ANALYSIS-Credit crisis threatens weak bulk shippers, shipyards

Tag : Industry raw materials
Norway - By Nick Carey
CHICAGO (Reuters) - Access to credit is the lifeblood of maritimetrade and the credit crunch has largely cut off that supply,threatening to weed out weaker shippers and shipyards, as well ashamper global trade.
"The credit crisis has made banks nervous and the last thing ontheir minds is making fresh loans," said Omar Nokta, an analyst atinvestment bank Dahlman Rose. "Some ship owners and shipyards inparticular are feeling the pain."
The outlook is worst for the bulk shipping industry, which haulsraw materials such as iron ore, grain and cement. More than 90percent of the world's traded goods by volume is carried by sea.
Access to credit has been cut off at an inopportune time for theindustry, after several years of robust growth in markets likeIndia and China -- accompanied by huge infrastructure investments-- spurred a race to build new ships, creating three-year backlogson shipyard order books.
Orders reached a milestone of 10,000 ships on Aug. 1. But orderingships is one thing, paying for them is another.
"There has been a further tightening (in lending conditions) overthe summer," Harald Serck-Hanssen, Norwegian bank DnB NOR'sship-financing unit said last month.
Some banks had shut their books for the year and the limitedshipping lending banking universe was shrinking, he said.
Serck-Hanssen spoke before the bloodbath on Wall Street of the pasttwo weeks in which credit conditions have worsened for shippers andshipyards, especially newer or smaller operators.
"Some of the newer shipyards (in South Korea and China) are goingto suffer a great disappointment," said Polys Hajioannu, chiefexecutive of bulk shipper Safe Bulkers Inc. "They will not be ableto deliver a number of ships."
"Some smaller shippers will also have trouble getting financing topay for the ships they ordered," he added.
Many of those companies put down a 20 percent deposit for theirships when credit conditions were better, but will have troubleraising the rest, Hajioannu said.
Some shippers and analysts have noted that letters of credit --bank guarantees on behalf of buyers that are given to exporters andwhich are an important aspect of global trade -- have becomescarce, leaving some cargoes stranded.
And analysts like Dahlman's Nokta argue the credit crunch may forcegovernments in Asia to slash infrastructure spending -- on roads,railways, bridges, airports -- if they need to bolster theirfinancial sectors in a slowdown.

A LONG WAY DOWN
The market turned sour rather quickly. In May, the BalticExchange's chief sea freight index for global raw materials hit alifetime high of 11,793 points on demand in fast-growing developingmarkets including China and India.
The index has plummeted since then due to the financial turmoil oninternational markets, falling commodity prices and fears thatAsian demand will falter. On Oct. 2 the freight index fell to 2,990points, nearly 75 percent down from the May high and its lowestlevel in more than two years.
Despite that decline and the apparent lack of available credit,shipyards have reported few cancellations so far for bulk carriersor other ships,
For instance, South Korea's Hyundai Mipo Dockyard Co Ltd announcedon Aug. 1 it had canceled a 197 billion won ($164 million) orderfor four product carriers. But the company said this was not due tomarket issues but the problems of the buyer -- an unidentifiedEuropean company -- and at the same time announced a 411.9 billionwon order for eight bulk ships.
"Concerns over a potential decline in shipbuilding orders andfinancial market instability are overplayed," said Lee Jae-kyu, aMirae Asset Securities analyst. "However, Chinese and second-tierplayers are likely to face challenges in receiving orders due totoughened terms and ship financing conditions."
Container ship company Global Ship Lease Inc CEO Ian Webber saidloans are "still available for good projects."
But Stamatis Molaris, CEO of Excel Maritime Carriers Ltd (nyse: EXM - news - people ) , said that if the credit crunch does not end soon then thenewer shipyards will "fall like a house of cards."
Molaris said some cargoes had been left on docks in numerousmarkets as banks were more reluctant to fund trade.
"The demand for goods is there; there is just not enough liquidityto move those goods around," he said.
Tight credit markets, plus an increased emphasis on letters ofcredit "may create a headwind for dry bulk stocks if rates remainlow enough to drive charter defaults," Wachovia (nyse: WB - news - people ) analyst Justin Yagerman wrote in a note for clients
Dahlman's Nokta said a crucial test for the sector will be howbadly the credit crisis affects Asia's financial sectors.
"If Asian governments have to bail out their financialinstitutions, funding could be cut for important infrastructureinvestments," Nokta said.
But Safe Bulkers' CEO Hajioannu said as long as the credit crisisis dealt with quickly , Asian demand will stay strong.
"Developing countries like China and India are half way through anunprecedented modernization requiring massive infrastructurespending," Hajioannou said. "There is no way that process can bestopped in the middle." (Additional reporting by Miyoung Kim inSeoul and Aasa Christine Stoltz in Oslo; Editing by Brad Dorfman) Copyright 2008 Reuters, Click for Restriction
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