The shipping industry is currently facing its worst downturn since the 1980s, primarily due to overcapacity stemming from vessels ordered before the 2008 financial crisis. While there are signs of recovery with rising ship prices and growth in the global dry bulk trade, many companies struggle to remain profitable, and a significant number face loan defaults. The current scenario is characterized by decreased new ship orders, rising scrappage rates, and persistent low freight rates exacerbated by a global commodities slump and reduced demand from China.

1. SLUMP IN SHIPPING INDUSTRY
INTRODUCTION
 The sector has been battling overcapacity since the 2008 financial crisis because new
vessels ordered before the downturn have flooded the market, dragging down rates and
hitting Chinese ship builders hard. The said industry is poised to emerge from its longest
downturn in three decades, buoyed by an end to years of overcapacity that have depressed
freight rates since the end of a shipping boom in 2008.
 Prices of new and second-hand ships started to rise last year on expectations of a recovery,
though experts warn some shippers will still only break even this year and any recovery
may fade after 2016 when overcapacity could again dampen freight rates.
 Key drivers of the pick-up will be China's continued urbanisation and falling iron ore
prices, experts say, which should support import growth even though the commodities
super-cycle that drove a 2003-2008 boom in shipping markets is over.
 Major companies are focusing on the side-lines of a conference in Chongqing that they are
focusing on cost control, securing long-term customers and expanding in emerging
markets, such as South America and the Middle East, to counter the slump.
 The global dry bulk seaborne trade is forecast to grow 5.8 percent in 2014 to 4.37 billion
tonnes, according to Barclays Research, outpacing a 5.3 percent rise in the global
merchant fleet to 753 million deadweight tonnes.
 The industrial slump has made a point that everyone will compete on costs, because
improving income is very difficult, if one wants to increase the freight rate it's tough, it's
not possible, the only way is to control costs.
LOANS SEEN PROLONGING WORST INDUSTRY SLUMP
 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.

2.  The Baltic Dry Index (BDI) 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, 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.Ten German banks have
98 billion euros ($129 billion) in shipping loans between them1. 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.
 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.
SHIPBUILDER SUPPORT
 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.
 Chinese banks have been providing funding 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.
1 Moody’s Investors Service.

3.  Commerzbank AG, the third-biggest marine lender, has 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.
CURRENT SCENARIO
 Up until a year ago, the shipping industry was ordering ships in droves. This year, orders
of new vessels have fallen to a record low and companies can’t get rid of ships fast
enough.
 About 1,000 ships that have the combined capacity to haul 52 million metric tons of cargo
will be dragged onto beaches, cut into pieces and sold for scrap metal this year. That is
second only to the record amount of capacity of 61 million so-called dead weight tons that
were scrapped and recycled in 2012.
 The global economic slowdown is putting shipping through its most bruising period since
the 2008 financial crisis. Companies including Maersk Line, a unit of Danish
conglomerate A/S, Germany’s AG and Bulk Shipping Co. have 30% more capacity in the
water than cargo. As the companies fight for bigger shares of the global
market, freight rates have dropped so low they barely cover fuel costs.
 In the five years through 2015, owners ordered an average of 1,450 ships annually. This
year orders through July fell to 293 vessels, or 11.6 million tons, according to U.K. marine
data provider Vessels Value.
 “Given the tremendous overcapacity, it will take much more recycling and at least two to
three years of no growth in capacity to see some balance between supply and demand,”2
 In the benchmark Asia-to-Europe trade route, shipping rates are at an average of $575 a
container this year, compared with $620 last year and $1,165 in 2014. Anything below
$1,400 is unsustainable. “Freight rates are dismal, so you either idle ships, if you can
afford it, or recycle.”3 The typical age for recycling a ship is 30 years. This year the
average age of ships getting scrapped is about 15 years.
 What’s changing is that younger ships are being scrapped, but recycling won’t solve
overcapacity on its own. The issue of overcapacity can thus only be solved by market
2 Basil Karatzas, Chief Executive of New York-based Karatzas Marine Advisors Co.
3 Anil Sharma, President & Chief Executive of U.S.-based Global Marketing Systems.

4. Growth. Some are more active like Hapag-Lloyd scrapped 16 ships last year, or 60,000
containers, roughly 6.2% of its total capacity.
 The overcapacity problem has been exacerbated by China’s slowing economy and anemic
growth in Europe. Last year, Chinese imports from the European Union fell nearly 14%;
Chinese exports to Europe were down 3% in the period. In this year’s first quarter,
Chinese imports from the EU fell 7% from a year earlier, a decline matched by exports to
Europe.
 That has drastically affected the container trade. Last year, some 100 Asia-to-Europe
sailings were cancelled. That amounted to 10% of the traffic that moves 98% of the
world’s manufactured goods, including electronics, household goods, shoes, clothing and
food.
 A global commodities slump hasn’t helped. Beijing has also substantially cut down on
imports of commodities such as coal and iron ore, forcing hundreds of previously
chartered dry-bulk ships to be idled or recycled. The world’s largest bulk carrier, China
Cosco Bulk Shipping, a unit of China Cosco Shipping Co., said in June it would recycle
53 vessels by the end of next year, or 8% of its existing fleet capacity.
 In the past, recycling a ship has typically generated about one-quarter of the price of a new
vessel of the same type and size. But owners say a sharp drop in the price of steel has cut
the rate of return to an average of 10% to 15% of the price of a new ship.
 Two years ago, in India, Pakistan and Bangladesh were paying about $460 a ton of steel.
Last year it was $300 and it is now roughly $2504. Officials at the Alang scrapyard—one
of the world’s biggest, on India’s West Coast—said prices were likely to stay low through
the rest of the year, as China is flooding the market with recycled steel.
4 As reported by Shipowners.