Red Tide for Shipowners

Like the seas it sails on, the shipping industry rises and falls economically in many ways. One wave falling now that I believe will have the biggest impact on the industry involves the non-operating shipowners, and few will even know it happened.

These entities have been an integral part of the industry and at times were the beneficiaries of widely fluctuating charter rates — when vessel space tightened, charter rates soared. Now, however, those charter rates aren’t just low; there also are signs that those owners with older, smaller ships are in real trouble. The rates they can get for their ships are less than the payments owed to the banks that financed them.

We’re seeing words such as “auctions” and “failure.” These entities, although well-known among industry strategists, work behind the scenes. None of their names are on the sides of the vessels. They don’t have hundreds of thousands of containers with their logos splashed on the outside. They are a combination of speculators and alternate financiers. When times are good, as they were in 2000-06, they make a killing as charter rates can climb from the mid-four figures to the mid-five figures in a matter of months.

With today’s supply-demand ratios in virtually all segments of shipping on the wrong side of the equation for vessel owners, the operating companies are shedding capacity they don’t own — putting these non-operating owners in a true bind. Few operators want their vessels. Those that do are able to secure rates that simply don’t pay the bills.

The next steps can be guessed: Some of these entities will go away. The ships, however, won’t, and that becomes problematic. Someone will buy them at bargain-basement prices and charter or operate them somewhere. Some will be scrapped, but with so many new, big ships set for delivery this year, it won’t be a one-for-one trade.

Why do I think this is so important? First and foremost is that many of these non-operating owners, mostly based in Germany, were a good source of alternate financing and shorter-term leasing arrangements for operators needing the flexibility in their fleets to reflect market peaks and valleys. If, as it appears, some of these entities begin to fall by the wayside during the next three years as operating companies take delivery of the new, larger and more efficient vessels and return more of the less efficient and more expensive older ships, who will take their place?

There undoubtedly will be firms that step into the void; there will always be those who see opportunity. But will they have the same riverboat-gambler perspective that’s been a trademark of those in the past? Or will they be more the tough realists and more conservative in their business approach?

I’m guessing that in the not too distant future, those who operate ships will have to be very well managed. They will have to make enough money consistently to replace aging, non-efficient assets, or they will have to be supported by government entities that have an agenda for their retention.

The fringe, purely commercial players won’t make it, absent a few well-run niche carriers that happen to be in a good market. Big, efficient, well-managed companies won’t only survive but also will flourish as the competition lessens, just as we’ve seen in the U.S. rail industry. The joker in the deck, then, is which governments will step up and keep their flag fleets afloat? That is what will separate what happened to the U.S. railroads from what will happen to global ocean carriers: How many governments will be involved?

The Europeans appear to have enough financial drama to keep most of them out of the fray, absent whatever tax incentives exist. Several Asian countries already are involved in one form or another, but may see a better alternative than having multiple companies to support. India could step up in the next decade and decide that it would be beneficial to have a viable shipping company presence.

As with all of these issues where speculation is all that any of us can really offer, it will be interesting to see who emerges successfully and why, and to speculate on the impact on those who buy the services provided. I think the evolution of how U.S. railroads have recovered and become economic powerhouses provides a clue. 

Gary Ferrulli, a veteran of nearly 40 years in the shipping industry, is director of export carrier relations for non-vessel-operating common carrier Ocean World Lines, a subsidiary of Pacer International. Contact him atmrgtf4811@mindspring.com. The views expressed here are his own and do not necessarily reflect those of OWL.

 

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