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Shipping companies sees further fall in asset prices
After witnessing a fall in the asset prices of vessels following the global slowdown, the shipping industry expects the asset prices of vessels, especially second-hand vessels, to fall further by about 5% to 10% due to volatility in freight rates and economic conditions.
 
"If the freight rates continue to remain volatile for the next three months, a correction in asset prices is likely to happen in the tanker and dry bulk segment," said Piyush Parag, research analyst from Religare Research.
 
Drewry's global freight rate index for container shipping has fluctuated between a maximum of $2,727 per forty feet equivalent unit (FEU) in July 2008 and minimum of $1,536 per FEU in May 2009. In August, the Baltic Dry Index (BDI), a measure of shipping costs for commodities, continued with negative momentum on signs of slowing Chinese raw material demand, BDI fell 28% over previous month. Port bottlenecks for ships have eased through reduced congestion in China, with about 7% of the fleet now held up outside ports, down from a peak of about 14% in early July, this coupled with fleet expansion were the major reason for significant decline in BDI.
In September, the Baltic exchange dry index has gone up to 2,390 points from 1,070 points in January, touching a high of 3,520 points in July. Though the second hand asset price momentum is high, which can be an indicator of an increase in trade activities, analysts feel that higher tonnage in the sea may act as a catalyst for downward movement of day rates in near future.
 
There are marginal activities for large sized vessels like VLCCs, however, the performance of other type of vessels like Suezmax and Aframax was below expectations, which was the result of lower activities and higher tonnage supply. The concerns of higher supplies are quite evident from this month as asset prices of second-hand tankers declined by more than 10% across the board, which implies that due to incremental addition in the tonnage, the business of second-hand vessels may be severely impacted, said Gupta Equities Pvt Ltd in a report.
 
Some two-three years ago, ship-owners were on a buying spree for deliveries from 2009 to 2011, but today many of them are trying either to cancel the orders or postponing the deliveries.
 
"In the dry bulk segment, there seems to be quite a freeze on new deliveries and prices may not fall. But in case the ship-owners are not cancelling their orders and new orders are coming in, then the prices of second-hand vessels also may fall," says SS Kulkarni, secretary general, Indian National Shipowners Association (INSA).
Indian shipping companies like Great Eastern Shipping Ltd (GE Shipping) and Varun Shipping Ltd are also in a wait-and-watch mode, to cash on this expected correction in asset prices.
 
GE Shipping says it is of the view that there could be some more pain in the asset market and therefore possibly another leg down in prices and the company, thus, is in a wait-and-watch mode.
 
"There has been a very sharp fall in second hand prices. In the dry bulk segment it is almost 60% to 70% and in the tanker segment the fall has been around 50%,” says a spokesperson from GE Shipping.
 
Buying vessels at lower rates and selling them at higher margins has been GE Shipping's forte for years and the company has kept a cash balance of about Rs26 billion for its next round of vessel purchases. In the past fifteen months, GE Shipping sold 13 ships with a good gain on sales margin.
 
Similarly, Varun Shipping also has set aside about $100 million for its fleet expansion plans and it expects the asset prices to fall further. "There is an ongoing fall in the asset prices and it could fall furthermore," says Manali Parekh, vice president, Varun Shipping.
 
Availability of second-hand vessels may also be causing the economic slowdown, wherein shipping companies would offer a couple of their vessels for sale, to maintain liquidity. 
 
Essar Shipping Ltd, the unit of India's Essar group, however, has a different view from others. V Ashok, director, Essar Shipping, Ports and Logistics Ltd, says, “I think the asset prices of vessels have reached a sort of bottom. Our view is the prices will not fall any further."
 
Even on the global front, the number of idle ships is increasing. According to a recent report from UK's Daily Mail, there are empty tankers and container ships anchored in the South China Sea. This fleet may be in a number close to 500 idle vessels, which is equal to 12% of the world's shipping capacity, the report said.
 
With the Korean shipyards continuing to produce new vessels for which orders were placed when the trade was booming, the number of idling fleet will only increase in near term. Yogesh Sapkale with Amritha Pillay [email protected]

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Airlines losses to go up to $11 billion in 2009
The International Air Transport Association (IATA) has said it expects airline losses to go up to $11 billion in 2009, higher by $2 billion from its previous estimate, due to low demand and higher-than-expected fuel prices.
 
"The bottom line of this crisis—with combined 2008-2009 losses at $27.8 billion—is larger than the impact of 9/11," said Giovanni Bisignani, director general and chief executive, IATA. 
 
Bisignani said the combined projected losses for this year and 2008 would be $27.8 billion — bigger than for 2001 and 2002. Losses for 2001-02 were $24.3 billion, as 9/11 triggered a precipitous drop in air travel.
 
IATA said industry revenues for the year are expected to fall 15% or by $80 billion to $455 billion compared with 2008 levels. The optimism in the global economy has seen passenger and freight volumes rise, but that is the only bright spot as rising costs and falling yields have squeezed airline cash flows, it added.
 
"The sharp decline in yields will leave a lasting mark on the industry’s structure and revenues are not likely to return to 2008 levels until 2012 at the earliest,” Bisignani said.
 
European carriers are expected to face highest losses at $3.8 billion in 2009, followed by Asia Pacific carriers at $3.6 billion.
 
“This is not an airline-only crisis. There is less cash coming into the industry and the entire value chain must be prepared for change. All our business partners—including airports, air navigation service providers and global distribution systems—must be prepared to cut costs and improve efficiencies. Some airports have delivered cost reductions, but not in line with the magnitude of the changes to the industry cash flow,” said Bisignani.
 
"Conserving cash, careful capacity management and cutting costs are the keys to survival. The global economic storm may be abating, but airlines have not yet found safe harbour. The crisis continues,” Bisignani added.
 
IATA said it expects losses to continue into 2010 with the industry expected to report a $3.8 billion net loss. This is based on a limited revival of growth in traffic volumes of 3.2% for passenger and 5% for cargo; very little increase in yields of 1.1% for passenger and 0.9% for cargo and oil at $72 per barrel.
 
IATA represents some 230 airlines comprising 93% of scheduled international air traffic. -Amritha Pillay [email protected]
 

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