We have an interesting situation right now in the international shipping market because we see some sectors of the market doing really well while others are performing poorly. It's definitely a mixed bag and here's why…
For many years, the tanker market was very depressed. The sector has improved in the last six to nine months as the market has strengthened, both for crude as and product transportation. On the crude side, lower oil prices have resulted in improved demand. This is bolstered by the fact that for many years there was limited ordering of new crude tankers to be built. Eventually, when the demand returned, the supply side was still relatively good because of the limited ordering over the last few years. This has resulted in a good supply/demand balance today, resulting in improved freight rates. On the product tanker side the story is somewhat different. The new refineries opening up, particularly in the Middle East and India, have resulted in increased transportation distances. This has helped the overall supply/demand situation as the increased transportation distances is a positive for the overall supply side.
Conversely, there still exists a supply overhang in the dry bulk and commodities markets. Simply put, there are too many ships in the water combined with an unfortunate decline in demand. The reduced growth in China, which we see as a major factor for the decline, has also been especially hard on the dry bulk market - it's very close to all-time low levels.
Although there really aren't that many U.S.-based, U.S.-owned companies very active in the international dry bulk sector, all will be impacted by the cash flow situation in this market. So it's rough going for a lot of these companies. The larger, public companies have raised equity to build a war chest for the next year or two with the expectation that the market won't strengthen for quite some time.
Some are well capitalized and well prepared for any near or medium term turmoil. They have prepared early and have done a great deal of work on their order books. They've either cancelled orders or extended the construction periods of new builds to allow more time for the market to rebound before actually taking delivery of the vessels.
We've also seen instances where companies have converted some of their order book to other types of vessels, however, this has been relatively limited.
The shipping markets are in general quite fragmented and there is a certain lack of discipline in terms of controlling the supply side. When the various markets pick up, companies have a tendency to rush out and order new vessels instead of focusing on buying modern secondhand vessels. If we continue to see a lot of ordering of crude carriers and product tankers over the next 6 to 12 months, there might be a reason to be concerned with the supply side down in 2017 or 2018. There is a risk that there will be a lot of new buildings delivering at that time. That's something we're keeping a close eye on.
Svein Engh is Group Head and Managing Director of
CIT Maritime Finance, where he is responsible for overseeing financing activities of oceangoing cargo vessels including tankers, bulkers, container ships and car carriers, as well as offshore vessels and drilling rigs. He has more than 25 years of experience in the global financial services sector, with emphasis on shipping, offshore oil services and transportation sectors. He earned a BBA and MBA from Ohio University.
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