Dry bulk: Newbuilding cancellations expected to rise.
Newbuilding contracts without guarranteed financing, a common phenomenon for those signed during 2008, are expected to be cancelled in the coming months, especially as owners are still looking to get rid of expensive vessels. By today"s standards, those contracted vessels are thought to be overpriced by a margin of 30-40% on average. Those dry bulk carriers had been ordered in a period of euphoria among ship owners who were lured by the record breaking freight rates,
enabling rather lucrative returns on investment. Shortly after, the market collapsed to return to a higher ground last year.
While 2010 is expected to fare better for the dry bulk market, recovery isn"t certain by any means. A lot will be determined by the shape of the balance between tonnage supply and demand. And while cargoes demand is predicted to pick up, with industrial production among emerging and developing nations having already surpassed the levels reached prior to the crisis, the same can"t be said ? at least for now ? regarding tonnage supply, or rather oversupply.
As a result the future of a series of new building contracts is threatened. This mainly applies to contracts where advance payments of 10-20% were given, with the second installments coming to line within the next couple of months. Analysts expect many of these installments not being paid, as no new financing has been signed, thus paving the way for more cancellations. But even those owners who have the available resources to make the installments, could very well be tempted to not realize them, losing their advance payments, but gaining in the long term, as if they paid the full price of these contracts their losses would be greater.
Of course, shipyards will look to resell these contracts to other owners with a hefty discount, which will open a window of opportunity for investors. In other words, a shipowner"s loss could be another shipowner"s gain. Already, approximately 10% of the global dry bulk orderbook is thought to have been cancelled. This translates to about 450 ships, according to shipbrokers N.Cotzias Shipping Group. They estimate that a whopping 2,263 units have been scheduled for delivery this year, bearing an aggregate carrying capacity of 120 million tons. This is almost 55% of the total outstanding orderbook for dry bulk carriers, as some of those deliveries include postponements or deferments from 2009.
Meanwhile, according to Clarkson"s latest weekly report, a newly found interest towards dry bulk newbuilding orders has been established, especially regarding the Kasmarmax ship type. ?However, even with this flow of new orders, shipyards are by no means out of the woods yet. It is clear that the major yards still intend to pull back significantly on their production until such time as they feel the market can sustain more orders. For the bigger yards this has been a relatively easy process involving laying off sub-contractors and temporarily moth balling dock facilities. For the smaller yards the process has not been so easy as they clearly need new orders to keep the cash flow coming through to sustain production, but at the same time they have had to find ways of cutting the cloth without affecting the deliveries of their current order book. The difficulty the smaller yards now face is not just in winning new orders to sustain the orderbook but then being able to sustain the support of their financial institutions and investors given the current suppressed asset values?