Operating in difficult market conditions
Operating in today’s market conditions has become very challenging to say the least. With lower charter rates, some ship owners are being faced with breakeven or even situations of negative cashflows which have in turn created numerous challenges for the owners in the operation of their vessels. Owners are at times forced to renegotiate on repayment terms with banks, seek alternative funding or investment or review alternative ways of operating which could possibly lower their OPEX costs. We have all been reading about the numerous amounts of mergers, acquisitions and sadly also bankruptcies which have been taking place. In fact, the year 2016 has been the worst year for dry bulk in more than 30 years.
Various observations can be made which contributed to the challenging market conditions which owners and charterers are being faced with, some of which are explained below:
– Oversupply of tonnage on the market caused by numerous building projects in previous years and also due to less scrapping of vessels.
– Vessels sailing below capacity levels in case of boxships.
– A decrease in the resale value of ships in circulation as a consequence of the massive reduction in the price of newbuildings, particularly with vessels built in China.
– A reduction in the amount of second hand vessels being sold contributing to more vessels in circulation. Since owners are facing situations where a large number of vessels in their fleet were ordered at a time where the cost of building a vessel was much higher, the drop in the re-sale value of their vessels would not make a sale viable since the income generated from such a transaction would not be enough to settle their obligations with financiers. Although we have also seen owners sell their vessels at the best price they could fetch on the market and cut their losses.
– A drop in the Charter rates of vessels due to the excess of supply over demand.
– Difficulty in paying back the mortgages on the vessels. With lower charter rates, the owners are faced with more challenging conditions because the income needs to cover both the finance costs and the OPEX costs of their vessels. Furthermore, investors would expect a return on their investment which is not always possible to meet.
– Greater difficulty for owners in obtaining additional finance from banks who are now more resistant in lending out to shipping companies.
Numerous discussions can be made on the subject, however I think that the important questions here are:
“How are we going to overcome these difficult market conditions, what can owners do to improve their situation and will the market recover over past years?”.
2017 has already shown positive trends with a marginal recovery in charter rates, and such upturn in revenues should start to alleviate some of the burden on ship owners.
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