Getting on the road to recovery

News was prepared under the information support of Online Daily Newspaper on Hellenic and international Shipping "Hellenic Shipping News".

30 Apr 2009

SINCE around September 2008, the global credit crunch has been dominating business headlines and gripped every industry worldwide. Financing troubles continue to take their toll and have ripple effects - and few believe that we can see the bottom of the cycle, let alone have reached it.
Recovery will be a long and arduous road, leading to an entirely different level playing field for doing business and securing credit.
A new era of transparency is imminent, as financing tops the agenda of businesses and forces them to seriously review their financial risk management approaches and business practices at every level.
In the past six months, countries, sectors and industry giants have gone under or needed rescues on an unexpectedly mammoth scale.
Shipping has not been spared - freight rates and trade volumes have collapsed in line with global demand. Confidence in the marine industry has nose-dived, as it braces for an unprecedented crisis.
The shipyard sector, for example, is undergoing a stormy contraction. The lack of finance is forcing massive cancellations that are eating into previously recorded order books, leaving possibly 50 per cent of the Chinese sector under serious threat of collapse. Already, the Seoul government has had to step in to try to stabilise 26 Korean yards. This can have serious implications in future years following recovery, with reduced capacity to replace ageing tonnage.
Another problem for the shipping sector is that even before the land-based credit crunch started unearthing the roots of the world finance and insurance markets, it was already undergoing its own crisis in cost-revenue terms, with fuel leaping from about 20 per cent to more than 60 per cent of overheads as ridiculously high and volatile crude oil prices drove a spike in marine fuel and operating costs.
This situation, now compounded by a series of financial woes - each one acute enough to strike a fatal blow to almost any company - has led to a collapse of trust across virtually the whole maritime industry, especially the supply sector.
Payment terms have been tightened on all fronts, and lending has been cut right back to protect cash flow - in some cases to levels where it has become virtually impossible to trade. This has led to a suffocating squeeze on credit in the bunker sector, the only hydrocarbon market where open credit is a basic lubricant that enables the entire shipping industry to function - until now.
While we may not yet be able to see the full picture of how the shipping industry will emerge from this crisis, there are already some underlying indications of how the sector may be reshaped.
At least eight known shipping company collapses have been reported from October 2008 to February 2009. These companies have come from Greece, Korea, Denmark, Turkey, UK and Sweden - there are no obvious epicentres by region.
From a cross-sectional perspective, charterers have been hit hardest, especially those that held long-term fixtures set in boom times, and are now suddenly confronted by collapsed freight rates. The container sector at all levels has been wounded, as the general collapse in the movement of commodities, with rates falling to rock bottom, has fed through to a major reduction in the production and export of finished products, especially from Asia. We may well start to see company failures in this segment soon.
The tanker sector is threatened by the impact that could be brought by drastic Organisation of Petroleum Exporting Countries (Opec) oil production cuts, and could also be adversely affected by the credit crunch. Already, the petrochemical sector is suffering.
A number of large and small Asian shipping companies are rumoured to be in trouble and widely reported to be defaulting on bunker bill payments. In Singapore, the local operation of Scandinavian-owned Armada sought judicial protection from creditors, while Singapore-registered oil trading firm Scandinavian Bunkering filed a lawsuit in the High Court of Malaya against government-owned Malaysian International Shipping Corporation (MISC) for alleged breach of contract and unpaid bills.
Few bunker traders or suppliers openly admit to having been hit by any recent bankruptcies, but a number of big names are believed to be linked to possibly very large losses. What is certain is that virtually the whole bunker sector is on the back foot, with a few notable exceptions that perhaps signal the future pattern for the industry.
Among all the problems that traders and suppliers face, counter-party risk stands out as the most significant. If customers go bust before they pay you, you are in serious - and possibly terminal - trouble.
Companies that adopt what was the traditional approach to credit management in the bunker sector - understanding the dynamics of their customers' businesses, and the effects that various factors have on their viability - will find themselves in the safest position. As long as you can do business with customers you know will pay you, you have a fighting chance of survival. In this scenario, intelligent, responsive, accurate and, above all, fresh and up-to-date market and company intelligence is crucial.
To eliminate counter-party risk entirely is impossible and would be counter productive, but to assess and manage risk to increasingly refined levels of accuracy is essential. One can already begin to see the signs distinguishing the survivors from the failures, but we are hardly at the beginning of a process that will likely result in a radical and unprecedented restructuring of the shipping industry.
Taking a long-term view, not all is doom and gloom. There are many positive impacts that we can expect, such as considerable market consolidation that will see the eradication of poor performers and the survival of the fittest. From a macro perspective, this will weed out bad practices and complacent attitudes, and spur positive industry progression moving forward, even though the current credit outlook seems dim. The survivors will be the ones who balance boldness and caution - and secure their cash supply.
The shipping industry as a whole needs to protect its heavy capital investment and re-establish confidence fast. It needs swift action and serious commitment to prevent a major collapse and reverse its downward spiral.
Both lenders and borrowers need to recognise that they have a joint responsibility to increase transparency, which is becoming essential for any financing decision because it is the only basis now upon which trust can be based, and credit is one of the purest articulations of trust. If the need to be open is recognised and acted upon, this will pay a priceless premium for those with adaptability and foresight. Transparency is no longer an option, but a vital business approach for players seeking the competitive credit access that will enable them to seize opportunities not just to survive the shake-out, but pave the way for the market in the future.

Source: Business Times