are not. That's why I expect this to be the bottom for the BDI.
Oh, and I completely forgot about the forward contracts (FFA). I don't know if anyone has the guts to get involved in these right now, unless they are already holding futures.
For one thing, many of the recent ship charters have been done on a spot or trip basis, at totally undervalued prices.
Ship owners are doing this with the theory that some cash is better than laying up the ships or having them sit idle. I even saw one comment that it was good for the crews to keep busy.
The Wall Street Journal had an article recently, stating that many of the indexes for the sale prices of homes in the U.S. were not including home sale prices for those sold due to foreclosure.
Perhaps the Baltic Exchange needs to consider "throwing out" some of these really cheap charter rates which do not really reflect what a normal charter rate would be.
The market has really been in a mess lately with people defaulting on contracts.
I discussed the problem with the freight forward contracts earlier this week.
Lloyd's List has a very good article today, mainly quoting Philippe Louis-Dreyfus, chairman of the European Community Shipowners’ Association, discussing these problems.
There has been a general loss of confidence in the markets, both economically and in counterparties,” Mr Louis-Dreyfus said. “It strikes me that we see more and more companies in shipping, and their clients, both talking about it and doing it: not sticking to their commitments.”
Plummeting rates, which in some cases have fallen more than 90%, were no excuse to walk away, he said.
“Some companies are claiming it is force majeure. That’s not force majeure, it’s business.”
I love that comment.
That’s not force majeure, it’s business.
I think that would be a good title for a college course.
The Baltic Exchange Forward Freight Agreements (FFA) are futures.
But,this is an unregulated market, so they are not really traded, just agreements between parties.
There have been lots of problems as people were not fulfilling their contracts. Why not, you ask?
Well, as far as I know, they aren't required to put up money or collateral. The motto of the Baltic Exchange is "Our word Our Bond".
Now, I am not sure about the futures, but the Baltic Dry Index (an average of actual charter rates) dropped about 90% over the last 5 months. That's right folks, 90 percent! One week you are getting $100,000 per day charter on a ship, and 5 months later you are lucky to get $10,000 per day for the same ship.
Talk about a bubble bursting.
There was a meeting last month, organized by one of the brokers who deals in the FFA's. Everyone was to come together, show their cards, convince the ship owners (or whomever they owed money to) that they were serious players. Ok, maybe they were having a little cash flow problem at the time... but they are serious players in the crazy world of international shipping.
Anyway, the minutes of the meeting have been posted for everyone to see. The press was barred from the meetings, so there's not much other information available.
I thought the minutes were only for members of the Baltic Exchange, but, apparently not.
It's pretty boring, but here it is if you are interested.
Baltic Exchange members are at the heart of world trade, arranging for the ocean transportation of industrial bulk commodities from producer to end user. The bulk freight market relies on the co-operation of shipbrokers, shipowners and charterers to ensure the free flow of trade.
Baltic Exchange shipbrokers undertake to abide by a code of business conduct based on the motto “Our Word Our Bond” and those who breach the code are disciplined or expelled.
Each working day the Baltic produces a dry cargo fixture list. Each fixture is carefully checked and verified and our report is regarded as the most comprehensive and independent such list available. This site also contains a database of over 25,000 fixtures.
A summary of the Baltic Dry Index (BDI), Baltic Capesize Index (BCI), Baltic Panamax Index (BPI), Baltic Supramax Index (BSI), Baltic Handysize Index (BHSI) and Baltic International Tanker Routes (BITR).
OK, that's enough boring stuff for today. Tomorrow I will (hopefully) make a post regarding what makes up the various indexes.
The Baltic Dry Index tracks charter rates for dry bulk ships. These ships carry mainly ores and grains, not liquids carried by tankers, hence the term "dry". And in bulk, not in containers.
The demand for bulk ships increased significantly when the container carriers began increasing the prices (presumably) or, at the very least, not making containers available for, commodity cargoes. This came about in the U.S. when exports began booming.
Because of this demand, charter rates on bulk ships surged from around 10,000 per day to over 100,000 per day. Absolutely crazy. Much worse than what was seen with charter rates for container ships.
In an October 24 article in American Shipper, Khalid Hashim, CEO of Thailand-based Precious Shipping, explained the reasons, as he saw them, for the dramatic decline in the Baltic Dry Index, the measuring stick for dry bulk rates.
“The deteriorating credit line led to the collapse of the BDI over the past few months, while little has changed in terms of fundamental demand and supply for dry bulk shipping,” according to notes from the JP Morgan-organized call, which took place Oct. 17. “Hashim thinks urbanization and economic advancement, which have been driving the demand for dry bulk shipping, remain unchanged. However, due to lack of trade credit, real demand is converting into potential demand and disappearing from the market.”
The Baltic Dry Index slid below the 1000-point mark, the first time it’s been south of four digits since August 2002, as the prices shippers are willing to pay for marine transport fall close to the costs of putting a vessel in the water and staffing it. The Baltic Dry Index has fallen 89% this year, as the credit crisis has robbed shippers of the ability to finance cargo movements. Shipowners have taken steps to reduce costs - for instance, trimming vessel speeds to save on fuel costs - but may begin to simply refuse to move cargo if pricing doesn’t show some improvement.
A lot of the bulk carriers went public in the last couple of years. The stocks were interesting as they were paying great dividends. But this is a wild, wild business, much like trading pork bellies.
