This Week’s News: A snapshot on the economic and shipping environment

ECONOMIC ENVIRONMENT
Greece default has become the fear of the world economy as Greece’s sovereign risk infects other economies. Some analysts believe that the Greek default would even derail the fragile environment of the U.S. economy. Greek default could mean economic market turmoil. Economists say a Greek debt restructuring would send shock waves through stock and money markets, European banks and possibly entire economies. Greek banks could go bust, overwhelming the government's ability to bail them out, and lenders in France, Germany and elsewhere in Europe could suffer losses they can ill afford.
The sovereign risk in the eurozone and the weakness in the USA economy, with projections for a slower growth this year, have trimmed IMF’ s projections for global growth to 4.3%, down from the April forecast of 4.4%, as it predicts the world economy to advance 4.5% in 2012. Given the weak first five months of the year, the IMF cut its forecast for US growth to 2.5% from 2.8% previously. The IMF also trimmed its forecasts for growth in Italy and the United Kingdom and projected that Japan would contract by 0.7% this year, compared with the pre-earthquake estimate of a 2.8% growth rate.

The Greek Prime Minister in an effort to ease social unrest and series of protests reshuffled his cabinet, by appointing New Finance of Minister, and asked vote of confidence from the parliament last Friday, which won early on Wednesday and paved the way for the release of the 5th tranche on the EUR110 bn.
Speaking in the parliament, the  Prime  Minister,  Mr.  Papandreou  and  the  Minister  of Finance Mr. Venizelos noted that Greece must take swift action as it has very little ability to maneuver under current conditions. The main opposition party asked for elections, a suggestion rebuffed by the Prime Minister who stated that ‘the last thing the country needs right now is elections. The focus now turns to the vote of the austerity/privatizations bill that is expected to be voted next week, by June 30th at the latest. The new Minister of Finance has embarked in an effort to make some changes in the revenue side of the austerity measures to try to ease the impact on lower incomes. Antonis Samaras, Greece’s opposition leader, said his party would vote against the government’s latest round of austerity measures, dashing the hopes of foreign creditors that the nation’s political classes would unite in a last-ditch effort to prevent a sovereign debt default. The socialist government plans to enact a €28bn euro package of spending cuts and tax increases next week in order to secure the next €12bn euro tranche of a €110bn international loan needed to avoid default.
Additionally,  Chancellor  Merkel  and  President  Sarkozy  agreed  to  a  plan  under  which  private bondholders could volunteer to buy new government bonds to replace ones that matured in an effort to avoid the risk of rating agencies declaring Greece in default. Mrs. Merkel in an interview said that Greece has 'achieved a great deal in the last year, we should recognize that...it has cut new borrowing by 5%, that is remarkable savings but it is not enough.' The German Chancellor called on private creditors to provide 'substantial aid' to ease the Greek debt crisis noting that 'at the moment we can only get the participation of the private investors on a voluntary basis.
In the U.S., the Federal Reserve acknowledged that the economy is growing more slowly than it expected. But it said it will complete its $600 billion Treasury bond buying program by June 30 as planned and announced no further efforts to boost the economy. Ending a two-day meeting, the Fed repeated a pledge to keep interest rates at record lows near zero for "an extended period," a promise it's made for more than two years. Fed officials said in a statement that they think the main causes of the economy's slowdown, such as high gas prices and supply disruptions from Japan's disasters, are temporary. Once those problems settle down, Fed officials said the economy should rebound.
In China, the market sentiment remains negative due to inflationary pressure and declines in the Shanghai Composite Index.

