The new bubble. After the real estate crisis of 2008, the creeping crisis of shipping finance.

In the autumn of 2012, when the German press reported that more than 250 closed-end funds that invest in new ships or in ship operations were at risk of insolvency, and that the main banks involved in shipping finance are either shifting away from this business or at risk of default, the ports community knew that something similar to what happened in the real estate bubble of 2008 could happen in its own sector.
When, on 19 November 2012, the CEO of Maersk Lines – the world’s leading shipping company in the container sector – told the “Financial Times Deutschland” that his firm would reduce its commitments in the shipping sector and stop orders for the construction of new vessels over the next five years, because business in the containerized cargo trade is no longer profitable, ports related businesses worldwide were forced to acknowledge that a new era in shipping and in the world’s trade industry had begun.
Globalization at risk?
Globalization is a system of producing goods in low-wage countries in one hemisphere and consuming the same goods in countries with high per capita income in another hemisphere of the globe. Goods are transferred from one hemisphere to the other by plane, if their value is high, or by ship using intermodal cargo units of 20’, 40’, 45’ standard containers. The boxships carrying containers are operated by big multinational companies, or carriers, whose fleets may be partly owned and partly chartered. The financial situation of these companies is under stress. Maersk Line number, number 1 in the top 20 range, lost 600 million dollars in the first six months of 2012; MSC, number 2, does not disclose its financial situation; CMA CGM number 3, has just restructured its debt, while number 4, Coscon, suffered a fall of 88% in its 2012 profit and so on – according to “Lloyd’s List”. In mid-October 2012, analysis of a sample of carriers by the consultancy firm Alix Partner, in the white paper Sailing in a Sea of Red, revealed that only two carriers would be able to avoid operating at a loss in 2012. The price that shippers pay to these companies is the “freight rate”, while the price carriers pay to the owners for chartering these ship is the “charter rate”. Both plunged in the second half of 2012. Falling rates and decreasing demand in the major trade lanes have brought the carriers to an extremely difficult financial situation, as half of them – according to the same study – “are not able to cover their interest payments”, whilst these companies’ estimated debt between 2007 and 2012 amounted to 90 billion dollars.
The risk that an insolvency of a big shipping company causes “supply chain disruption” is real. In fact, if the 2008 crisis concerned the immaterial circuit of money, the current shipping crisis has hit the material exchange of goods.
The system of shipping finance
Owners specialised in chartering cargo ships are known as non-operating ship owners (NOOs). The largest of these companies are located in Hamburg and some of them are bigger than the shipping companies. They commission to the shipyards new vessel building, for their own account or on behalf of the shipping companies. As the most important customers of the shipbuilding industry, the NOOs need a huge amount of capital, provided by a group of specialised banks (such as HSH Nordbank, Commerzbank, Deutsche Bank and The Royal Bank of Scotland) or by a very fragmented and unregulated market of closed-end funds, which raise money from private parties, savers who are encouraged to invest in shipping by extremely favourable tax regulations in this sector in Germany – the country with the highest ownership of full container vessels in the world.
Specialised banks, NOOs and closed-end funds are the three main pillars of the shipping finance system, while the two other protagonists of the shipping industry, the carriers and the shipyards, play different roles. Shipyards have become a fourth arm of shipping finance to an increasing degree. Subsidised by the governments of South Korea, Japan and China, they sell new ships with the most sophisticated technological equipment at the lowest prices, which are often lower than the actual production costs. The price for a full container ship of 4500 Teu size was 53 million dollars at the end of 2011, one year later the same ship could be ordered for 14 million dollars, according to a Clarkson Research report. Shipyards are also able to grant extended payment terms. The ships built continue to get bigger and bigger – recently the French company CMA CGM launched the biggest full container vessel on the seas, the “Marco Polo”, with a capacity of 16020 Teu – while the equipment becomes more and more sophisticated; however their market prices continue to drop. The value of a full container vessel depends not only on her capacity, but also on the performance of its equipment, and especially on its fuel consumption. With the increase of fuel prices in the last decade, the bunker cost is now the most important factor in the cost structure of a ship’s operation in the deep sea trade. In the last three to four years, carriers tried to reduce the cost of fuel consumption by adopting the so called “slow steaming”, a reduction of commercial speed from the usual 20/22 knots to 14/16 knots.
The struggle for market share (or for a good rating)
In order to maintain the same schedule in a round trip (Far East-Northern Europe-Far East or Far East-North America-Far East for example) by “slow steaming”, shipping companies were forced to deploy a higher number of vessels on the same service. To be competitive in one of the main trade lanes, for example in Far East-Mediterranean, and offer different options to shippers, it is necessary for a carrier to organise at least three services with different schedules and itineraries, at an investment cost of 1.4 billion dollars each – a manager of CMA CGM told “Containerisation International”. Three services, with seven/eight vessels each and the necessary intermodal equipment, means 4.8 billion dollars. This is a huge sum – an amount of capital that only the banking system can provide. Despite their enormous cash flows – the price of transport is generally paid by the shippers in advance, especially when they are SMEs, while only big forwarders and logistics companies have special payment terms – carriers need the support of the credit system. The competition for a good bank rating is one of the main issues for a carrier’s management. A key metric for a good bank rating is market share. In order to ensure their market share and have easy access to credit – don’t forget that we are living in a debt-based economy – in recent years carriers deployed a number of vessels in excess to market demand in the main trade lanes, creating a dramatic overcapacity, with the result that freight rates fell to the lowest levels ever recorded in the new Millennium.
