The cost of money

Republished by kind permission of: A&A Thorpe, 131a Furtherwick Canvey Island, Essex SS8 7AT Tel: +44 (0) 1268 511300 Fax: +44 (0) 1268 510467 shipaat@aol.com

Shipping’s recent downturn may remind those with long memories of grim years during the 1980s when ship owners became accustomed either to operating their ships at below breakeven, laying them up, or scrapping them. Certainly, the fact that all of shipping’s main markets, and most of its minor ones, have collapsed simultaneously looks bound to make the next few years extremely difficult.
    It is difficult in times like this to see any positive points. However, a look back at the 1980s shipping depression reveals important differences between then and now. And one of them – the cost of money – constitutes a good reason to be cheerful.
    Like last time, today’s markets have been made worse by mindless over-ordering but unlike last time, the crisis has been caused by the folly of bankers and global financial turmoil. In a recent weekly report, Clarkson’s Martin Stopford noted that “one of the appalling features of the 1980s was bank debt; there was a lot of it about.” Whilst that has also been a major feature of recent boom years, shipping banks have now reversed their easy lending policies and many are effectively closed for new business.
    In the 1980s, the two oil crises of 1973 and 1979 had created vast pools of petrodollars, Stopford pointed out, which found their way into the Western banking system and eventually into shipping loans. In fact, banks went on a lending spree, confident that the market would soon recover. “That’s often a reasonable assumption,” Stopford wrote, “but in the 1980s it was not. Earnings fell to $5,000/day for most ship types in 1982 and stayed there until 1987.” Hardly a comforting reminder for owners today!
     Another important difference between then and now is the cost of money. In the early 1980s, six-month Libor climbed to nearly 17% and spent most of the rest of the decade fluctuation between 6% and 12%. This was a huge challenge for borrowers who were confronted with massive interest charges. According to Stopford, the daily cost of interest on a new Panamax bulk carrier, assuming 100% finance, average $4,500 a day between 1982 and 1987.
    “That may not sound very much compared with recent Panamax earnings,” he admitted, “but from January 1982 to April 1987 spot earnings for a Panamax bulker averaged only $5,165/day.” Operating costs would have accounted for around $3,000 a day so most of the interest would have been paid out of capital, and without any repayment of principal.
     How different are things today. Stopford pointed out that six-month Libor recently slipped below 0.9%, meaning that interest on a new $33m Panamax would amount to just $814 a day. This compares with average earnings for such a ship so far this year of around $10,000/day. Of course, for those with plenty of money sitting around on deposit, low interest rates are extremely disappointing. But for those owners mired in debt and with yet more new ships to deliver, low interest rates are a godsend.
    Of course, Stopford pointed out that what happens next is the key question. Last time Libor fell close to 1% in May 2004, it was back up to 4.6% within a year. Signals from central bankers, however, do not suggest that interest rates will rise significantly for the moment. That may be bad news for cash-rich investors, but must be a welcome relief for hard-pressed owners.