It is a Riddle…

During the past six months hardly any week (or even any day) has passed without "news" about cancellations, reshuffling of building programmes and that 10%, 20%, or even 50% of the (especially, dry bulk) order book will simply vanish into thin air. So far the only reasonably reliable sources have indicated around 400 vessels of all types have been cancelled. We freely admit it - we have great problems in producing firm and reliable data ourselves. One challenge is that several of the orders that reportedly have been cancelled have never appeared in our order books. We have checked these orders with other databases and haven’t found a trace of them anywhere. Are these orders then cancelled? Have they ever existed? We don’t know.

"The greenfield yards will go bankrupt and no ships will be delivered" is yet another statement. Well, this is true to a certain extent as Chinese authorities have said that they will support the shipbuilding industry, but not all yards will be supported. A similar situation prevails in South Korea. So one could assume that the only a few of the greenfield yards will close. This will have very little impact on deliveries as the majority of newbuildings are ordered at established yards.

Maintaining the order book statistics is a Sisyphean task, and it is a real challenge to get correct information on delivery dates. In our experience we would be content to have, at the very least, the correct year of delivery since the delivery month (or even the quarter) is often inaccurate and subject to later revision. This brings us to delays. Assuming that we got the delivery year right for the order book scheduled for 2008, we estimate that about 20% of scheduled deliveries did not occur then and slipped into 2009 resulting in a "revised" order book for 2009 of about 74 mdwt. As three months of 2009 have now elapsed, we see that only some 6 mdwt of new bulkers are delivered. Or to be more precise - this is the amount of new bulkers for which we have registered movements. This is a surprisingly low number and although we know that several of the greenfield yards are struggling with production and yet more are still in a steep area of the learning curve before reaching a reasonable level of productivity, the low deliveries during 1q09 indicates an output of only 24 mdwt this year. On a more optimistic note, let’s just assume productivity increases and that this year’s tally ends at 30 mdwt. This leaves us with a shortfall of more than 40 mdwt! Could it be that many more vessels actually are completed, but lying off the yard? Could it be (and we think this is not unlikely) that owners are doing whatever they can to delay delivery of ships?

On top of all this come today’s extremely challenging finance market in combination with asset values that in many cases have dropped more than 70% from the peak. We estimate that outstanding payments on the dry bulk order book amount to about USD 110-115 billion (and in addition come outstanding payments for tankers, container vessels, etc) and several of the prominent ship- financing banks have declared they will not increase their exposure to shipping; on the contrary, several banks have announced they will reduce their exposure. Hence, equity has to be increased. Although ship owners have made fortunes during the past years, it has not been enough to finance the current order book. Using Supramax bulkers as an example, the average earnings in 2007 and 2008 combined were 44,500 USD/day. Corrected for OPEX one arrives at about 29 million USD in income for the two-year period. The average new building price in this period was 43 million USD, so before any other costs or payments (or dividends) the total earnings for the period constitute some 67% of the new building price. Based on recent transactions, a fair market value of a prompt Supramax resale today is about USD 30/31 million - and in our view one can hope to borrow about 50% of this (there are of course variations to this) which means that spending your entire earnings the last two years and borrowing as much you can you can pay for your Supramax which, to repeat ourselves, is worth only two thirds of what you paid. Hmmm….

How to finance the current order books is, in our view, "..a riddle wrapped in a mystery, inside an enigma.."