SHIPPING MARKET
Overall, the outlook of the shipping industry is still under question as we approaching near to the second quarter of the year. The main shipping segments, bulk carriers, tankers and containers are facing the threat of oversupply and Chinese commodities’ demand volatility, which is mainly the key driver for moving the shipping market out of recession. Ratings agency Moody’s has downgraded its outlook for shipping from stable to negative due to ongoing oversupply of tonnage and warned that some dry bulk companies might struggle to survive. Even though it expects that demand will remain solid this year, supported by positive trends in world trade, the overcapacity will cause industry conditions to deteriorate in the next 12 to 18 months.
In the dry market, the BDI still struggles to surpass the 1,500 points level mark with weak expectations for the forthcoming days. Capesize earnings are still in depressed territory, but there is some comfort in the market as the index still keeps its pace, above the 1,000 points level, and capesize earnings are standing above  $10,000/day,  while  one  week  ago  there were  floating  at  levels  region  of  $8,000-$9,000/day. Capesize rates have been able to find some support due to a sharp increase in capesize coal cargoes and improved iron ore demand outside of China.
In the meantime, iron ore port stockpiles continue to increase, slowly reaching the 112 million ton capacity level that Chinese iron ore ports can hold as per Commodore Research, leaving less room for massive buying in summer season. However, Chinese crude steel production set a new record in May, but fears for electricity restrictions in the upcoming months may put a break on Chinese steel productions. Thus, uncertainty still surrounds the future of Chinese iron ore consumption and the level of iron ore imports that impact the outlook of capesize earnings. On the contrary, positive prospects for coal and grain demand, now that the grain export ban in the Former Soviet Union has finally lifted, incline healthier earnings among smaller vessel sizes.
All vessel sizes seem to battle to climb to new highs this week with the BDI closing in green, standing at 1,424 points level, up by 1 point from previous Friday closing and down by 43% from last year’s levels, when was standing at 2,501 points. Capesizes are currently earning $11,571/day, up by $1,451/dayfrom  previous  week’s closing; while at similar week in 2010 were earning $24,283/day. Panamax earnings have fallen by 7.9% from last Friday, earning $14,125/day, while in 2010 earnings were more than  $24,000/day.  Smaller  size  vessels,  supramaxes  are still  earning  levels excess of  capesizes, $13,818/day, down by 38% from last year‘s levels. Handysizes are earning $10,697/day, down by $6,531/day from 2010 levels, when earnings were standing more than $17,000/day.
In the wet market, VLCC rates have shown some signs of firmness with players appearing bullish for the future. The increased Saudi Arabian production is expected to provide intermediate term support for the tanker rates, but more increased production is needed to sustain the long term tanker recovery. Saudi Arabia is currently reported to produce more than 3million barrels per day in excess and is looking to increase production to 10 million barrels per day by July, as long as the spot brent crude price remains above $110/barrel. The oversupply is a serious concern in the crude tanker market and IEA is expected the demand to be driven by non OECD nations.
The outlook seems more positive for MR units than crude carriers, as there are predictions for increased clean products and chemicals’ demand, mainly from China. China, the world’s second largest oil user, may increase its refining capacity by 33% till 2016, according to the International Energy Agency. Global oil demand may rise 1.2 million barrels/day annually through 2016, with China accounting for more than 40% of the increase. China will add about 2 million barrels/day of refining capacity in the next five years, as per announcement from the official Xinhua News Agency in January.
In the container market, the Shanghai Container Index is on decline with liners considering cutting their services in the Asia-Europe trade route. CKYH alliance, composed of top liners, COSCO, K Line, Yang Ming and Hanjin, announced the suspension of an Asia-Europe loop that accounted for 20% of its capacity and 2.4% of the total Asia-North Europe trade. Further service suspensions and possible layups are expected to place further pressure on the boxship market. Container trade statistics (CTS), as revealed in Tradewinds, suggest that European imports from Asia were marginally down in April but were still up by nearly 3.9% from one year ago. The main problem that liners are facing is falling rates, as increasing numbers of large ships are delivered on the Far East to Europe trades. CTS price indices show that rates for Asia to Europe fell by 10% in April, which marks the ninth consecutive monthly decline to a level not seen since October 2009.
However, major liner operators have already made their investment decisions for this year by placing post panamax newbuilding units in Chinese and Korean yards, since they targeting to new more efficient technological ships offering economies of scale. According to Alphaliner, 13 of the main carriers have already opted for units at least 12,500 TEU and only seven of the top 20 carriers have not yet committed to ships of above 10,000 TEU.
In the gas market, the LNG ordering spree lifts some questions in terms of finding experienced staff to run these vessels. Shipping recruitment consultant Faststream has warned that shipowners proceeding to LNG investments could face serious difficulties in finding experienced superintendents to run these vessels in the coming months and years, particularly in Europe. Group CEO Mark Charman said: “With the capacity of the LNG market said to rise from 300 billion cu m to 380 bn cu m by 2015, I believe that ship owners are going to be hard pressed to find the right people to manage these complex vessels. This has always been a specialist market, but the latest DFDE LNG vessels are equipped with electric engines and using propulsion systems which have not been around for long, so finding experienced LNG people to run these vessels is going to be a real challenge.
In the shipbuilding industry, the Japanese government is working with industry players to establish some basic guidelines so as to strengthen the country’s shipbuilding industry. The broad outline of the guidelines includes corporate alliance and business consolidation, entering new segments and strengthening the maritime cluster. Shipyards that work under these requirements would receive tax incentives or other regulatory benefits. The May ended with Japanese shipbuilders having signed 18 newbuilding orders totaling 550,000 gross tones, down 41% year-on-year in gross tones terms, according to announcement from Japanese Ship Exporters’ Association.
On the other hand, China’s competitive advantage in the shipbuilding industry seems to persist also in 2011.  During January-May period of  the  current  year,  China's total  completed  shipbuilding output amounted to 25.07 million dwt, up six percent year to year, with 84.7 percent of this volume destined for export - as announced by China's Ministry of Industry and Information Technology (MIIT).
Notable deal in the shipbuilding scene this week has been the signed agreement of the South Korean shipbuilding and shipping conglomerate STX Group to build a $1 billion shipyard in Russia. STX is also seeking to jointly build shipyards in Brazil and the United Arab Emirates.
In terms of shipping finance, China Development Bank is said to be joining forces with Greece based Aegean Baltic Bank in order to unlocking a pledged $5bn in finance for Greek shipowners. Although details  have not been announced yet, it seems that the Chinese institution will take a significant shareholding in AB Bank to become one of three major shareholders.
In terms of shipping finance deals, the executive committee of Euronav NV yesterday announced that it has signed a new USD 750 million forward start senior secured credit facility led by Nordea Bank Norge ASA and DnB Nor Bank ASA acting as Lead Arranger and Bookrunners and ABN Amro Bank N.V., Fortis Bank SA/NV, Credit Agricole Corporate and Investment Bank, Danish Ship Finance, Danske bank A/S, ING Belgium SA/NV, Skandinaviska Enskilda Banken AB (publ) acting as Lead Arrangers and ITF International Transport Finance AG and ScotiaBank (Ireland) Limited acting as Co-Arrangers and Banque LBLux S.A., KBC Bank NV and Dexia Bank Belgium SA/NV. Nordea is also the facility agent. The credit facility comprise of (i) a $250 million non-amortising revolving credit facility and (ii) a $500 million term loan facility. Additionally, Nordea Bank is believed to be heading a consortium for a large refinancing package, rumoured to be in the region of $1bn, to a leading European tanker owner.