Shipping in deflation mode

The shipping industry is caught in the midst of a new “(ab)normal”, according to the title of the latest weekly report from shipbroker Intermodal, as the global economy and ocean shipping experienced dramatic volatility in the beginning of 2016. “As the global economy undergoes structural changes, so does the derived ocean shipping activity, principally epitomized by the following abnormal trends: (i) Constrained financing, (ii) Deflation in asset prices, and (iii) Shift in demand growth”, said the shipbroker.

According to Panos Tsilingiris, SnP Broker, “first, ship financing in all of its forms is very restricted and will remain so in the years to come. There has been just one shipping IPO this year raising a mere $7m! Following the 2008 financial crisis, the excessively detailed banking legislation enacted, has forced bankers to spend more time filling out forms for regulators rather than understanding better their clients and the industry. Despite monetary expansion, banks are not lending the excess supply of money but rather hoarding it. If you think this scarcity of financing is temporary and that the implications of Basel III have already been felt, you are simply wrong. In 2018 we also anticipate the IFRS 9 to take effect contributing to earlier recognition of credit losses, making it more expensive and difficult for banks to lend. So, via upcoming regulations, deleveraging will intensify both in the west and in emerging markets. Only the best buyers will receive money, good luck to smaller companies”, he noted.

Intermodal’s analyst went on to say that “secondly, the cost of creating new shipping assets, i.e., shipbuilding prices, are low, will get lower and will remain low for some time. Shipping deflation is due to the vast manufacturing overcapacity from the previous cycle and technological change. We will experience newbuilding prices lower than the 2012 ones which at the time represented multi-year lows. The Japanese shipbuilding prices, the premium in the sector, are correcting thanks also to the Yen now standing at 111 a dollar vs. 76 in 2012, while Chinese Builders, the floor of shipbuilding values, offer aggressive pricing assisted by the Yuan devaluations. In S. Korea, we expect consolidation and further correction of prices following the recent elections. The abovementioned lack of financing will keep newbuilding appetite subdued for long. This will further drive prices down. And since newbuilding prices are in a sense an upper bound for second-hand prices in normal freight conditions, asset prices will stay deflated endangering the plans of opportunistic asset players”.

“Third, there is a shift in growth as we transition from an industrial into a se…

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