13 Mar 2014
5 Nov 2012
Market conditions in the biggest global shipping sectors deteriorated rapidly during the second half of 2011 and many analysts have predicted that 2012 will also be tough.
By the fourth quarter (Q4) of last year, the situation in the tanker market was described as "disastrous" by Jacob Pedersen, a senior analyst with Sydbank, who also said container freight levels in 2011 were "catastrophic".
Analysts have warned that the overcapacity and unprofitable rates plaguing the tanker and container markets could soon hit the drybulk sector, which could be heading for a collapse in rates due to newbuild entries outpacing demand growth.
There were several shipping company casualties in 2011 with fears that several operators could go under in 2012 unless market conditions improve. Some analysts are cautiously optimistic that profitability will improve during 2012 for some shipping segments.
Deteriorating trading conditions during 2011 has also made banks more cautious about lending to shipping. Some say banks are contributing to a "downward spiral" by being reluctant to lend money for ships that become available, thereby pushing down ships' second hand values. This in turn eats into shipping companies' asset values which increases the risk of them defaulting on existing loans.
With tightening credit and fears of the health of shipping companies, bunker suppliers and traders are understandably nervous about counter party risk. They need to assess the ability of shipping companies to pay their bunker bills on time, whether it is based on 30 days credit terms or less.
Bunker suppliers have frequently been on the list of creditors of bankrupt shipping companies, but also appear to have been among the first to secure outstanding payments. Recently, beleaguered shipping firm General Maritime Corporation determined that all their bunker suppliers were 'critical vendors' as bunkers are "a vital commodity without which the debtors' business could not continue".
In light of the above and the market outlook, the latest poll on Bunkerworld asks:
Do you expect counter party risk to become more critical in 2012?
Today (February 2012) what we see as we look at the markets is that bunker prices are nearing all-time highs again, and show little desire to return to levels that would five years ago have been considered high. Beyond that we have freight markets (charter markets) in almost all segments facing over capacity as delayed newbuilds ordered prior 2008 collpase are still being delivered, plus the rush for tonnage when makets showed some resilience in 2010. The scrap market whilst finally seeing increasing volumes of tonnage has been shackled with environmental restraints right when what we need is for them to gobble up as much tonnage as their beaches can possibly take. This scrapping problem has also been hurt by owners, doing as they have always done, and deferring scrapping decisions for up to two-years beyond market collapse in the hope of a return to profit. This is especially so for scrapping candidates which are often debt free and the only tonnage that can make money out of such depressed markets. Finally, S&P markets have been flooded with tonnage at a time when banks, remember banks, they used to lend money for shipbuilders, are themselves under severe pressure to reduce loss making portfolios, take those customers that have been paying interest only and either seek principal repayments or liquidate positions, especially where owners are 'new names' or have a less than robust trading history.
The result is good for Ocean Intelligence Pte Ltd and its peers, demand for insight into counter-parts is always high at times like this. However, the sellers of fuels themselves need to do more, the tendency towards credit Insurance has made many less attentive to the warning signs, yet there appears a misundertsanding in that a duty of care does exists, and there is an obligation for the insured party to act reasonably and disclose all material facts. It seems incredible to see bunker players caught out by the likes of Genmar, TBS, Seaarland, BN Shipping, Samho etc... But then people were also caught out in the past by Britannia Bulk, Armada, Industial Carriers and Eastwind. The problem is that where the risk is, then so is the margin, and greed can be a funny thing.
From this voice the recommendation is clear, 2012 will be a critical year for Counter-Party Risk so look to your portfolios, make sure your procedures are followed, and your knowledge is up to date, put a closer watch where margins are the biggest as this is often a warning sign, and be prepared to pull out even when there is good money to be paid, IF your system recommends you do so.
Timing is everything and even with all this still be prepared to expect the unexpected.