Credit crisis affecting shipyard orders

There are growing signs the credit crunch that began with the US housing market is spreading to the world’s shipyards. Over the last couple of years order books at most shipyards around the world have grown to a three-year backlog, but the credit crunch is making it harder for some ship owners to raise money to pay for the ships they ordered.

“Around 70 % to 75 % of the order book is not yet financed and it’s going to be a challenge for some operators to obtain financing,” said Akis Tsirigakis, chief executive of Athens, Greece-based Star Bulk Carriers Corp, a dry bulk operator with a fleet of nine ships.

In late February an executive at Dalian Shipbuilding Industry Ltd in China’s warned of slowing orders for new ships, citing fears that a US slowdown could damp global trade.

Shares of shipyards have suffered. Hong Kong-based Guangzhou Shipyard has fallen 38 % in the last three months, while Yangzijiang Shipbuilding is down about 55 % over the same period. JES International, which debuted on the Singapore Exchange in December, is down 64 % since the beginning of the year.

Among recent ship order cancellations, Hong Kong-based shipping company Jinhui said in January it was calling off construction of two giant ore carriers, citing global credit conditions. “The risk-return profile of completing the vessels has changed drastically due to persistent negative sentiment clouding the global financial markets,” the company said.

The ships were to cost $122 million each. Jinhui said it would pay a $4 million cancellation fee. The company added that it could not get good financing conditions despite a 15-year charter contract from a “first class steel mill.”

In February Athens-based Oceanaut Inc announced it had terminated a deal to buy nine dry bulk carriers for $700 million. “Funding can be hard to get now even if you have a customer lined up,” said Omar Nokta, an analyst at investment bank Dahlman Rose. “There is uncertainty among banks over the potential impact of a US slowdown.” According to some ship owners, any deal over $500 million that requires a syndicated loan is more likely to run aground.

“Banks are more reluctant to fund acquisitions that require a very large syndicated loan or to lend money to newcomers who have no track record,” said Nikolas Tsakos, CEO of Tsakos Energy Navigation Ltd, an oil tanker company with a fleet of 43 tankers and nine more on order. Some shipping company executives are cautious about whether a wave of cancellations is coming.

“We haven’t seen many cancellations yet, but it’s possible there are more yet to come,” said John Wobensmith, chief financial officer of New York-based dry bulk shipper Genco Shipping & Trading Ltd, which has a fleet of 28 ships. But others say they are excited by the chance to pick up bargains.

“I think there will be some fire sales,” said Gerry Wang, chief executive of Seaspan Corp, which has a fleet of 29 container ships with another 39 on order. “We are like a tiger waiting for opportunities to come up. We have the liquidity, we have the capital,” said Wang. “Look at the shipping space … there are about 1,100 ships on order in the industry worth $350 billion,” he added. “In my humble opinion there is no way there is that much liquidity available to finance $350 billion over the next three years.”

Nikolas Tsakos said order cancellations due to financing troubles would also ease fears that a glut of ships would push down charter rates. And if demand for commodities, consumer goods and oil remains robust despite the woes of the US economy, then shipping rates should stay strong. “This could bring a nice positive surprise for operators,” said Dahlman Rose analyst Nokta.

Nokta said if European demand for consumer goods remains robust that should support container ship charter rates, but the big question for dry bulk rates is what happens to demand for commodities from China and India, which has been a major rate driver in recent years. The Baltic Exchange’s chief sea freight index , which gauges the strength of trade routes for commodities like coal, iron ore and grains, has had a roller-coaster ride over the last six months, hitting an all-time high above 11,000 points in November before falling below 6,000 in January. It is now above 8,000 points.

“So far we’re not seeing any slackening in demand from China for commodities,” especially coal and iron ore to produce steel, Nokta said. “As far as dry bulk rates go, steel prices will dictate a lot of what happens.”