October in the Baltics

Last October 2008, Guambat noted that one of the landmark indicators of the then rapidly sinking market was a significant drop in the market prices of shipping companies. Not everyone, however, was so pessimistic:

Despite the recent slowdown, analysts in general believe in the secular China growth story. Cantor's Boyden says at current prices the stocks represent a "phenomenal buying opportunity," adding, "Right now I think they have been ridiculously oversold."

Guambat wonders how that worked out.

Last month, September 2009, Guambat noted the huge mothballed fleet of ships off Singapore and the death dive of the Baltic Dry Index. In particular, Guambat questioned the impact this may have on the steel producers, and wrung his paws over the bearishly divergent chart comparing the Baltic Index to the S&P500.

The story continues to compound, and Guambat holds fast to his sinking feeling.

China, Korea ‘Good Fight’ for Shipyards May Hit Rates (Update1)

The world’s two largest shipbuilding nations [China and Korea] have taken steps this year to aid shipyards and safeguard jobs as customers delay or scrap orders amid tumbling world trade. That support will likely ensure more vessels enter service, even as lines mothball and scrap existing ships because of a lack of cargo.

China’s bid to become the largest shipbuilding nation by 2015 may also worsen the glut as it competes for market share, said Matthias Umlauf, senior economist at HSH Nordbank AG. China has “the chance to become the world’s largest shipbuilding nation and they will not let this chance go,” said Umlauf. “They will support their national champions and that will definitely add to the overcapacity situation.”

State support may ensure that many of these vessels are delivered even if banks won’t finance them, said C.K. Ong, president of U-Ming Marine Transport Corp. Ong estimated that shipowners will likely need to raise as much as $90 billion to help fund the roughly $165 billion of dry-bulk vessels on order worldwide because of dropping asset values.

China State Shipbuilding Corp. and China Shipbuilding Industry Corp., which construct more than 70 percent of dry-bulk vessels, are both state-owned.

“What worries me is whether the Chinese or Korean governments will sit still and let the shipyards get into financial trouble because of the non-delivery of ships,” Ong said.

State support for struggling shipyards may prevent a rationalization of overcapacity, driving down vessel prices and profits across the industry. The aggregate capacity at the world’s 55 biggest shipyards is already as much as 40 percent bigger than demand, according to Morgan Stanley.

hat oversupply may help cause prices for new vessels to fall by as much as 20 percent by the end of next year, according to the bank. Prices for newly constructed container vessels fell 31 percent in the first half on the capacity glut, according to Morgan Stanley. Bulk-ship prices dropped 26 percent and tanker prices declined 25 percent.

China in June announced a two-year plan to help shipbuilders, including funding for cash-strapped producers and moves to encourage mergers and acquisitions. In April, South Korea unveiled an 11.5 trillion won ($9.6 billion) financing package to help shipowners pay for new and existing orders.

Perhaps this is just an Asian way of throwing a TARP over a TBTF industry. Even so, Guambat reckons the excess capacity will sink in a sea of tears.

And, how is that divergence in the Baltic Dry Index and S&P500 coming along? Well, it's widening, as the S&P has rallied to a rarely seen huge quarterly increase, while the BDI has continued to bail:

Source: Investmenttools.com