Global demolition activity increased by 16% in the first nine months of 2016 in comparison to the same period of 2015, as shipowners struggle to counter the imbalance between supply and demand in the market, according to international shipping association BIMCO.
A total of 36.2 million dwt was demolished in the first nine months of 2016, with most of it taking place in the first four months of 2016. This is equal to 21.8 million dwt or nearly twice as much as in the following five months of 2016.
However, comparing the period May – September 2016 in the same period as last year, the growth of demolition activity adds up to 2.9 million dwt or 26%. Therefore, the decrease in scrapping from the fourth until the ninth month of 2016 can be accounted for by cyclical demolishing activity.
"The poor global economic situation, as well as the depressing outlook for most of the seaborne shipping sector caused by excess supply of capacity, needs to be countered by a drastic increase in demolishing activity in order to lower merchant fleet growth," said BIMCO's Chief Shipping Analyst Peter Sand.
Comparing the period between January through September 2016 to the total previous year's, the amount in dwt is a record in the making, as 94% is already scrapped in the yards.
In reference to the available data from the beginning of January 2014 through September 2016, the average demolished ship size in dwt increased on a year-on-year basis by 32% in 2015 and additionally 13% in 2016.
"The trend for the demolition of bigger ships can be explained by weak global demand, especially for containerships in 2016, which is not growing at the pace needed to match excess containership capacity. Another factor is the expansion of the Panama Canal, which takes the uniqueness away from the panamax ship segment," Sand added.
From the beginning of January 2014 through September 2016, the dry bulk segment accounted for 72.9 million dwt or 66% of the total demolition, while crude oil tankers accounted for 8.6 million dwt or 8% and containership demolition accounted for 14.2 million dwt or 13% of the total demolition.
All other ship segments accounted for 10.7 million dwt or 10% in the period from January 2014 through September 2016.
While the overall amount of non-performing loans (NPLs) held by Italian banks has an estimated value of US$350bn, the shipping sector accounts for almost US$10bn. The statistic emerged during the finance session of the Shipping and the Law conference held in Naples where Michele Autuori, a lawyer from Watson Farley & Williams, discussed a presentation dedicated to the NPLs market.
"The shipping industry is a major borrower and has been one of the worst hit by the economic downturn and the vast majority of the Italian shipping firms, with the exception of few shipowners, are under restructuring," he said. Italy's top two banks, Unicredit and Intesa Sanpaolo, hold roughly half of the overall financial exposure of the local shipowners (US$7bn out of US$13bn) and they have been so far reluctant to sell their loan books at a highly discounted rate.
According to Autuori, hedge funds typically apply a 40% discount on average to the book value of Italian shipping loans to reflect higher default risks and greater potential for trouble when it comes to recouping their money in court. "Nevertheless investment funds seemed to be interested in buying Italian non performing loans and have set their sights on an estimated $13bn of shipping portfolios held by Italian banks," commented the Italian lawyer.
As of today several NPL transactions took place in the Italian shipping market with Pillarstone Italy at the forefront with US$281m invested, followed by Goldman Sachs with US$206m, Deutsche Bank US$193m and Bank of America Merrill Lynch on US$3.8m.
Autuori however also stressed the issue that today there is a price gap of as much as 20% of loan value between NPL sellers and buyers due to many factors such as the inefficiency of the Italian judicial system and inability to carry out quick private sales.
Tidewater has received extensions of the waivers on certain covenants until Nov. 11 – the second extension in quick succession for the troubled US OSV operator, however it has admitted it remains mired in financial woe and bankruptcy remains a possibility.
"The company has previously reported that progress was being made in its negotiations with its principal lenders and noteholders to obtain the covenant relief sought; however, recent industry data, including data regarding projected levels of offshore drilling activity, a primary driver of activity within the offshore service vessel industry, has led the company to conclude that important debt terms will require further negotiation. While the company will continue to work toward amendments to its various debt arrangements that will be acceptable to all parties, there is a possibility that the lenders, noteholders and the company will not be able to negotiate new debt terms that are acceptable to all parties, in which case the company will have to consider other options, including a possible reorganization under Chapter 11 of the federal bankruptcy laws," Tidewater warned in a release.
Non-delivery of vessels on the orderbook, which has been a prominent theme in shipbuilding in the last decade, looks set to be increasing again this year amid troubled shipping markets, according to Clarksons Research.
In the year to date, changes to the market environment have been important across all of the major sectors, and this increased market risk looks set to drive non-delivery to record levels in full year 2016.
Based on the difference between scheduled deliveries from the start year orderbook and actual deliveries, Clarksons said that the total non-delivery increased significantly with the onset of the financial crisis, from 8% in dwt terms in 2007 to 33% in 2009. In the year to date this figure has hit 41%, and 2016 seems likely to set a new record.
