By George Laios
Deputy CEO, Intermodal Group
Since the Covid-19 outbreak, governments and central banks around the globe have been using their ammunition and stimulus packages to keep their economies running. Trillions have been injected into global economies to fight unemployment and minimize recession. Apart from the central banks of EU, Japan, Switzerland, Sweden and Denmark, who have been offering negative rates for the past five years – a handful of central banks have now reduced their policy rates to near-zero values. Regardless of how successful or not the above mentioned five banks’ “experiment’’ has been, negative rates have undoubtedly made hedging strategies more complicated.
When it comes to the US Dollar, the Fed Chair has made it clear that negative rates are not part of its policy tools for the time being and that it is highly unlikely that rates will be pushed below zero. However, the US President has openly expressed that he views such a tool favourably. Although market experts do not expect negative Libor rates in the imminent future, no one can rule out the possibility of this happening.
These developments have had numerous effects on shipping companies who typically borrow using USD-Libor floating loans. The first and obvious outcome of lower Libor is the reduced borrowing cost. Whilst average 3-month LIBOR rates were 0.69%, 0.74% and 0.95% during the 2009, 2016 and 2020 (to date) recessions respectively, the 3-month LIBOR rate in July closed at 0.3% and has decreased approximately 6-fold since January (0.25%, as of 17/8). USD Libor loans have a zero lower bound limit which is incorporated by banks in their loan documentation (LMA) language: if Libor is less than zero “it will be deemed to be zero’’. This wording is also included in proposed documentation by the Alternative Reference Rates Committee, who is responsible for the development of Libor’s successor.
Low interest rates have also resulted in increased enquiries from bank clients who want to exploit their interest rate hedging options. Most shipping borrowers have decided not to hedge owing to the consensus that USD interest rates will not increase significantly over the next couple of years. Nevertheless, the number of shipping companies (mainly listed) that have engaged in hedging derivatives remain significant.
Under “normal” circumstances, a Cap or a SWAP for protection against an upward movement of interest rates would be the norm. However, nowadays it is essential to provision for negative interest rates. The borrower who hedges should bear in mind that USD Libor can also turn negative. Some banks even “encourage” clients to include a Floor in their SWAPS which will prevent base rates on their loans from dropping below zero. This limits the extent to which their derivatives can fall “out of the money”. Such protection comes at a premium. Indicatively, a 5 year SWAP is priced at 0.37 %, while the cost of a Floor is [10-30] bps. With rates expected to remain close to zero, the SWAP protection premium will continue to rise for as long as there are statements in favour of negative rates such as that of President Trump. However, whether the cost of protecting of a company’s future cash flows through the xyz premium is high or not is also a matter of perception and is reflective of one’s risk profile.
Chartering (Wet: Soft- / Dry: Firm+)
Rates in the Dry Bulk market increased throughout the last week with Atlantic basin Panamax activity being the key performance driver followed by an increased demand for geared vessels across both basins. The BDI today (18/08/2020) closed at 1586 points, down by 12 points compared to Monday’s (17/08/2020) levels and increased by 76 points when compared to previous Tuesday’s closing (11/08/2020). With the exception of the Aframax vessels the rest of the sizes in the crude carrier market faced additional pressure last week. Among them, Suezmax rates suffered the biggest discounts with earnings decreasing in all key trading routes. The BDTI today (18/08/2020) closed at 490, decreased by 7 points and the BCTI at 407, an increase of 54 points compared to previous Tuesday’s (11/08/2020) levels.
Sale & Purchase (Wet: Stable- / Dry: Stable+)
The tanker secondhand activity remained quiet for another week; owners in the SnP market focused on the dry bulk candidates with geared sizes having the lion’s share among the recently surfaced deals. In the tanker sector we had the en bloc sale of the “GW DOLPHIN” (55,600dwt-blt ‘20, China) and “GW FORTUNE” (55,600dwt-blt ‘20,China), which were sold to Chinese owner, CSSC, for a price in the region of $34.37m and $36.60m respectively. On the dry bulker side sector we had the sale of the “ECOMAR G.O.” (75,093dwt-blt ‘08, China), which was sold to Greek buyers, for a price in the region of $9.5m.
Newbuilding (Wet: Stable- / Dry: Stable-)
Sentiment continues to be low in the newbuilding realm as orderbooks across all shipping sectors are at low levels with only a handful of orders surfacing in the past week. This can be attributed to the economic uncertainty caused by the COVID-19 pandemic combined with the shipping industry’s “divided” view on the commercial and long-term implementation feasibility of ESG in maritime transportation. In addition, shipyards have been struggling to stay afloat financially since the start of the coronavirus outbreak owing to the increased number of newbuilding order cancellations and the travel/work restrictions. Given the prevailing conditions in the tanker market coupled with the current challenging macro-economic fundamentals, an upturn in the newbuilding front appears to be a pipe dream for the rest of 2020. In terms of recently reported deals, Danish owner, Norden, placed an order for two firm Ultramax vessels (61,000 dwt) at NACKS, in China for an undisclosed price and delivery set in 2022.
Demolition (Wet: Stable+ / Dry: Stable+)
The demolition market has seen another healthy week. Demolition scrap prices are en route to recovery from the downturn in the 2020 February to April lockdown period. Rates this week remained constant in Pakistan whereas increases in scrap prices were observed in India, Bangladesh, and Turkey. The overall demo market’s upward trajectory can be attributed to recent increases in steel prices coupled with lack of available demo candidates. In India, some vessels intended for green recycling emerged and demolition rates increased, forming the second highest demo rates in the market. Pakistani breakers are still offering the highest demo rates as opposed to breakers from competing countries. On a final note, Turkish cash buyers are also offering higher week-on-week scrapping premia despite the increasingly depreciating Turkish Lira. Average prices in the different markets this week for tankers ranged between $200-345/ldt and those for dry bulk units between $195-330/ldt.
Please click here to open Intermodal's Weekly Market Report for the week 33,2020