Asian banks are prolonging the shipping industry’s worst slump in decades by lending more money to fund building of vessels ordered from local yards, according to HSH Nordbank AG, the world’s biggest marine lender.
Record deliveries of new ships built in the past four years are curbing earnings and vessel owners’ cash flows, Christian Nieswandt, Hamburg-based HSH Nordbank’s global head of shipping for Germany, said in interviews in the city and London on Feb. 21-22. “Significant” numbers can’t repay loans, he said.
The Baltic Dry Index of rates to ship minerals and grains by sea fell in four of the last five years as the fleet’s growth outpaced demand for commodities. A delayed recovery will hurt European banks estimated by Petrofin Research to hold about 75 percent of $500 billion in global shipping loans. Banks are deferring repayments and restructuring terms to avoid foreclosures and writing off defaulting loans as vessel prices plunge to levels below outstanding debt.
“Asian banks are in a difficult situation,” Nieswandt said. “They want to support their domestic shipyard business, and you see this tremendous amount of money they have committed to new projects in 2012. This will again lift the more promising equation between supply and demand farther out into the future, and therefore we tend to become more skeptical about the recovery in 2014.”
Worst Since 1980s
Shipping is in the middle of the worst downturn since the 1980s, said Martin Stopford, president of the research division of Clarkson Plc, the world’s biggest shipbroker.
Ten German banks have 98 billion euros ($129 billion) in shipping loans between them, according to Moody’s Investors Service. German banks’ exposure to Greece, Ireland, Italy, Portugal and Spain totals about $360 billion, including bonds and lending to governments, banks and the private sector, figures compiled by Bloomberg Industries show.
HSH Nordbank has outstanding loans of 29 billion euros on about 2,800 vessels, said Nieswandt. The closely held company said on a December conference call shipping accounted for “the lion’s share” of 458 million euros in net loan-loss provisions, or money set aside for nonperforming loans, in the third quarter.
Most new orders for vessels are financed by export credit agencies to support shipbuilding in Japan, South Korea and China, filling a gap as European banks curb lending to the industry, according to Nieswandt.
Chinese government policy since 2009 has been to encourage banks to fund orders by foreign owners in the Asian country’s yards to support shipbuilding, Zefeng Gao, the Beijing-based deputy director shipping at Export-Import Bank of China, the nation’s biggest lender to the industry, said at a conference in London last month.
Chinese banks have been providing funding since last March to owners ordering “high-end, high-tech” vessels, in line with a government policy encouraging shipbuilders to diversify from basic designs to more sophisticated models including gas carriers, Gao said.
Commerzbank AG, the third-biggest marine lender, has said 26 percent of its shipping loans spanning 2,000 vessels were higher-risk, with loan-loss provisions for the industry accounting for 299 million euros of the fourth quarter’s 614 million-euro total. The Frankfurt-based company closed its ship-finance unit and stopped maritime lending last year.
New orders at Chinese shipyards fell 44 percent in 2012 and only 69 of the country’s 1,500 builders secured contracts, according to an Export-Import Bank of China presentation in January. The agency loaned $7.5 billion since 2009 to 80 owners building new ships in China including Vale SA, the largest iron-ore producer, and A.P. Moeller-Maersk A/S, operator of the biggest container line, the presentation showed.
Banks lent $34.3 billion to shipping in 2012’s first nine months, totaling 45 percent of capital, compared with $129.2 billion and 75 percent in 2007, Marine Money International figures showed. More money was raised through bond sales than bank loans last year as financing shrank from $74.5 billion for 2011, according to the Stamford, Connecticut-based publisher.
Freight rates plunged after Lehman Brothers Holdings Inc. collapsed in September 2008, causing used ships to tumble as much as 66 percent in value and prices of new vessels to slide 55 percent, according to figures from London-based shipbroker Simpson Spence & Young Ltd.
HSH Nordbank has $42 billion in shipping loans, followed by $33 billion for DNB ASA, the biggest Norwegian lender, and Commerzbank’s $28 billion, according to a November 2011 presentation by Petrofin. The Athens-based maritime consultant estimated European exposure at 75 percent of the $500 billion in outstanding loans.