A key safety valve for regulating the world’s supply of ships has stopped working in recent weeks, after credit and other problems brought the sale of ships for scrapping to a near halt.
The problems are centred in India, the heart of the world ship-demolition industry, and have prevented owners from selling the thousands of ageing vessels worldwide that are no longer worth keeping afloat, following a collapse in the rates earned by many vessel types.
There had been hopes that large-scale scrapping might limit the effects of oversupply in key shipping markets, brought about by the manic ordering of key ship types in recent years – particularly dry bulk carriers and container ships.
“The Indian market is basically closed at the moment,” one industry participant said.
The central problem, according to people involved, is that many shipbreakers’ banks are no longer willing to issue letters of credit – documents assuring the seller’s bank that the agreed price for the vessel will be paid.
The banks fear that falling scrap values mean their customers will be unwilling to pay the seller the guaranteed sum and the vessel will not cover the guaranteed amount if it is seized as security.
Some Indian banks also appear to have refused to honour letters of credit over fears about the value of the ships pledged as security.
Vessels were fetching record prices of up to $740 a tonne as recently as September, while the present market price has collapsed to $300.
Michael Bodouroglou, chief executive of Nasdaq-listed Paragon Bulk Shipping, based in Athens, said: “This credit situation is really suffocating the industry in a number of ways on the scrap side of it. It’s unbelievable what’s going on.”
The seizing up of the market means that owners will either try to keep operating older ships or will store away the many obsolete vessels that were kept going in boom conditions.
According to figures from Clarksons, the shipbrokers, there are still more than 250 ocean-going dry bulk ships built in 1975 or earlier and more than 350 built in 1984 alone.
There are also large numbers of excess, ageing container ships, while large numbers of oil tankers need to be phased out before a ban on single-hull vessels in most parts of the world from 2010.
Mr Bodouroglou said scrapping was a healthy thing that always happened in a downturn: “It eases the strain of the oversupply of ships placed on the market.”
However, one shipbroker said prices for scrap had now fallen so far that mothballed shipbreaking yards in China could start reopening to take advantage of the low prices. Such yards are usually regarded as easier to deal with than Indian shipbreakers, whose facilities normally consist of no more than a plot of beach.
Quentin Soanes, managing director of London-based Braemar Seascope Shipbrokers, said a surge of such scrapping was likely to be accompanied by significant cancellations of orders for new ships. Both would reduce concerns about future oversupply.
“All the issues that will help the recovery are probably coming faster than people expect,” Mr Soanes said.
By Robert Wright in London
Financial Times (UK).
October 26 2008
Copyright The Financial Times Limited 2008
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