Seeds of the Next Metals Cycle Being Laid by Ship Owners and Miners

Lower freight rates and lower metal costs, for both struggling exporters and consumers, have been about the only two developments that could be considered as a silver lining to the last 12 months of turmoil. But as with long term commodity prices, the industry’s reaction to the crisis will sow the seeds for a longer term problem.

Carl Steen, head of the shipping, oil services and international division at Nordea Bank Norge ASA is quoted in this article as saying he would not be surprised if more than 30% of the new ships on order were canceled over the next three years. Cancellations are currently running at 20%. That would affect commodity ships such as bulk ore, container and grain to a great extent and tankers to a limited extent, he said. The world fleet is set to increase by 42% this year as new orders come up for delivery but shipping companies who are unable to cancel imminent deliveries will have to finance new vessels by selling equity rather than taking on debt as vessel values have plummeted and banks are unwilling or unable to lend.

In some parts of the world, the problems of financing new vessels is even more acute such as India where 50% of the fleet is going to exceed acceptable age limits during the next three years yet lines can’t raise the cash to finance new orders according to the Hindu Business Line. As new ship orders are canceled, and lines fight to stay solvent by slashing costs, the current over capacity will be gradually reduced but as always happens in industries with such long lead-times and high capital costs to bring new capacity on stream, the inflection point comes and goes with a dreadful lag in it. The balance is never struck and may be two to three years from now a dearth of capacity will push up rates again as they did in 2006-7. Add rising shipping rates to growing supply side scarcity at mining companies and you can see how the seeds of the next cycle are being laid.

–Stuart Burns

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