Confidence crunch?

January saw one of the biggest runs on global shipping stocks in recent memory.
COMMENT, Business Trends


January saw one of the biggest runs on global shipping stocks in recent memory. After consecutive years of climbing stock values and increased confidence, last month seems to have hit major industry players hard and caught them somewhat unprepared.

Despite the fact that the Middle Eastern economy and shipping demands seem rather insulated from the vagaries of economic activities in other regions, the drop in global confidence in the sector will no doubt cause local companies to sit up and take notice of the worrying trend for several reasons.

Local shipping companies in the petrochemical, bulk, and container sectors may be beginning to wonder if the record high prices paid for new vessels and second hand ships last year may in fact have represented value at all.

In 2007 the price of a newbuild capesize bulk carrier reached around US$97 million, a 50% increase on the same purchase one year before. Second hand carriers finished the year fetching prices at a 60% premium on year-end 2006.

The vast liquidity supply washing around the region, thanks largely to an unprecedented and sustained period of high oil revenues, has meant local lines have had ready access to a cheap supply of capital.

Many firms have taken advantage of this low cost financing to invest in new acquisitions to bolster their fleet size and shipping capability, in spite of the astronomical acquisition costs. Forecasts for a strong 2008 put such investments in a rosy light.

However, come the middle of January, stocks in two of the world's largest shipyards, Hyundai Heavy Industries, and Daewoo Shipbuilding, began to plummet.

In one week both saw 6% wiped off the value of their shares. Chinese-owned Cosco Corp, parent of the massive Cosco Shipyard Group saw 15.3% of its value wiped out in a single day of trading.

A perceived weakening of demand for newbuilds, as many ships laid down over the last few years begin to enter the market, may force these yards to drop the prices they are currently charging.

Add to this fact that in the same week investors in major shipping lines ran scared from those stocks and a dangerous image appears. Fears of a downturn in shipped commodities generated by the threat of a weakening US economy led many institutional investors to dump shipping stocks, with Singapore's top dry bulk owner STX Pan Ocean falling hardest with a drop of nearly 11%.

Although many listed companies saw a resurgence towards the end of the month, confidence in the sector certainly seems to be falling.

None of this really matters to Middle Eastern owners that have already negotiated contracts for new vessels, with day-rates agreed and pegged to expected market demand last year. However, the market performance of both yards and shipping lines in January may well indicate the price of new vessels peaked last year.

Firms which judged that building costs would continue to rise through 2008 may come to find last year's lavish procurement spree turns out less than prudent.

Most Popular