In general, the uptick in non-delivery over the past two years has been driven by an increase in market risk across the major sectors amid depressed markets.
In the bulk carrier sector weak earnings have persisted through 2016, causing non-delivery to rise to 50% in dwt terms in the year to date, up from 42% in 2015. Although tanker non-delivery has fallen from 32% last year to 23% in 2016 so far, due in part to firm earnings in the first half of the year, the biggest change has been in the boxship sector, where non-delivery has risen from 13% in 2015 to 39%, following a sharp decline in rates across most ship sizes.
Weak markets have also added to owner risk, with many owners negotiating delays to the delivery of vessels, particularly bulk carriers.
Total annual operating costs in the shipping industry slipped by an average of 2.4% in 2015, compared with the 0.8% average fall in costs recorded for 2014, representing the fourth successive year that the operating costs were in decline, according to shipping consultant Moore Stephens.
All categories of expenditure were down for the previous 12-month period. This suggests continued pragmatic management of costs by ship owners and operators, as well as a reduction in active trading for some owners as a result of the prolonged worldwide economic downturn.
The total operating costs for the tanker, bulker and container ship sectors were all down in 2015. On a year-on-year basis, the tanker index was down by 4 points, or 2.2%, while the bulker index fell by 6 points, or 3.6%. The container ship index, meanwhile, was also down by 6 points, or 3.7%.
There was a 1.2% overall average fall in 2015 crew costs, compared to the 2014 figure. Tankers overall experienced a fall in crew costs of 1.3% on average. All categories of tankers reported a reduction in crew costs for 2015 with the exception of Panamaxes and VLCCs, which recorded increases of 1.4% and 1.2%, respectively. The most significant reduction in tanker crew costs for 2015 was the 3.6% recorded by product trankers.
For bulkers, meanwhile, the overall average fall in crew costs in 2015 was 1.1%. The operators of Handysize bulkers paid 2.3% more on crew costs than in 2014, but the operators of other categories of bulker paid less, in the case of Panamax bulkers to the tune of 3.2%.
Expenditure on crew costs was down 3.3% in the container ship sector. The biggest fall in crew costs in this category was the 3.6% reduction recorded for vessels of between 2,000 and 6,000 TEU.
"This is the fourth successive year-on-year reduction in overall ship operating costs. The reduction is three times that recorded 12 months ago, and a reduction at this level had not been widely anticipated," said Richard Greiner, Moore Stephens Partner, Shipping & Transport.
He added that shipping can draw "some comfort" from a fourth successive annual fall in operating costs, but that it should remember "that costs can move both ways."
"The indications from the freight markets are that shipping is still selling itself too cheaply. Inflationary pressures on operating costs will remain, so maintaining the status quo will not be a viable option. For many, the freight markets will remain challenging and so to remain competitive, shipowners need to continue to improve efficiency, innovate with new technology and harness the considerable benefits of 'big' data without delay," Greiner noted.
The global shipping industry has called on International Maritime Organization (IMO) Member States to give serious consideration to a joint industry submission regarding the need for further progress on addressing the sector's CO2 emissions.
The submission calls on IMO Member States to finalize the adoption of a global CO2 data collection system for international shipping, as a precursor to the consideration of possible next steps to address the sector's CO2 emissions.
Such steps could then build on the existing IMO mandatory agreement on technical and operational measures to reduce shipping's CO2, which entered into force worldwide in 2013 – the first global agreement of its kind to be established outside of the United Nations Framework Convention on Climate Change (UNFCCC), according to ICS.
In particular, the industry associations will be requesting MEPC 70 to agree to develop a roadmap which would include a timeline for the completion of this important work, which the submission describes as determining a "fair share contribution" towards reducing the world's total CO2 emissions, of which international shipping is currently responsible for about 2.2%.
Made in advance of next week's meeting of the Marine Environment Protection Committee (MEPC 70) in London, the joint industry submission by BIMCO, International Chamber of Shipping, INTERCARGO, INTERTANKO and World Shipping Council, represents a unified response from the shipping industry to the Paris Agreement on climate change, which will enter into force on Nov. 4.
Hanjin's receivership represents the trough of the container shipping market, according to shipping consultants Drewry, and despite continuing concerns of weak trade growth and fleet oversupply a gradual market recovery is expected, according to the latest annual Container Forecaster and Review 2016/17 report published by the British company.
"Worse than expected second quarter financial results will be followed by a better second half-year," Drewry maintained. But the analyst still expects container carriers to book a collective operating loss of US$5bn this year.
"We forecast industry profitability to recover next year, thanks to improving freight rates and slightly higher cargo volumes, and so record a modest operating profit of $2.5 billion in 2017," the company maintained.
