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Shipping Loans Go Bad for European Banks
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.
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"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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BDIY at 680 today and dropping.
At this rate and avg. 3.5% daily drop, we're looking at the return of the Dark Ages of global trade by March 2012.
On the topic of resource trade. Canada's GDP gone negative. They were supposed to be the healthy guys.
Aside from natural resouces, what else do they export in significant quantites? And, other than the U.S., who are their other major trading partners, other than for raw materials?
Looks like another 'decoupling' myth going down the tubes. In the inter-connected world, we are all going down the drain together...some will be flushed first, but the bowl will be flushed again and again. No country is safe.
There's no hiding anywhere. The elite got us into this mess, the elite needs to be taken out to get out of this mess.
US taxpayers gave the financial elite banksters $7 trillion dollars to get us out of the credit crisis they put us in four years ago. NOW IS A GOOD TIME TO GET US OUT BANKSTERS!
+ 1 11b40 and walku're
This mess will touch everyone...
I think "Tyler" is just being sarcastic and tongue in cheek about the sustainablity of this so called secured loan model. Perhaps like the housing inventory they won't write off much, but a loss is a loss in my book.
Next boom - Gold Rush:
http://www.boatingsf.com/photos/050805/05-02-2005-20-11-43-376_edited-2.jpg
NFP
And along those lines, we can make all the troubles disappear with the stroke of a pen...value all assets at 200-300% of real value...what's the difference as we do it today by valuing at 100% US mortgages and strip malls, Spanish villas, Greek ships...100% or 200%, will just take a little more time to get there and if it never does then at least we had a little more time at the punch bowl...
In a sick and twisted way, your logic makes sense.
What is the price of anything and who makes the rules? If we're all delusional anyway, who cares? Only problems are finite supply and limited yield. Other than that, we could all be millionaires again.
Those loans are secured. When companies file banks will simply reclaim the ship and keep the loans at par with the assumption that the boats will be sold at the next boom. No issue.
Not quite.
Whilst they ARE indeed secured, the banks in possession will find ( and have already discovered) that owning a ship, particularly if you do not know what you are doing, is one of the fastest ways to destroy money known to man. (apart from getting married!)
Just to park one costs hundreds of thousands a year if not more. Crewing to ( ever increasing) regulatory standards - very expensive. They need huge maintenance and if you skimp you have a completeley worthless asset.
But there is more. With the current environmental regulation a rusting hulk is a PR disaster AND a huge outsatanding liability for any mess it causes.
Trust me you DO NOT WANT TO REPOSSESS A SHIP!
As I posted before, the banks worked this out 3 years ago and decided ( in concert with ship builders) to leave the ships in the hands of the lines.
Quite why things have deteriorated, I dont know. Banks are now desperate? BDI finally pulled the last Jenga stick?
Watch out for Denmark - home of AP Maersk Moeller - this biggest in the world.
20pc of Danish GDP. And their banks are already fucked!
CMA CGM also in the poop.
Just like housing then.
Yep....wanna buy a moldy house? If so, and you want to retire to the sunny, humid Southeast, you will have plenty to select from.
Yes but a ship is like a living creature. It has to have ventilation running constantly, the engines have to be kept warm and oxidation goes through the entire ship, not just the hull.
And that costs money. A panamex tanker costs about 100k a month in maintenance per month. If you forget that, the ship dies and rusts away.
You also need a constant crew onboard, which also costs money, etc.....
And lets not forget the most important! When a ship is older than 7 years, the value halves!
Inner bottoms get filled with treated fresh water-- electrics get heat strips so they don't get mosture damage, fuel gets pumped out( its bunker C by the way not diesel, except for the high speed gens) the inert gas generators get plugged top and bottom, the cathode system remains on line, the intakes and stacks get closed, and the house gets paper layed on the floor and the galley reefers get emptied and shut down. It takes about two days to lay it up and about two weeks to get it back on line-- The US gov't laid up old Victory ships for years (1945 till 1970) and then took them out and put grain cargo in them --I know --I was on some of those.
not that simple mate.
