Shipping has always worried about a shortage of finance. But with the credit crisis in the N. Atlantic and the Euro crisis hitting many of the European shipping banks, angst is not unreasonable. Or is it? Don’t forget, ship finance is about demand as well as supply and over the next couple of years falling demand could be just as much an issue as too little supply. Ship Finance in Focus Most of the shipping industry’s finance goes to pay for new ships, a notoriously cyclical business. To put that into context, in 2011 the value of second-hand sales was $18 bn, whilst the value of new ships delivered was $138 bn. But that isn't the whole story. When a second-hand ship is sold, the seller will probably pay off finance on the ship, which offsets the new loan raised by the buyer. So it is new building finance which drives the ship finance industry and that goes hand-in-hand with the shipbuilding cycle.
The Ship Finance Super Cycle
We do not have statistics for the finance raised by the industry, but a few rough calculations illustrate how ship finance needs have changed recently. In 1996 new ships delivered were worth around $13 bn. But, as capacity expanded and shipyard prices rose, by 2010 the value of deliveries had reached $145 bn, over 10 times as much as at the start of the period (see graph).
If deliveries were financed with 60% debt, the funding requirement would have had to increase tenfold from $8 bn in 1996 to $88 bn in 2010 (the line in the graph). It is of course only a rough estimate, but clearly massive amounts of new debt finance were needed. On the same basis, the call for equity increased from $5 bn in 1996 to $55 bn in 2010. No wonder shipping IPOs suddenly became flavour of the month.
Now for the Downswing?
So, a shortage of finance is not the only worry. With deliveries now running at $130-$140 bn/year, ship finance demand is at the peak of a cycle which, like shipbuilding, is set for a downturn. Three quarters of the ships delivered in 2010 were ordered in 2007/8 when a VLCC cost $160m and a Capesize $100m. Today, prices are 40%-60% lower. In addition, even shipbuilders admit that they have far too much capacity, so output levels are bound to decline over the next five years. The value of the firm orderbook falls from $160 bn in 2012 to $40 bn in 2014.
Shrinking Finance Market?
So there you have it. The great shipping boom generated a massive requirement for new funds to finance the headlong expansion of the world fleet. The time lags in ship production mean that, despite all the problems of the last two years, this cycle is still moving towards its peak. But as investment levels adjust to this new scenario and new building prices edge down, it may turn out that the current restructuring of ship finance is not just a matter of supply. Demand might shrink even faster. Have a nice day.