The crisis is a development that actually had its roots far away from the shipping markets, however, due to its powerful impact on our daily business and personal life it is worthwhile to take a deeper look at the factors driving it.

When in mid 2007, first reports pointed towards developing problems in the US real estate and banking sector, only few people would have expected that in the following months we would see a new world order of the entire financial world unfold in front of our eyes. The initial scattered reports were followed by a sequence of increasing write-offs on book values for many banks, a subsequent, significant reduction in availability of debt financing, and later on a multitude of takeovers and bankruptcies of well established financial institutions. With the collapse of Lehman Brothers as a result of the American credit crunch on housing and other loans, things did change dramatically and the market capitalisation of most big banks has come down between 40% and 65% since early 2008 with the result of freeze on most loans for the general industry, commodities and of course also for the shipping industry. This coincided with China’s central government decision to close down steel mills prior to the Olympic games in Beijing in August 2008 to ensure air quality. The shipping industry collapsed due to the lack of export and import goods around the world within as short as 4 months.

Initially with a significant impact on the financial sector only, the crisis‘ effects have now hit our industry hard and for example pushed freight rates for all relevant vessel types to lows not seen in many years. This severely affected the income streams for shipowners and especially those, who had purchased vessels or entered newbuilding contracts and corresponding debt obligations during the recent peak time. But also liner sevices and spot market players in dry and wet cargo are faced with drastically lower income potentials for their freight services. We all remember that in the last few years we enjoyed a continuous strong growth rate in Asia and China in particular. China had growth in all goods, import and export, and an extremely massive expansion of the steel industry, which of course required lots of ore and coal. Fantastic predictions were made. An unprecedented amount of liquidity was thrown at our industry as a result of the Wall Street’s enthusiastic approach of the commodity boom. The Baltic Dry Index was used as one indicator for the global financial health. Wall Street woke up and investment bankers wanted their piece of the cake and to become shipowners, freight traders and even ship builders. And everything on the back of the fantastic China story and the boom.

Shipping of course is the vehicle to supply China. Too much easy money came into the shipping market and if billions of Dollars are thrown into the shipping industry, an asset bubble is the logical result. The demand for investment into tonnage was very high and as there were only a limited number of vessels for sale, the second-hand purchase prices went right through the roof and Newbuilding prices as well. Demand was high and steel prices and all commodities were driven by speculation.

Many private shipowners reduced their Newbuilding programs in late 2007. From then on the prices of vessels were mainly determined by IPO’s or public companies and shipping funds, who needed to invest the stream of money flowing to them. Ironically, public companies which were holding surplus cash had been punished at Wall Street and other exchanges, as they apparently did not maximize the return for their investors. The consequence was a high 2   

leverage of borrowed money. That the commodity boom would last for many years was the clear understanding of those involved.

The result of this is that we do still have a staggering order book of newbuildings in the next years, even considering that a lot of bulk carriers, container vessels and tankers have been cancelled or delayed. At the height of the market, an amount of close to 320 bn USD worth of newbuildings had to be financed for the coming years. Considering that the portfolio of the biggest shipping banks did not even exceed an amount of 330 bn USD, this would have meant that an increase of ship financing of close to 1oo% would have been required. Too many vessels unemployed resulted in the asset value of vessels dropping dramatically. We saw asset value reductions of up to 60-70% for all major ship types. This means that many vessels and particularly new tonnage have breached their loan to value clause and the financing banks have prepared for bad debts, as most owners will not be able to cover the difference.

Unlike with previous shipping crisis‘, where the banks were prepared and able to support the shipping industry, this is different in today’s environment. It is the banking sector that following the decline of the financial markets had to deal with its exposure to the effects of being asset holder in case of investment banks or buyers of structured products such as mortgage backed securities in case of commercial banks. Thus banks are less and less able and in the position to fulfil their role of liquidity providers to the industry, which is in need of financing to support continuous growth.

With the massive losses of the banks, governments were required to step-in to re-capitalize the banks with taxpayers money and the banks were more than pleased to take these money injections to re-capitalize as long as the money is available. Under these conditions they can restore their balance sheets but clearly all of them are in survival mode and most probably they will continue to be very restrictive in giving loans well into the next years. We have seen government bailouts in various industries such as car manufacturer’s and banks, and we are also beginning to see such government involvement for some companies in the shipping industry. Germany’s Hapag Lloyd is a colourful example of a company, which went all the way from the takeover of CP Ships in 2005 through the only partially successful buyout from its parent company TUI in 2008 to a situation today, whereby the Germany government is currently placing a guarantee of 1.2 bn EUR to secure the company. One notable aspect of the current trade slowdown is the way that decline in both imports and exports has been synchronised across the major economies since September 2008. The muchanticipated decoupling effect of developing economies, such as China, from the economic turmoil in the US and developed nations has not turned out to be the case. Decline in trade flow in the closing month of 2008 and start of 2009 were larger than previous slumps, because of wider participation in the world economy and the globalisation of supply chains. Goods in the 21st century cross many frontiers during the production process and components in the final product are counted every time they cross a frontier. The world’s largest boxship port, Singapore, has for example reported an average contraction in container volumes of around 18% for the first half of 2009. What is worrying about these figures, and similar ones from other major ports, is that an expected pick-up in the second 3