You're not a Greek Shipping Magnate are you?
Thought I recognised the technique ! I was on one of your ships once. Got my feet wet.
Captain X.
Idling any complex piece of equipment is not worth the effort for more than a few months. Time is money. The banks are going to find themselves owners of rusting hulks of iron.
Which is precisely why the BDI can't be jacked up by mothballing excess shipping capacity.
What value is a ship if there is no cargo to carry?
I say turn the empty ships into floating apartment buildings -- will this solve any problems? Only one, the ships can now earn currency in the form of rent.
surely there will be some cargo to carry: http://www.zerohedge.com/news/why-us-rail-traffic-so-strong
3 warships aren't gonna pull this off
Drain the ship of nearly all its diesel fuel and sell that.
Hire a camera crew and crash captain.
Load the ship up with "valuable treasure"...some Silver and Gold...throw in a few diamonds.
Film the next "Costa Concordia" off a luxiurious beachside community.
Run it with live actors and as a real movie...of course no one really gets hurt or injured.
A good 3 hour mini.
Then invite scavengers to find the "hidden treasure"...film the whole set of above and below water expeditions.
Turn it into a pay-for-play for all the treasure hunters.
Afterward turn it into a famous location where divers and wanna-be treasure hunters can test out their skills.
Maybe keep loading it up with secret stashes of Gold and Silver...to attract new customers.
Win-win.
Maybe the best revenue solution is a new fleet of floating casinos and pawn shops.
Fits the times perfectly.
in case Guantanamo and FEMA camps get full..
Good point, and ships have to be kept seaworthy and sailed every several weeks, regardless if they have cargo or not. The point is however that since the banks have liens on assets, courtesy of MTM death, they can do whatever they want, as long as they can plug the capital shortfall using other means (such as $1.6 trillion in excess reserves, or hundreds of billions in LTRO loans). Money is fungible.
yeah i forgot MTM death but they all have LTV covenants.
and for the investors out there it worth knowing that Japanese vessels are heaps better than any other make.
Owners can negotiate the lease and then layup/mothball the ships that are due inspections and major repairs and forego the cost of shipyard and dry dock. Crews are laid off and ships are anchored so dock fees are a non issue. Least efficient will be first to the boneyard if scrap prices rise to the level of break even--shipping times will slow so that large ships will fill and just on time inventory model will suffer. The thing that is important IMHO is the velocity of stuff (like money) if it moves slow there is less profit and if it doesn't move there is no profit.
A low bulk rate means the ships want cargo and are lowering their bid to get it. Tonnage is a better indicator of the economy than rates. Rail tonnage is better yet.
Shipping times are 50% longer than one year ago, as ship owners are slowing their sail speed in an effort to save energy costs and keep their vessels at sea longer.
Case in point YoY shipments from China are taking 50% longer. December stats. Institute of Shipping Economics and Logistics.
The worlds largest shipping industry financier is HSH Nordbank. The other ship financing entities include; Deutsche Shiffsbank, Commerzbank and Dredner Bank.
With the German government backstopping shipping giant Hapag Lloyd as guarantor.
Taking into consideration the European macro financial situation, the shipping sector weakness is one more rock around the neck of mainly German Banks.
They can pledge the ships to the Feral and ECB and get em off the books the EZ-Money way. The Feral has already stated it likes to hold things to maturity.
And you get a fantastic visual of Bernutty in a Cpt's hat standing on the deck of a rusted sinking cargo ship.
Priiceless.
What value is the cargo with no people to consume it?
That's the nib of the querstion, isn't it? Value lies in the actual and potential contribution to the reproduction of future generations, at a level of wealth which allows them to continue the process.
The "our proterity" phrase in the preface to the American Constitution has exactly this meaning. And, the preface, as the statement of intent, is the soul of the document.
Depends on the metal prices.
I think you could refer to replacement cost as a possible starting point in the valuation of a cargo ship.