Dry-Bulk Shipping Firms Face Unprecedented Crisis

By
Costas Paris

The Wall Street Journal

http://www.wsj.com/articles/dry-bulk-shipping-firms-face-unprecedented-crisis-1453293892

LONDON—Falling demand from China is wreaking havoc among the world’s biggest shipping companies, forcing some to offload vessels at a discount to survive one of the industry’s deepest crisis.

“Things have just stopped in China,” said George Logothetis, chairman and chief executive of the Libra Group, an international shipping firm, speaking at The Wall Street Journal’s CEO Council luncheon at the World Economic Forum in Davos, Switzerland. He described the situation as “Armageddon level.”

The shipping industry’s pain has been worse for dry-bulk shipping companies—whose vessels carry much of the raw materials of global trade, from grain to iron ore. The Baltic Dry Bulk Index, sometimes viewed as a proxy for global trade, peaked out just before the 2008 financial crisis at 11000 points. On Wednesday, it closed at 358. The index has hit fresh record lows every day since the beginning of the year.

That is forcing some shipping companies to offload vessels at bargain-basement prices. Many of those same firms were bulking up just a few years ago, confident the global economic crisis was behind them.

“We’ve never seen anything like this,” said Emanuele Lauro, chief executive of New York-listed shipping major Scorpio Bulkers Inc. “We never thought we would find ourselves in this situation when we were buying ships in 2013 and 2014 at historically low levels. But, in the past few months, the priority has been to create a liquidity runway [by selling ships] and keep zero value off the table.”

Scorpio Bulkers—part of Mr. Lauro’s Scorpio Group, which also includes a fleet of tankers and ship-management services—spent $1.5 billion for 28 “capesize” vessels, the biggest general-cargo ships in the water, between November 2013 and March 2014. As the prices of commodities that Scorpio ships have tumbled, it has sold all of them, at a loss of $400 million.

Shares in Scorpio Bulkers have lost 85% of their value in the past year, and were at $3.75 in New York at midday Wednesday.

“It’s a bloodbath, which calls into question the survival of many dry-bulk shipping companies,” said Basil Karatzas, a New York-based maritime adviser. He said the number of capesize vessels in the water exceeds demand by more than 50%.

Daily general-cargo freight rates for newly built capes are currently around $3,000. Owners need rates of $6,000, or as much as $12,000 for vessels with financing costs, just to break even. For older vessels, the daily operating cost, including financing, can be up to $23,000.

Mr. Karatzas said big players such as Scorpio and fellow major Star Bulk CarriersCorp. can withstand the difficult market conditions as long as they have access to capital markets. Nasdaq -listed Star Bulk, which is majority-owned by U.S. private investor Oaktree Capital Management LP, recently sold four capes still under construction, raising $148 million. Its shares were trading midday Wednesday at 39 cents, compared with a high above $228 in October 2007.

Nasdaq notified Star Bulk this month that it has six months for its stock to reach a minimum bid of $1 for 30 consecutive trading sessions, or it will face delisting. Other big bulk carriers in breach of the minimum-bid rule include DryShips Inc., FreeSeasInc., Globus Maritime Ltd., Paragon Shipping Inc., Top Ships Inc. and Ultrapetrol Ltd.

Star Bulk didn’t reply to requests for comment.

A handful of smaller operators filed for bankruptcy-court protection last year. Also last year, at least a dozen closely held companies ceased operations, mostly in Asia and Europe, brokers said.

“A lot of companies have gone under, and more will go under this year,” Mr. Lauro said. “We will go under if this market persists.”

Scorpio Bulkers now has a fleet of 49 smaller ships, and Mr. Lauro said he would try to hold on to them in hopes of a recovery.

“This year is going to be very tough, but for those who can weather the storm, the upside could be very high,” he said.

The market is expected to be at least partially supported in the second half as increased volumes of grains come into play. Brokers said Ukrainian wheat exports will move in substantial volumes this year, boosted by the falling value of the hryvnia. The lifting of a grain-export tax by the new Argentine government also should support the market.

“We rely on moving products like cement and steel,” Mr. Lauro said. “The grain-exports pickup will boost the market, but agro products alone [are] not enough, and this year I don’t see any other drivers strong enough to push the market up.”

—Khadeeja Safdar in Davos contributed to this article.

Write to Costas Paris at costas.paris@wsj.com

Corrections & Amplifications: 
Shares in Scorpio Bulkers listed in New York at $9.75. An earlier version of this article incorrectly stated they listed at $117. (Jan. 20, 2015)

 

 

Copyright © 2017. Powered by WordPress & Romangie Theme.