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Is the shipping business bouncing back?

by July 23, 2017 General

The shipping industry is back in business after a prolonged and devastating slump. This is according to a friend of mine who has worked in the industry for decades and is well placed to call a turn in the market.

As evidence, over a pint of beer last week in Singapore, he proffered the rising cost of sending a 20-foot container from Singapore to Europe, from S$150 (US$110) six months ago to S$1,500 today.

What has changed in the interim? For one, industry consolidation in Singapore has forced up prices in a classic case of oligopoly pricing at work. And there has been some logistical tinkering, by way of explanation for the price recovery among Singapore-based shippers, such as the “congestion surcharge,” something applied by Singapore-based shipping companies to expectant cargo.

I’m told this practice has spread to Chinese shippers who are employing the “China manifest surcharge” and to US companies who are beginning to deploy the “advanced manifest surcharge”.

THIS APPARENTLY POSITIVE story for the logistics sector has yet to translate to the capital markets, which have been rather unforgiving of the Asian shipping industry as an investment proposal.

I’m thinking of Soechi Lines, the Indonesian shipping company which was responsible last month for the ignominious outcome of a pulled public bond issue, a rare event in Asia’s booming primary bond markets these days. The issuer blamed oversupply in Asian markets as well as a typhoon in Hong Kong for the decision to pull the deal.

Cynic as I am, perhaps a more fitting explanation was that investors are not brave enough to bet on a resurgent shipping industry across Asia.

The backdrop story was rather good: overcapacity, rock-bottom freight rates and a sustained price war had been replaced by a far more optimistic business discipline, allowing the big shipping companies to recover some pricing power. The deal was also high-yield – or whatever passes for that asset class these days – by virtue of its 8.375% coupon and a whispered restricted issue size.

A pulled deal is something of a disgrace in the public primary bond market and it remains to be seen whether Soechi can rehabilitate those plans in the short to medium term. The last fully marketed deal to be withdrawn so far this year came from Bollywood movie company Eros International, which pulled a five-year non-call two trade in March. A tinny name and a tinny result. Better luck next time.

But as far as shipping is concerned, any return of pricing power must surely bode well for the debt restructuring exercises that are currently rolling on.

ONE IS THE protracted restructuring of Berlian Laju Tankers, which seemed to have reached a form of conclusion around two years ago after the Indonesian shipping company managed to get creditors to forgive almost US$600m of debt alongside a chunky swap into equity which managed to finesse thresholds of foreign ownership.

It seems to me that as freight pricing recovers, the terms of that restructuring, which specialist advisory firm Borrelli Walsh worked on for the best part of the last four years, might well appear far too generous from the creditors’ perspective. Waiting for the price recovery appears in hindsight to have been an unimpeachable aspect of the restructuring process, however drawn-out it eventually became.

Perhaps the same thinking will apply to the proposed restructuring of Singapore-listed Marco Polo Marine, where Indonesian unit Marcopolo Shipyard in May placed itself under a PKPU debt forgiveness plan. Depressed shipping rates seemed to propel the process, so it will be interesting to see how a recovery of market pricing may affect the terms of any restructuring.

In the meantime, consolidation has clearly arrived in the Asian shipping market in the face of the prolonged pricing slump. Chinese shipping giant Cosco bought Orient Overseas Container Line in July for a hefty US$6bn just to stamp the rising hegemony of China on the global logistics industry.

And in May, beyond Asia, Hapag-Lloyd bought Middle Eastern operator United Arab Shipping Company, perhaps an early signal of shipping’s recovery as a viable enterprise.

Shipping seems to be recovering from the demise reported prematurely in no uncertain terms over the past few years. That should encourage any creditor caught in a shipping industry restructuring to hold out for the best possible terms as pricing power returns to debt-laden shippers.
Source: IFR Asia