Too many bulk ships

Bloomberg published an article yesterday, stating there are too many new bulk ships coming out of yards, which has already caused charter rates to drop.

Leasing costs for capesizes, 1,000-foot-long ships hauling iron ore and coal, will drop 34 percent to average $22,000 a day this year, according to the median in a Bloomberg survey of eight fund managers and analysts. The last time that happened, China’s economy, the biggest consumer of the minerals used in steel and power, was 75 percent smaller and the benchmark Standard & Poor’s GSCI commodity index 67 percent lower.

While Clarkson Plc, the world’s biggest shipbroker, expects seaborne trade in the two cargoes to exceed 2 billion metric tons for the first time this year, the 7 percent increase won’t be enough to eliminate a glut. About 200 capesizes, spanning some 35 miles end-to-end, will leave shipyards this year, expanding the fleet by 18 percent, the Bloomberg survey showed.

Of course, the Chinese could surprise everyone, and stock up on commodities when the shipping is cheap. They did that last year.

Later in the article they quote folks in the containership business as saying "things are pretty good".

Let's see if they stay that way, after more containership newbuildings come into service.

click here for link to article

It's all so complicated - those Rule B attachments

From Lloyds List

SAMSUN Logix Hellas, a Greece-based owner linked to troubled South Korean bulker operator Samsun Logix, is facing a raft of rule B attachment applications in a New York court that seek to freeze more than $11m to cover unpaid charter payments.

The largest has been filed by Malta’s Hope Shipping which is seeking $10m to cover unpaid charter fees for the 1981-built, 24,030 dwt Ist. Hope Shipping is linked to Croatian shipowner Jadroplov.

Samsung Logix Hellas manager Kurt Kim told Lloyd’s List that negotiations were taking place with Hope Shipping to reach a “commercial settlement”, but said the outstanding amount was “much, much less” than the $10m.

He was also unaware of two other rule B attachment applications that had been made on behalf of two other owners. “We have not been informed by any other owners or charterers of legal action,” Mr Kim said.

Turkish owner Er Denizcilik Sanayi Nakliyat ve Ticaret is seeking to freeze $681,000 related to the 1985-built, 27,652 dwt Fuat Bey. Racing Shipping, which is linked to Greek owner Sea Force Shipping, has applied to secure $399,000 allegedly owed on the 1985-built, 43,479 dwt Alkistis.

All three applications have been filed in New York’s southern district court.

ER Denizcilik declined to comment. When contacted by telephone, one executive said: “We can’t comment on anything.” He said talks were taking place to resolve what he said “was not a real dispute” between the firms.

Mr Kim expressed surprise that action was being taking over the Fuat Bey. “We are now trading the vessel. We are paying the hire,” he said.

Racing Shipping confirmed that its rule B application covered outstanding charter and other payments related to the Alkistis.

Explaining the circumstances leading up to the application, one source said Samsung Logix Hellas started having problems making payments on the vessel in October. The company redelivered the ship at the end of last year and later negotiated a lower charter rate with Racing Shipping. But after that agreement the source said Samsun Logix Hellas was “unable to pay in January and February”.

He added the company approached Racing Shipping to renegotiate “but by that time the trust was gone”.
Hong Kong’s Winland Shipping has also made a rule B application but no details of the amount being sought has been released, while the shipping company could not be contacted.

Mr Kim said Samsun Logix Hellas was a legally registered company in Greece that had no direct contact with Samsun Logix Corp in Seoul. This was disputed by several sources, who said there was “definitely a relationship” between the two firms, which share the same business logos.

Mr Kim added that Samsun Logix Hellas was a shipowner and operator with three owned vessels and four chartered vessels, comprising four handysize ships, one handymax and two panamax vessels.

Sources with Samsun Logix, which applied for court protection a week ago, said most of the chartered-in tonnage of around 60 mostly handysize and handymax vessels, would be redelivered to owners because the company is prevented from seeking new business under court rules.

“Some of the vessels are at anchor, some have been redelivered to owners, some are trading, completing voyages,” the source said. He declined to give details of the ships.

I'm sure this will keep the lawyers busy for awhile.

Star Bulk Carriers - read the small print

Star Bulk is upbeat. They have declared a cash dividend of .18 per share. Their stock is trading today slightly above 2.00. Pretty good return.

I guess they passed out rose colored glasses to their management.

They say things are lookin' good, but if you read through their report, personally I wonder what this is based on.

Their average charter rate for 3rd quarter was $62,156 per day, but they adjusted it down to $45,756, which was closer to the market rates at the time.

An average of 12.1 vessels were owned and operated during the third quarter of 2008, earning an average Time Charter Equivalent, or TCE rate of $62,156 per day. Adjusted to exclude the effect of the amortization of time charters attached to vessels acquired at above or below market rates, the TCE rate for the third quarter of 2008 was $45,756. We refer you to the information under the heading "TCE rate and adjusted TCE rate" later in this release for further information regarding our calculation of TCE rate.

Ok, all fair and good. Now, let's look at what they are currently getting for their ships. Approximately $25,000 per day (I'll be generous)

New Charter Party Agreement

The Star Beta has entered into a short term period employment with Brazil's Companhia Vale do Rio Doce (Vale) for a minimum of two and a maximum of four months at the gross daily rate of $15,500 for the first 50 days and $25,000 for the days beyond 50 plus a repositioning ballast bonus of $525,000.

