Shipping Loans Go Bad for European Banks

ilene's picture

As we noted in Stock World Weekly, the Baltic Dry Index, a benchmark indicator for global economic activity (an index of global freight rates for shipping dry commodities, e.g., metals, coal and grain), has been in free-fall since the beginning of the year and has analysts buzzing about whether the decline in the index was reflecting a precipitous drop in demand, or an unusual oversupply of shipping capacity. The index is down from its 12-month high of 2173 in October - now in the low 700s.

"A quirky canary-in-the-coal-mine indicator for global economic activity is in freefall, but market experts can’t agree on whether it’s a sign of danger or an accident of recent history on the high seas.


"The Baltic Dry Index – an index of global freight rates for shipping dry commodities such as iron ore, coal and grain – had fallen for 23 consecutive days as of last Friday, cutting its value in half in the space of a month. The last time the index was this low, the world was in the depths of a credit crisis and a major recession. (Baltic Dry Index springs a leak)"  

Chart from Bloomberg:

In Russ Winter's view, the problem is two-fold - a drop in demand and oversupply of shipping capacity. Here's his take on the situation. ~ Ilene 

Shipping Loans Go Bad for European Banks

Courtesy of Russ Winter of Winter Watch at Wall Street Examiner  

In 2008 the markets got very worked up with what at the time I was relentless calling a China commodity bubble.  A search under the term “China Bubble” from Winter Watch turns up 75 articles mostly in 2007-2008 and also in 2011.

A bubble can be defined as speculative activity not well related to the real economy, in short, a maladjustment. One of the consequences of this was the ramp up of shipping construction to feed the China boom.  When commodities came back in late 2009-2011, shipping construction surged forward unchecked. Now with China rolling over, the shipping that was produced during this period is increasingly lined up and stacked in Asian harbors around the world. Shipping rates have collapsed, another event which the markets continue to largely ignore.

I have been feeling for some time that this would bite the players involved. Although the shipping company stocks have become very depressed of late, the story as it relates to shipping lenders has been relatively overlooked. Now the IHT is out quoting industry observers stating that European banks may be facing write-downs on these loans on the order of $100 billion, which is even more than their Greek losses.

At my Actionable site I am now recommending a bearish strategy using a big poorly capitalized European bank that is not only exposed to European sovereign debt, but also to the double impact of inflated commodity lending in general. The market thinks LTRO, I think multiple lending blowups in tandem.  In addition to shipping, I am including shale nat gas, which is also maladjusted. Natural Gas was discussed separately on Jan. 23 in the “Natural Gas in Maladjusted Feast and Famine Mode” report.

Check out Russ’s premium service, Russ Winter’s Actionable. Click here for information.  

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jaffa's picture

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Vendetta's picture

A cash for floaters program should rid the world of excess shipping capacity while keeping ship builders going. 

Heyoka Bianco's picture

We've got a global oversupply of everything except nutritious food, clean energy, and good decision-making. I don't have a pretty chart, but some things are just self-evident.

disabledvet's picture

textbook "malinvestment" with a trillion in stranded capital thrown in just for shits and giggles. goes right to the TRUE issue with "fiat money creation." namely..."how do i EFFICIENTLY deploy capital in such an evironment?" and of course the answer is: "you can't." what's coming are BANKRUPTCIES. Plain and simple. and such a simple reality...(just based on the "axiom of simplicity in finance" should be sufficient) goes a long way towards explaining the catostrophic series of events currently unfolding. obviously throwing in the problem of the collapsed price of natural gas makes no sense: this particular happenstance is called "capital formation"....a wonderfully cheap currency waiting to be monetized in a world where money has lost all meaning to capital and labor alike. Unfortunately the natural gas engine has been held in abeyance by governments worldwide...SO STARVATION IT IS THEN! hahahahahaaha! up yours, phuckers! "vote death this November!"

mobydick's picture

So the speculators keep all these commodity prices afloat, whilst in the real world there's this fire raging in the hold. And I guess these mining execs aren't going to tell you anything. Not until they've finished offloading all their stock.

rsnoble's picture

Wouldn't our previous GDP discussions have something to do with the crash in BDI?  If we've already built for the future we certainly don't need anymore shit do we.

Dead Canary's picture

Geeze it's dark down here. Does anyone else smell gas?

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StychoKiller's picture

Fresh out of matches; here, use this road flare...

Fix It Again Timmy's picture

Apparently, rubber dogshit sales have collapsed....

Slim's picture

Simple, understated, but a solid laugh nonetheless.  Thanks for that.

Peter Pan's picture

The shipping industry is running out of tricks. The last trick they used was to slow down the ships which lead to a massive fuel saving as well as requiring more ships due to slower delivery times.

And then you have VALE which is the Brazilian iron ore producer which has recently commissioned the construction of another 18 ships.

As scary as shipping is, I think that a plunge in airline traffic would cause a guaranteed economic nightmare.

ThisIsBob's picture

In the news is that China, to protect domestic shipping companies, won't let Vale ships bring in ore cargo.


jonjon831983's picture

oh rofl... all of Vale's efforts... for nearly nothing?  Denied access by their client?

sadpanda's picture

I guess this is also bearish for somali pirates.  

