Seaspan predicts cancellations as Evergreen slumps

Seaspan predicts cancellations as Evergreen slumps
Janet Porter and Sandra Tsui - October 31, 2008
(From Lloyd's List)

ORDERS for big containerships will be cancelled, delayed, or converted to other ship types if the industry downturn is prolonged, Seaspan chief executive Gerry Wang predicted as the box trades took another pummelling and Evergreen joined the casualty list.

Evergreen Marine Corp, the Taiwan-listed arm of Evergreen Group, reported a 94% slump in third quarter net income following the crash of Asia-Europe freight rates to record lows and declines on other routes.

Commentary: Would this indicate that virtually 94% of all ocean going freight delivery orders are contingent on letters of credit transactions which have been either cancelled due to questionable bank liquidity or due to cancellations due to virtually halved commodities prices which buyers in Asia would now need to absorb as netlosses?

Evergreen, one of the few global carriers not to have ordered super-sized box ships, said net income in the latest three months was down to NT$291m ($8.8m) from NT$5.2bn a year earlier.

Cumulatively, Evergreen achieved net income of NT$1.5bn in the first nine months of 2008 compared with NT$6.8bn in the corresponding period of 2007 as revenue fell from NT$21.bn to NT$17.4bn, according to a filing to the Taiwan Stock Exchange.

In New York, containership owner Seaspan posted a third quarter net loss of $5.1m on net earnings of $42.6m, compared with a $38.6m deficit in the corresponding period of 2007, and reflecting a non-cash unrealised loss from interest rate swaps rather than the underlying business.

A coalition of industry interests including shipowners, liner operators, banks and shipbuilders would probably orchestrate a reduction in the record high orderbook in a variety of ways, while a number of marginal or greenfield yards will almost certainly have to withdraw from some of their commitments, said Mr Wang.

Commentary: Would this coalition represent an offical or unofficial freight convention?

Seaspan’s shares have been battered in recent weeks in line with other shipping stocks, falling from around $25 in August to $11 at the end of last week and forcing Mr Wang to tell investors that its business bore no relation to the Baltic Dry Index or the letters of credit crisis that has hit the drybulk trades, and stress that the company is a shipowner, not a liner operator.

Commentary: How can the Baltic Dry Index and letters of credit crisis not be related to a 94% drop in freight volumes irregardless of shipownership? Would not losses then be on cancellations of projected charters or future contracts?

The New York-listed company which has 33 ships on long-term hire to boxship majors, and another 35 on order against firm charter deals, believes it should be relatively immune from the market downturn because of these fixed employment commitments.

In a conference call to analysts, Mr Wang said Seaspan had not picked up any hints of charter defaults, or received requests to renegotiate charterparty agreements.

With its ships only fixed to bluechip companies, Mr Wang said the risk of that happening was low. The average duration of current charter contracts is seven years, said Mr Wang who went on to express confidence that options which come up for renewal in four years’ time would be exercised.

Commentary: Are the financial management operations of bluechip companies not somehow similar to investment banks?

He also predicted an upturn in scrapping activity and a continuation of slow steaming, despite a drop in oil prices.

Reduced speeds are helping to absorb tonnage capacity, and Mr Wang said that, even at lower fuel prices, it still made commercial sense to run ships more slowly.

“Slow steaming will be here for some time,” he forecast.

Seaspan’s chief financial officer Sai Chu said the company’s bank relationships “remained strong” and that there had been no problems over recent drawdowns or credit rollovers.

For the industry overall, Mr Wang said a long recession would probably lead to more consolidation.

But Seaspan could benefit if liner operators outsource during these difficult times and prefer to take tonnage on long-term charter rather than have ships on their balance sheets.

Container lines are now enduring some of the worst conditions ever as supply races ahead of demand and some decide to put vessels into full lay-up.

Just days before Evergreen released its latest figures, China Shipping Container Lines posted a net loss of Yuan272m ($39.8m) for the third quarter.

Singapore’s Neptune Orient Lines expects to suffer its first operating loss in six years in the fourth quarter.

Meanwhile, Taiwan’s export orders, an indicator of actual shipments over the next one-to-three months, increased by the lowest level in more than six years in September, as demand from China and the US fell, according to Taiwan’s Ministry of Economic Affairs.

Commentary: How much of demand losses actually represents sudden letters of credit transaction cancellations?