Neil Dekker, Drewry's director of container research, commented, "Hanjin's failure is the culmination of several years of poor commercial decisions and mismanagement, not just by Hanjin, but the industry as a whole. But it did not necessarily signal a major tipping point for the industry. It was more a side-show as freight rates had crucially already turned a corner at the mid-year point. More consolidation is likely, but is not necessarily the route to the promised land. Senior company executives talk about synergy savings of hundreds of millions of dollars, but this means nothing when it is all too easily given away in weak contract negotiations and the desire to maintain precious market share. The answer lies with fully addressing the revenue side of the equation and thankfully there are signs that the spot market is being addressed to some degree. The acid test for 2017 will be how the lines approach BCO contract negotiations."
Bankrupt Hanjin Shipping has redelivered the majority of its chartered-in vessels with more to follow, which is swelling the global fleet of idled containerships, according to research by Alphaliner.
Since the line filed for receivership on Aug. 31, the South Korean carrier has returned 67 vessels (360,790 teu total capacity) to their owners.
These redeliveries have caused the fleet of idle containerships of over 500 teu to surge to 371 vessels (1.33m teu total), as of Oct. 3, Alphaliner said in its latest weekly report.
Some 36 containerships (282,700 teu total) remain under Hanjin's control as of Tuesday this week, the research said.
Most of these vessels will be returned to their owners once the cargo onboard has been unloaded, which is expected to happen by the end of the month.
Meanwhile, there remain six vessels that are "in question", which were previously listed as Hanjin-owned but are expected to be taken over by their secured creditors, according to Alphaliner.
Twelve containerships have been detained by creditors, although the line has already negotiated the release of six of these vessels.
Alphaliner voiced scepticism that Hanjin would focus purely on its operations in the intra-Asia market when it submits its rehabilitation plan in December, as some press reports have suggested.
"It has to be considered that Hanjin ceased running its intra-Asia services in September," the report said.
Privately-owned container carriers could risk losing shippers' trust if they do not provide any data on their level of indebtedness and balance sheet strength, according to shipping consultancy Drewry.
The recent failure of South Korean carrier Hanjin Shipping has exposed the high level of financial risk that exists and created renewed demand for financial transparency.
While Hanjin's financial position was at the extreme edges and its demise is not expected to create a domino effect, a number of major carriers are still struggling and the risk of another following the same path as the Korean line cannot be discounted, Drewry said.
Drewry's Z-score carrier financial stress index sunk to its lowest ever point following the first-half 2016 results. The decline in the Z-score index has coincided with the heavy reduction in container freight rates that dropped to historical lows in the second-quarter.
"As freight rates staged something of a recovery in third-quarter we expect to see some uptick to the Z-score when the third-quarter 2016 results are published, while the removal of Hanjin from the sample will also benefit the average score. Nonetheless, carriers will almost certainly continue to reside in the so-called 'distress zone'," Drewry said.
Based on the latest available financial reports Drewry's Z-score table shows that only two, namely, A.P. Moller-Maersk and OOIL, of the 14 selected companies scored high enough to make it to the cautionary 'grey zone', with the remainder struggling in the 'distress zone'.
With shippers expected to pay much closer attention to the financial risks when selecting carriers in future, carriers themselves will need to be sure of the financial health of their alliance and service partners, or potentially risk losing customers.
The current crisis in the dry bulk shipping sector could have a wider impact with effects on other major sectors of shipping such as tankers and containers, according to BIMCO's latest report.
Looking at the "road to recovery" for dry bulk shipping beyond the current market difficulties, BIMCO predicts major changes, including consolidation, greater focus on risk management and higher finance costs.
Namely, consolidation and risk management will be the new industry model for dry bulk shipowners with parallel effects in other sectors.
"The fragmented ownership of the dry bulk fleet cannot be sustained over the length of the downturn and we will see greater consolidation, meaning fewer and bigger companies," Bimco said, adding that company stakeholders will seek a more sophisticated business model with better quality information and a greater focus on risk management.
Meanwhile, shipbrokers will need to provide a broader range of services as the new, larger shipping companies will seek to deal directly with larger customers on major trade routes, plus more long term COAS and digitalisation will also place brokers under pressure to widen the services they offer.
In addition, BIMCO said that the Basel III and the proposed Basel IV regulations will increase the cost of bank finance for shipping, while shipyards will have to diversify with many of them opting to close or consolidate.
"This crisis will affect shipping companies, not only economically and financially, but also sociologically. We will see deep changes in the fundamental structure of the shipping world and in shipping companies, mainly the smaller ones. A new business model will emerge, not just for shipowners but also for brokers, shipyards, financial institutions and other stakeholders," said BIMCO President Philippe Louis-Dreyfus.