Blue Horshoe Loves Annacott Steel's picture

The Somali Pirate Short ETF (SMLI) hit an all-time high of $174.78 in Federeral Reserve Notes.

geno-econ's picture

Iranians will buy those Greek cargo ships pennies on the dollar and then scuttle ships in the Straits of Homuz therby creating a new index---Straits of Hormuz Dry Oil Index.  Baltic Dry Index hits all time low. 

Buck Johnson's picture

No kidding, we are seeing everything slowing down to a crawl.

Smiddywesson's picture

Clear the lower decks and install rowing benches, labor is about to become very inexpensive.  We could make a floatilla of Waterworld warships for the post apocalypse taking of Iran.

Gold Dog's picture

Victor Mature as Barrabas!!

StychoKiller's picture

It was Anthony Quinn, not Victor Mature.

battle axe's picture

We use Greeks as rowers, hey they need the money...

Clowns on Acid's picture

They need the exercise as well......

Citxmech's picture

Funny.  My worry is that we will move on Iran just before the conventional economy is about to roll-over.

tony bonn's picture

thank you fo reminding us that ratios have numerators and denominators.....if some kind soul can isolate the new capacity and business decline, then perhaps we can properly interpret the index....

mattu13048's picture

From Armada Markets website: For God's sake, we should ask all global internet providers to ban every website that has Greece, debt, crisis, promise, plan and some other words on the same page. 

onebir's picture

Probably why the EU's so keen on ACTA ;-)

SmittyinLA's picture

At some point in time they're going to have to stop or slow building new ships, paint technology may be extending ship life too.

MrPalladium's picture

Funny, I keep reading all these conclusory statements about ships built but I never see any numbers or data. No data on number of ships scrapped per year (by category) and no number of new ships (by category) built.

The decline in Baltic Dry is hard data. The argument of shipping oversupply is, absent data, pure fluff.

gookempucky's picture

The riddle of the shipping industry is wether or not it will stay afloat ? no pun intended. If folks don't mind I would like to clarify some information in regards to the shipping industry.

First, the newbuild industry actually spit out around 1.5 - 2 trillion$ worth of new builds - the 100 billion -not to knock the post info-is actually current new orders figures. As an example, in 2006 the new order vessel count was 4,409 at an average cost of 80 million, this started in 2002 and blew out in 2008. The Newbuild programs included- Dry Cargoe- Container-Tanker- Bulker- Ro-Ro - Passenger- Reef.  Within these newbuild catagories springs Tugs-Platform-supply-anchor-bunker-LPG-Vehicle Carrier-fishing-etc etc.

 So in a nutshell  Yes the system has slowed considerably(CRASHED). We can see that this industry does mirror a Housing Industry made of steel and has all the consequences that the mortgage industry(housing) has fallen upon.

It is a Major Construction Industry period and the backbone of the shipbuilding industry is of course----everything that goes into the system via the back door---- pipe-fabrics-hose's-fittings-gears-bunkering stations-chain-rope-plastic-etc etc and the most important thing from this overbuild is Manufacturing Destruction which of course leades to Jobs Destruction.

The loopback effect for slowdown and job loss( which you can not put a number on) will be at--HHI/Korea--ASL/Singapore--Daewoo-Samsung Heavy-Keppel-Labroy marine-Babcock-Subic-Hanjin-CSIC-Minami -Misui-Mitsubishi----the list goes on and on .

There is no recourse

yes to some degree anti fouling coatings do extend structural life but as for the crew cost = on average vlccf is round 40k monthly--maintenance cost what maintenance cost- due to each circumstance.

We are now witnessing the WORLDS 2nd Largest Construction Industry falling to it's knees--your choice- flak jacket or life jacket.


StychoKiller's picture

So, in essence, we're batting .667!  Well alrighty then.

BandGap's picture

Well, I am a genius.

Don't ask why, watch Baltic Dry.

Drink Canada Dry, just try, don't ask why, no Bud Dry.

Paul Bogdanich's picture

In case all you geniuses hadn't noticed the time to go negative on Baltic Dry was in December.  I personally don't see a lot of downside left in it because what happens if prices stay this low is they take the older ships and scrap them thus reducing the capacity.  Same thing with gas.  if it stays low more power plants convert to using it, drilling for gas stops, acerage gets take out of production and declining wells get shut in.  And all that is already happening.    

ShoeShineBoy's picture

 you have obviously taken the word out of my mouth.

 Shorting BDIY is too little reward, too late a trade in my mind with the obvious risk of a short squeeze for any remotely positive headline. There is a huge supply glut in drybulks, especially in tankers and to some degree in container shipping and anyone and their mama already knows about it. In my research, container supply will turn to negative (scrapping and run down of the backlogs at the shipbuilders) in 2013, while no one knows when for tankers (some say 2015). Chemical tankers are supposed to be better next year. Granted for BDIY it is the drybulk matter and it wont come clean till later 2013, arly 2014. I think the price levels already captures that or else shippers would be operating at a loss at the gross margin level.

 Natural Gas is also similar story, my last check of commitement of traders just indicates that for the last 2 years, every flying trader, commerical ot speculator isshort the effing nat-gas. If that dream of shipping them via chemical/lng tankers off of the US ports comes true (one company has already signed bunch of deals with Latam and Japan corps), while with some resource rationalization, things might stabilize a bit, if not turn the corner.