Yeah, sure. Things are really looking up. Actually the rates of $15,000 - $25,000 per day is closer to market reality.

It's almost becoming a penny stock as it is, with a 52 week low at USD 1.99. I guess they think by issuing the dividend it will keep the price up, and no one will read the fine print about all that other stuff, including the issuing of additional stock.

Korean dry bulk carrier is bankrupt

Lloyds List reports Parkroad Corp. is bankrupt. Parkroad had eight vessels, mainly Panamax and Handysize dry bulk ships.

SOUTH KOREAN dry bulk specialist Parkroad Corp confirmed that it has gone bankrupt and its vessels are being operated by Sinokor Maritime Co Ltd.

A spokesman Mr SK Chung from Sinokor in Seoul also confirmed that they are operating eight vessels owned by Parkroad.

Sinokor isn't a bulk carrier, they are in the liner business. I can only guess that the lender decided it was a good place to put the vessels for the time being. Or, perhaps Sinokor will start picking up dry bulk ships for pennies on the dollars in this down market.

It's not unusual for shipping companies to engage in both liner (with fixed schedules) and tramp (without fixed schedules) services. And, if you have the money, are already in the business of shipping, now is the time to buy some ships.

Breaking covenants

Forbes had an article last week regarding the dry bulk carriers.

Shippers Breaking Their Covenants
Ruthie Ackerman, 11.20.08, 07:45 PM EST
Falling prices for vessels creates technical defaults for battered dry-bulk industry.

Apparently the author has followed these stocks for some time. The article is worth reading.

At the end, this is how it wraps up.

Burk said that it appears that DryShips, Eagle Bulk Shipping (nasdaq: EGLE - news - people ), Excel Maritime Carriers (nyse: EXM - news - people ), and Genco Shipping & Trading (nyse: GNK - news - people )have technically breached their loan covenants.

Nonetheless Burk points out that all the companies have enough cash flow to cover their interest payments, which mean as long as their charters don’t default the companies themselves will be able to service their actual debt if their lenders aren't too insistent on the technicalities of the borrowing agreements.

The history of the shipping industry has been carriers must operate for some time not being able to cover their costs. This is why only those will very deep pockets survive, unless there are some sort of cartels or pools set up. That is probably no longer possible due to the change in regulations (although the Koreans are considering setting up a pool).

I particularly enjoyed one of the comments posted regarding this article. If anyone knows who "PoorandUnemployed" might be, give him or her my best.

Posted by PoorandUnemployed | 11/21/08 11:33 AM EST


Given the history of shipping finance, in times like these, owners make the interest payments but stop paying the crews, fuel suppliers, port costs and other suppliers. In it's uniqueness, all the debt is always incurred by the vessel regardless and the vessels can be arrested in different jurisdictions world-wide for a five dollar unpaid bill.

Expect banking style collapses, mergers, forced marriages and defaults. Given the past history, it is likely that the Publically held companies would not survive this storm. Once the market players have lost the interest in the sector, many will lose their NYSE or Nasdaq listings. Managements will purchase the stock at very low price (pennies) and eventually take them private in effect buying the underlying assets for pennies on a dollar. Same banks will refinance the assets to new owners at a discounted price with higher percentage ratio of private equity.

At this stage of the game, banks can neither foreclose on the ships and sell them at auction nor they can allow to companies to add on to debt to meet operating expenses. This calls for some ENRON type creative accounting!!!!!!!!!!!

German ship banker predicts more bankruptcies around the corner

As per Lloyds List article:

DVD Bank head of shipping, Mr. Dagfinn Lunde, said the downturn in shipping would be “deep and long”.

In two years’ time “we will have a crisis very similar to that of the mid-1980s”, which some experts believed was the worst ever experienced by shipping, he said.

“There will be many more bankruptcies,” Mr Lunde told the Lloyd’s Shipping Economist Ship Finance & Investment Conference in London.

What I found interesting is he believes container operators will go bust, in addition to dry bulk.

“You can see this from the leverage of the companies and the charter rates. It is a question of weeks and months.”

Some bankruptcies were “very close around the corner” and could involve big names in the industry.
Collapses would not only involve dry bulk operators, but also other sectors such as containership operators.

I can't think which container carriers are likely to go bankrupt. I guess some of the smaller ones. We'll have to keep an eye on that.

Close look at the BDI, Baltic Dry Index

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.”

Today, October 28, the BDI hit a 6 year low.

Out of Barron's,

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.

It will be interesting to follow.

The party's over for bulk carriers

Apparently bulk shipping is a bit like farming. I come from farm country, and there is a joke in these parts that goes; "How do you end up with a million from farming?
Start out with 10 million!"

The first bulk carrier has gone bankrupt. Industrial Carriers Inc. They had 1 billion dollars in revenue in 2007. One Billion! They operated 50 ships. I don't know how many they owned, if any.

Lots of companies have entered the bulk shipping business in the last 10 years.
One can understand why. One can also understand why this will probably be just the first of many companies to go belly up.

From the Journal of Commerce:

"During the market's free-fall that began this summer, rates for 150,000-165,000-ton Capesize ships crashed by 50 percent as of last week to just over $12,000 a day compared with a peak of $233,000 in late May."


Click here for complete article.

That's almost a 95% drop in revenue! Of course the charter rates were insanely out line on the high side, the result of too much demand for bulk cargoes such as iron ore and grains.

I will post later regarding the other companies, especially those who issued stock.