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Falling rates and the recent collapse of Korea Line Corporation, South Korea's second-largest operator of dry bulk carriers, has led to warnings that more dry bulk shipping companies could fold in 2011.
Weak rates have been particularly pronounced in the dry bulk sector. The Baltic Dry Index slipped to a two-year low on February 2, when it fell to 1,045 points. A glut of new ships has pushed market levels to below operating costs, with capsize vessels being particularly hard hit, according to reports.
Rates have been weakening in other sectors too during January a supply has outweighed demand, though not as pronounced as in the dry bulk sector.
Container rates have been falling on all major trade lanes, causing speculation that rates this year may continue to decline as shipping companies chase market share while the fleet grows as more newbuilds enter the market.
Liner shipping specialist Alphaliner noted that carriers were trying to limit the impact of "the massive number of large containership deliveries this year" by delaying the introduction of new services, but warned the restraint would be short-lived due to a "flood of new vessels".
Analysts at Sydbank in Denmark, however, this week said they saw only a "very limited risk" for a rate-war in the container sector, as owners were showing a high level of discipline in the wake of the 2009 crisis. A Sydbank newsletter said it expected container rates to turn around in the coming months and that they would be only marginally lower in 2011 than in 2010.
Product tanker rates fell slightly in January compared to December, Sydbank said, adding that short term operators would struggle to make profits. Overall, they expected rates in the sector to be higher in 2011 compared to 2010.
There were "surprisingly few" shipping bankruptcies in 2009 and 2010 considering the difficulties faced by the industry, Chris Morgan, an analyst at the maritime credit reporting service Ocean Intelligence told Bunkerworld.
Shipping rates plummeted in 2009 due to vessel overcapacity as demand weakened with the global downturn and newbuilds ordered during the shipping boom in preceding years entered the market.
Morgan said several companies were on the brink but survived, in part because of healthy reserves built up in the years prior to the 2008 market collapse.
Many shipping firms that suffered losses in 2009 returned to profit in 2010 as rates improved with growing demand and measures to restrict supply. These included delaying newbuild deliveries, early scrapping of older vessels, lay-ups and slow steaming. But newbuild deliveries could threaten the supply-demand balance in 2011, pressuring rates and profitability.
Shipping companies may not have the same reserves to fall back on as they had during 2009, according to Morgan. He also noted that companies that had not hedged adequately could have a hard time coping with rising bunker costs.
Combined with the mounting number of new vessels expected to enter the market during 2011, Morgan said signs were not good for the dry bulk sector in light of current two-year low rates, unless there were measures to reduce supply, such as more scrapping. He said small to medium sized companies in particular could be vulnerable.
Compared to 2010, the latest Bunkerworld poll asks:
Will there be an increase in shipping company bankruptcies in 2011?
Capt. Rifaqat Ali Khan
For Krishna Trading Company
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Drilling into it you will see that some sectors of the market are actuually more secure than others and thus present a lower risk. However, the basic bottom line can be easily considered by comparing freight market against fuel cost in relation of value in companies, and the scene is not good. For both Wet and Dry Segments financial bases which had gorged on the good years up to 2008 provided an element of support when markets fell in late-2008. This allowed confidence to trade on and provided breathing space whilst restructuring occurred.
Today the environment has shifted. Those reserves have been eradicated or at least diminished to such a level that they no longer provide the underlying security necessary to allow breathing space or to instil confidence in investors. Indeed, there lies another issue. In 2009 we hoped to see a bounce back in the relative short-term, with restructured finance deals and delaying of deliveries, for example, allowing that bounce-back, in some cases at least, to occur.
However, whilst bouncing-back the sectors never fully regained the high ground they had previously occupied. This time, the outlook, over burdened by new tonnage leaves little positive in prospect and thus the bounce-back seems a long way off. Given this, support from financial institutions seems less likely than in 2008/2009, surely a warning sign we must heed.
The real bottom line, manage your customer base carefully as the road ahead looks dark and foreboding.