Asset prices hit by supply overhang

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

31 Jan 2010

A SUPPLY overhang in the transport industry is depressing asset prices, even as global economies begin to show signs of recovery. Wolfgang Driese, chief executive and chairman of the board of managing directors of German bank DVB - a specialist in transport finance - is braced for a long haul. An equilibrium in terms of demand and supply of vessels and containers is not expected until around 2013.
'It's a long cycle,' said Mr Driese. 'The magnitude of the fall of the Baltic Dry Index (in 2008) was unique. Are we past that? No. Close to 40 per cent of aircraft and vessels are in the order books of the yards. This is extremely unhealthy.
'Over the next three years, there will be scrapping, postponement and cancellations.
'Many of the vessels are built in Asia, and governments want to keep employment. So even if a company in Germany cancels an order, it could still be built because the government wants to keep jobs.
'Capacity is not shrinking as it would in a free market . . . Improvements in asset values and freight rates will take a while.'
Some 10 per cent of the container fleet is also idle. This has put enormous pressure on shipowners and their financiers.
Idle capacity threatens owners' ability to service debt; falling asset prices deal yet another blow in that financing covenants may be breached.
Said Mr Driese: 'This is the deepest crisis yet and needs the longest time to recover. The problem is also the impact of the financial market crisis. Even if there is an opportunity to buy a vessel cheaply, where do I get financing?
'As long as not many participants in financial markets come back to help clients, the longer the problem will last.'
Greater intra-regional Asian trade will help the recovery, 'but we still need the US and Europe'.
'We should not underestimate that the largest market for aviation is still America,' Mr Driese said.
Foreclosures, he added, have stayed relatively low so far. 'When a customer cannot service debt, is there anyone else who can employ the vessel better? There are foreclosures but not as many as in previous cycles when banks were more active.
'Today because of limited availability of financing, the second-hand market is very soft.'
The virtual drying up of competition as more ship financiers exited the market is a silver lining of sorts for DVB as it consolidates its presence.
The bank remains profitable - as at end-September last year, it reported a return on equity of 11 per cent, and a consolidated net income of 77.9 million euros (S$152.8 million), 22 per cent lower than the record 2008 year.
'I always say, and customers appreciate this . . . that we have to support the transport industry through all the cycles,' said Mr Driese. 'It's much easier said than done on a down cycle, but there is little competition presently.'
DVB employs some 550 people globally, of whom 60 are in Singapore.
It provides financing solutions - debt and equity - as well as advisory and structuring services.

Source: Business Times Singapore