Building and scrapping ships
The daily operating cost of a full container ship of 10/12000 TEU size, estimated by Drewry Shpping Consultants in 2011, was 13,420 USD and should rise to 13,778 USD by 2016. Bigger ships allow for a reduction of the cost per unit, but if the fall in demand reduces the load factor and vessels are only filled to 60% capacity instead of 75/80%, their operation can bring big losses for the carrier. Forecasts at the beginning of the new Millennium promised a growth of 7/8% per annum in containerised cargo in the main trade lanes until 2030. Confident in this development, the main investors (carriers, NOOs, banks) commissioned the shipbuilding industry to construct a huge number of full container ships and bulk carriers. In October 2008, when Lehman Brothers crashed, the number of ships on order from shipyards were equivalent to 50% of the existing world’s fleet of bulk carriers. In 2009, this “order mania” was subdued for a while but, with the unexpected resumption of the maritime trade in 2010, the shipping companies deployed a new rush of orders for new ships in 2011. The “Dynaliners Weekly” of 4 January 2013 reports that the order book of the top 25 shipping companies in the container trade equals 3,092,000 TEU for an operating fleet of 14,435,000 TEU, 22.6% less than in January 2012. “2013 will be a record year for boxship deliveries: an estimated 1.9 million teu of extra cellular capacity will be launched into largely flatlining markets – including 64 behemoths by the top five liners”, said Mike Wackett in “Lloyd’s List”, 16 January 2013.
High unemployment, big infrastructures
Analysts and managers of the top 20 shipping companies in container trade fear a tough time for this year if no improvement happens in the crisis of the Eurozone. Few are aware of (or reluctant to accept) the danger coming from the internal situation in China, hit by inflation, social unrests and price instability (in 2012 the port of Shanghai – “Lloyd’s List” report – “posted moderate improvement in both throughput and net profits.….container volumes rose 2.5%, but total cargo throughput levelled off at the mark 2011”). In Rotterdam, the gateway to North and Central Europe, the throughput in numbers of container (Teu) stayed the same as in 2011. “Terrifying jobless statistics for the troubled southern states of the Eurozone will result in worsening cargo prospects for the Asia to Mediterranean tradelane in 2013. Unemployment levels in Spain, Greece, Portugal and Italy hit record levels in November, with the first two nations reporting 26.6% and 26% respectively of its citizens out of work – and no less than 56.5% and 57.6% of their under-25-year-olds being jobless”, “Lloyd’s List” of 10 January 2013 said.
The President of the Italian Business Association spoke recently of a possible duration of the crisis until 2015. How many companies will get bankrupt in this time, how many unemployed? And if recovery is expected in 2015, how many years will it take for the economy to reach the same level as that in 2007? In this dramatic situation shipping companies continue to order bigger ships and maritime ports all over Europe – but especially in Southern Europe (Rijeka, Venice, Taranto, Augusta, Naples, Civitavecchia, Genoa, Marseilles Fos, Barcelona, Valencia) – get 55-foot dredging, expanding terminals, building new infrastructures in order to host the new mega ships. European Authorities, the World Bank and other international financial institutions support this frenzy.
The political consequences of the shipping crisis
Will Germany stop being the world’s leading owner of container ships and the world’s leading lender of full container ship building? “German shipping experts say that two-thirds of the country’s marine fleet is in financial distress. If the crisis drags on much longer, the Greeks may leapfrog ahead to become world leaders in container shipping”, wrote “The Telegraph”, on 13 August 2012, adding “Greek firms are teaming up with Chinese banks. Chinese premier Wen Jiabao pledged $5bn in loans to the Greek shipping industry two years ago, part of a twin-headed plan to gain a stronger foothold in the EU market and to provide vendor financing for the Yangtze shipbuilding industry – currently in dire straits”. Chinese firms took the control of Piraeus transhipment port two years ago. The exposure of German banks to the shipping sector is bigger than their exposure to PIIGs government bonds. Germany’s 12 largest banks had around 98 billion euros ($129.2 billion) in shipping loans in mid-2012, according to the German Federal Financial Supervisory Authority (BaFin). A collapse of German shipping finance could have huge consequences for the entire German banking system, forcing Merkel’s government to promote a stricter fiscal policy at European level and to limit the effort to rescue the distressed southern States. The consequences: weakening position of the euro and more obstacles to an economic recovery of the “olive belt” countries. Political considerations at national level also play a role. The most distressed German bank is the HSH Nordbank, owned partly by the state of Hamburg and partly by the Land Schleswig Holstein. The seats of these two Länder ensure the left-wing majority in the Bundesrat (before Merkel’s defeat in Lower Saxony). The default of the bank could hit very hard the finances of the two Länder and provoke a revolt by taxpayers, as they would bear the brunt of the austerity measures that would follow the waste of money caused by the reckless lending of a public bank.
The risk of a lose-lose game
The shipping companies of the container trade are perhaps too big to fail but their inability to change their business model is a self-defeating strategy. They expand their services on all trading lanes in order to gain market share, necessary for a good rating by their bankers and continue to commission newbuildings to the shipyards in order to present a good asset portfolio to the credit market; they put into service ultra-large container carriers compelling the maritime ports to invest in new infrastructures with the same port tariffs; they force the terminal operators to invest in new cranes and to mobilise all their resources of technology and organisation; and they restructure their debts with the support of the state (of the impoverished taxpayers). The risk of a lose-lose game for all the parties involved in the shipping industry – businesses, employees, suppliers, authorities – in the current economic recession is high. A change in the business model might benefit everyone, particularly the shipping companies.