By Martin T, Macronomics
“All things are subject to decay and when fate summons, monarchs must obey.”
In our recent post “Money for Nothing“, we argued the following:
“Many pundits have been arguing about the importance of the Baltic Dry Index as a leading indicator. For us, it is just another indicator in the deterioration of credit and for tracking NPLs for the Danish banking sector given, as indicated by Bloomberg:
“Nordea highlighted the weak economic environment in Denmark and decreasing collateral values in the shipping industry as key drivers of the 134% increase in loan losses since 3Q. These trends will likely hurt peers Danske Bank (27% share of total Danish lending) and DNB Bank (11% share in syndicated shipping loans).”
In this conversation, we would like to go further. Shipping is in fact an important credit and growth indicator, but, more importantly a clear deflationary indicator.
As a reminder:
Danish Bankruptcies rising:
As indicated by Deutsche Bank in their shipping survey from the 13th of February:
“Modern tanker values have now firmly trended below the lows of 2008/2009 as the rate slump pressure owners’ financing”.
Looking at the historical 5 year Old Dry Bulk Ship Prices since 2006, one can clearly see the weak trend of the economic recovery and the deflationary forces at play – source Deutsche Bank:
Given big player Maersk is expecting its container line, the world’s largest, to lose money again in 2012, as rates drop, as indicated by Bloomberg on the 27th of February by Christian Wienberg (Maersk Says Container Line to Lose Money Again as Rates Drop), it spells trouble ahead for the exposed Danish banking sector:
“Maersk’s container division had a net loss of 2.88 billion kroner ($521 million) last year compared with a profit of 14.9 kroner a year earlier, the Copenhagen-based company said today in a statement. That exceeded an estimated loss of 2.28 billion kroner in a survey by SME Direkt. The container result for 2012 will be “negative” as overcapacity will continue to hurt the market, Maersk said today.
Global rates have dropped because the container shipping industry has added too many ships in anticipation of an economic recovery, causing overcapacity. Container demand growth will slow to as little as 4 percent this year compared with 7 percent in 2011 andexpansion on Maersk’s most important trade lane, Asia to Europe, will be lower than the global average, the company said today. Maersk also predicted that earnings from its oil division will decline.”
LTRO 1 and LTRO 2 will not enable Europe to escape a slower growth, credit crunch and a recession. Maersk is in fact shifting its business away from Europe as indicated by Christian Wienberg in Bloomberg in his article - Maersk Bets Against European Recovery as Recession Kills Trade:
“We think there will be negative growth in Europe this year and that is affecting our view of Asia-Europe trade,” Trond O. Westlie, chief financial officer of A.P. Moeller-Maersk A/S, the owner of Maersk Line, said yesterday in an interview in Copenhagen. “The solution that Europe is trying to take is different from the solution that the U.S. is taking. We believe that general growth will be higher in the U.S.”
We have long argued that the difference between the FED and the ECB would indeed lead to different growth outcomes between the US and Europe (US economy will grow 2.2% this year versus a 0.4% contraction in the euro area, according to the median economist estimates compiled by Bloomberg):
“Whereas the FED dealt with the stock (mortgages), the ECB via the alkaloid LTRO is dealing with the flows, facilitating bank funding and somewhat slowing the deleveraging process but in no way altering the credit profile of the financial institutions benefiting from it! While it is clearly reducing the risk of banks insolvency in the near term, it is not alleviating the risk of a credit crunch, as indicated in the latest ECB’s latest lending survey which we discussed in our last conversation.” The LTRO Alkaloid - 12th of February 2012.
“We mentioned the problem of stocks and flows and the difference between the ECB and the Fed in our conversation “The European issue of circularity“, given that while the Fed has been financing “stocks” (mortgages), while the ECB is financing “flows” (deficits). We do not know when European deficits will end, until a clear reduction of the deficits is seen, therefore the ECB liabilities of the ECB will have to depreciate.”
The law of unintended consequences - 25th of January 2012.
Also in the same Bloomberg article:
“Maersk, which is also struggling to adjust to over-capacity, has responded to Europe’s turmoil by deploying fewer ships for the route. The company said Feb. 17 it will cut capacity on Asia-to-Europe trade by 9 percent in an effort to avoid further losses. In contrast, Maersk has no immediate plans to cut vessels to the U.S. or high-growth markets, Westlie said.
“The question as to when we’ll see demand picking up depends on when euro zone leaders will come together and resolve their issues — and there are quite a few issues,” he said.
Euro area leaders have yet to agree on how to bolster their rescue fund as U.S. policy makers including Treasury Secretary Timothy F. Geithner have urged Europe to make crisis-fighting efforts “credible.”
Not only Maersk will reduce its capacity on Asia-to-Europe trade, they indicated on the 17th of February, they would as well increase freight rates on the route. As indicated by Bloomberg Chart of the Day on the 8th of March, this price effort might be futile – source Bloomberg:
“The CHART OF THE DAY shows fee increases announced by A.P.Moeller Maersk A/S since 2010, and the actual change in spot rates on the planned implementation day and two weeks later, based on figures compiled by Alphaliner, a Paris-based data provider. Maersk, the world’s biggest container line, intends to raise rates by $400 per 20-foot box starting April 1. Other lines have announced similar plans (CMA CGM SA, Orient Overseas International Ltd.).
The additions, if implemented, may be quickly rolled back or trimmed, if history is any guide. Vessels on the Asia-Europe route are operating at less than 90 percent full and that will probably decline further next month because of new ships entering service, said Tan Hua Joo, an analyst in Singapore for Alphaliner. Overcapacity, price wars and rising fuel costs caused the industry to lose about $5.1 billion worldwide last year, according to Drewry Shipping Consultants Ltd.”
Baltic Dry Index on Course for Lowest Monthly Average Since 1986 - source Bloomberg:
“The Baltic Dry Index (BDIY), a measure of commodity shipping costs, is on course for its lowest monthly average in more than 25 years as an oversupply of vessels keeps hire costs below break-even levels.”
It is still a game of survival of the fittest.
Consolidation, defaults and restructuring are going to happen no matter what we commented recently:
“Standard and Poor’s Ratings has lowered its long-term corporate credit rating on the world’s third largest containership operator, France’s CMA CGM S.A., to ‘B-’ from ‘B+’. The ratings agency also lowered its issue ratings on CMA CGM’s debt to ‘CCC’ from ‘B-’ and placed all issuer and issue ratings on CreditWatch with negative implications. The recovery rating on the debt remains ’6,’ indicating S and P’s expectation of negligible (0%-10%) recovery in the event of a payment default.”
CMA CGM in debt moves - Financial Times – 7th of March 2012:
“France’s CMA CGM plans asset sales to raise cash and has asked its banks to reschedule debt payments for this year and next, demonstrating how slumping container ship earnings have undermined the finances of the world’s third-biggest line.
Rodolphe Saadé, the Marseilles-based company’s executive director, told the Financial Times the company had outlined the request for a debt restructuring to its bankers at a meeting on Tuesday where it had given details of its 2011 performance.”
Of course it was expected, that’s what the bond and CDS markets had been telling us for a while:
Zero Freight Rates Fueling CMA CGM Default Risk to 90%: Corporate Finance – source Bloomberg, 5th of September 2011:
“Bonds and derivatives tied to CMA CGM SA, the third-largest container line, are signaling that the company has a nine in 10 chance of defaulting as the slowing global recovery pushes freight rates to about zero.”
“He who rejects change is the architect of decay. The only human institution which rejects progress is the cemetery.”
“He who rejects restructuring is the architect of default.” – Macronomics.
* Martin is a credit specialist at a London based bank.
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