PT Berlian Laju Tanker

For Shipbuilders, “2012 Will be a Difficult Year” – Marine Money [REPORT]

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March 2, 2012

HONG KONG (Dow Jones)–The global slowdown in the shipping industry is claiming more victims and industry experts expect more defaults in the coming months as heavy debt loads and tight financing squeeze the weaker players.

The shipping industry, often seen as a barometer of global economic health, has been hurt by high fuel costs and a slump in trade that has suppressed rates. The retreat of lending from European banks–which traditionally account for the bulk of shipping finance–has further clouded their outlook.

The shipbuilding industry, heavily centered in Asia, with the biggest players including South Korea’s Hyundai Heavy Industries Co. (009540.SE), Samsung Heavy Industries Co. (010140.SE) and Daewoo Shipbuilding & Marine Engineering Co. (042660.SE), has been the most vulnerable because of its capital-intensive nature that requires builders to invest billions of dollars to keep their production up and running, and fund operating expenses.

On Tuesday, Indonesia’s biggest oil and gas shipping firm, PT Berlian Laju Tanker (B66.SG), became the latest casualty of the downturn, saying it couldn’t make debt payments of $46 million that was due in early February. This comes after Norway’s Frontline Ltd. (FRO.LN), one the world’s largest oil tanker operators, wasn’t able to meet its covenants last year due to an oversupply of vessels, and said it would create a new entity to assume $666 million in bank debt.

“2012 will be a very difficult year,” said Kevin Oates, managing director at ship financing consultancy Marine Money Asia. He estimates that the industry will require around US$200 billion of funding over the next few years, a move that will likely drive up the cost of borrowing for many shipping firms and further hurt their ability to grow.

Already, small shipbuilders in China and South Korea such as Nantong Qiya Ship Engineering Co., Huigang Shipbuilding Co., and Samho Shipbuilding Co. have filed for bankruptcy. Samho, based in South Korea, last month underwent a liquidation process.

“There are cases of weaker shipyards going through a bankruptcy process in China and some of them have approached us for help,” said Simon Liang, chairman of privately-owned Chinese shipbuilder Sinopacific Shipbuilding Group. He said his firm, however, is very cautious about making acquisitions amid the downturn.

“Many shipbuilders aren’t interested in small shipyards because they don’t have strong assets that can be acquired,” said an official at South Korea’s Samsung Heavy Industries, one of the country’s biggest shipbuilders.

Combined new orders from more than 1,500 shipbuilders in China, which aims to become the top shipbuilding nation by 2015 to overtake South Korea, have fallen more than 50% last year, according to a recent report from the China Association of the National Shipbuilding Industry.

South Korean shipbuilders say that demand for commercial ships such as bulkers, tankers and container carriers will remain weak throughout the year due to continuing worries about the euro-zone debt crisis.

“The oversupply of new vessels, which is driving down shipping rates and higher bunker fuel costs will be the biggest challenges this year,” said a spokesman at Hanjin Shipping Co. (117930.SE), South Korea’s largest shipping company by sales. “At a time when there’s no demand, we have no choice but to remain cautious in our spending.”

In light of credit tightening from banks, many shipping companies are turning to the bond market or private equity for funding. But industry analysts say even that won’t be enough.

The total amount of shipping bonds issued in Asia surged 90% to US$7.97 billion in 2011 from US$4.12 billion the previous year, surpassing the historic high of US$7.81 billion the industry raised in 2009, Marine Money Asia estimates.

“There are of course pockets of finance available from some private equity firms in Europe, the U.S. and the East, but the amount is just a drop in the ocean,” Mr. Oates said.

London-listed Chinese shipbuilder and shipping firm, Dongfang Shipbuilding Group Co. (DFS.LN), which manufactures small and medium-sized vessels such as chemical tankers and container ships, said last month that its 49%-owned Zhejiang-based shipbuilding unit, DFS Shipbuilding, is in discussions with its banks and the local provincial authorities to secure financing following a significant reduction in its order book. The firm said two of its large contracts– worth US$52.6 million– were cancelled after it failed to secure financing from banks.

-By Joanne Chiu and Kyong-Ae Choi, Dow Jones Newswires

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