Shipping slump to deepen in 2012 –Citi

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14 Nov 2011

Citigroup_logoProspects for dry shipping are set to remain poor for two to three years as the sector struggles with a glut of vessels, while crude tankers face more pain in 2012 as economic

problems add to supply pressures, Citigroup's shipping chief said.
China's transportation minister said last week the global shipping sector was in a downturn even worse than during the 2008 financial crisis, with the outlook for the industry made increasingly uncertain by euro zone debt turmoil.
"For dry bulk, I remain pretty pessimistic because the supply overhang is still pretty significant," Michael Parker, Citi's global head of shipping, said on Friday.
"Essentially the dry market is going to be pretty poor for the next two to three years -- I don't see anything changing that," he told Reuters in an interview.
Despite recent rate gains on larger capesize vessels, which typically transport 150,000 tonne cargoes such as iron ore and coal, supply has outpaced commodity demand. The situation has been compounded by moves by China to keep a lid on inflation.
Meanwhile, vessels continue to be delivered.
"Although quite a lot of ships have been sent for scrap, the evidence suggests there has been some delay or slippage in the delivery of some capesizes, but they will still be delivered," Parker said.
"I don't think any China stimulus plans will benefit the dry market as China will focus on domestic demand."
Parker said crude tanker owners have to expect "more or less zero (positive) cash-flow" in the coming months.
"They can't expect to do more than break even at best unless they have locked in charters or there is some significant move to lay up," he said.
Lay up is when a ship is taken out of service for a period, with some or all of the crew taken off.
"One should expect 2012 to be a very poor year for the (crude) tanker market again. There are supply issues and it does not look like global demand is really going to pick up in a way that will change that," Parker said.
In recent weeks average earnings for very large crude carriers on the benchmark Middle East Gulf to Japan route have struggled to meet operating costs estimated around the $10,000 a day level.
The chief of the world's largest independent oil tanker company, Frontline, said this week while oil cargo demand was rebounding and November may see a near-record number of charter contracts, the tanker market remained challenging, with rates "far from" break-even levels.
Current rules provide a disincentive for tanker owners to lay up vessels.
"The problem with the tanker market is the vetting issue -- if you lay up, you lose your vetting and that is acting as a constraint to people putting ships in lay up," Citi's Parker said.
When a tanker loses its vetting approval it makes the ship almost impossible to trade on the market. In the case of lay up, a ship loses vetting approval because it does not have regular inspections, which is one of the major oil company requirements.
"In the 1980s you did not have vetting issues in the same way as you do today. That makes it more difficult for tanker owners to control supply in a way to improve rates," Parker said. "Things should start to recover from 2013, assuming demand picks up."
Source: Reuters

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