Fears of a global recession are hammering freight rates. The Baltic Dry Index, which tracks dry bulk rates, has slumped more than 70 per cent since the start of the month. Similar weakness is also being felt in the tanker market, for example, in the TD3 rate for Very Large Crude Carriers (VLCCs) covering voyages from the Middle East to Asia.
Baltic Dry Index over the year:
The bloodbath though is yet to feed through into the results of the major ship owners, which all benefited from relatively high rates in the previous quarter.
US-based Overseas Shipholding announced last week that its Q3 profits rose sharply. Meanwhile DryShips, a Greek shipping firm owned by shipping tycoon George Economou, said its Q3 profits rose 71 per cent.
But… as the FT points out, someone somewhere is going to be feeling pain on account of the sell-off.
In Asia, shareholders are already pricing in the losses. Mitsui O.S.K Lines, operator of Japan’s largest fleet of iron-ore ships, fell for a second day in Tokyo trading. The group was also forced to lower its profit target end of last month.
In London, Britannia Bulk was forced into administration on Friday after being hit by its exposure to speculative positions in freight rates.
But while the world tries to determine who’s next to suffer, it’s worth pointing out another less obvious shipping magnate - that would be investment commercial bank Morgan Stanley.
The bank has been heavily involved in the physical commodity markets for the last few years, and, as well as buying stakes in everything from production assets and petroleum distribution businesses, it has also been piling into shipping. As the bank confirms in its SEC filings:
In connection with the commodities activities in our Institutional Securities business segment, we engage in the production, storage, transportation, marketing and trading of several commodities, including metals (base and precious), agricultural products, crude oil, oil products, natural gas, electric power, emission credits, coal, freight,
It fails, as always, to pin down those investments in financial terms. Freight rate traders, however, confirm the bank is and has been a prominent dealer in the forward freight agreement (FFAs) market for years. But there’s more.
As recently as February 2007, the bank was reported to have a total long-term vessel charter numbered anywhere from four to eight. The bank would then charter out these vessels for single voyages in the spot market - a business that was seen even then as highly risky because of the volatility in the markets. To hedge itself the bank entered into the contracts of affreighment (COAs) market - an obligation to ship a specific number of cargoes for a specific voyage. It would either find suitable charters to satisfy the contracts or use its own ships to move the cargoes if they failed to find a suitable rate themselves.
But Morgan also has exposure via its commodities division. The group acquired shipping-pool firm Heidmar back in August 2006 for approximately $200 mn according to its SEC filing.
It said at the time:
The acquisition enabled the Company to expand its physical freight business across multiple vessel classes and geographies and provided an opportunity to expand into international shipping and services. Since the acquisition date, the results of the Heidmar Group of companies have been included within the Institutional Securities business segment
According to its website Heidmar manages over 90 tankers in five tanker pools for shipping companies around the world. Perhaps sensing upcoming troubles, Morgan Stanley has been seen downsizing that exposure this year. In April, the group announced it would be selling the Heidmar Lightering division to Overseas Shipholding for an undisclosed sum.
It also announced in April that it would be selling another 51 per cent stake in Heidmar outright to DryShips’ George Economou via has Shipping Pool Investors firm. Morgan Stanley though still retains a 49 per cent ownership stake. Lloyds List described the deal as follows:
Mr Economou’s arrival is to coincide with the establishment of a new very large crude carrier pool at Heidmar, according to the official announcement. The price being paid by Mr Economou was not disclosed. He has routed the purchase through Shipping Pool Investors Inc, which is affiliated with his Cardiff Group.
Morgan Stanley’s global head of oil liquids, Olav Refvik, insisted his group remains committed to the business despite the sharing of spoils.
The bank’s latest research report on dry-bulk shipping, meanwhile warns freight rates may continue to fall in the near future, slightly contradicting its own “committed” investment into the industry.
Lloyd’s List cites the report saying:
In 2009, it expects that spot and one-year time charter rates will decline 60% from 2008 levels. The report also warned that a “substantial portion” of capesize orders would be cancelled as they are no longer economical to operate at the contracted high vessel prices.
Of course, the sums involved in Morgan’s freight business are unlikely to be anywhere close to those cited in recent writedowns. However, in these days of cash-strapped banks, all losses do add up. What’s more it’s the counterparty risk plaguing the market that remains the real concern.
Morgan Stanley declined to confirm the bank’s exact exposure to the market when contacted.
It’s worth remembering that while the bank is among the most directly connected to the freight market - it is certainly not the only bank with exposure. According to the Telegraph in the UK are RBS and HSBC are also particularly exposed via their lending and underwriting activities.
Shipping specialists say the Royal Bank of Scotland and HSBC provide the lion’s share of loans for both the bulk goods and tanker fleets, exposing these two banks to further potential losses.Also worth noting is the exposure of one particular European Union member famed for its shipping connections…Greece. The Telegraph writes the country’s shipping families still control up to a third of the freight market for bulk goods. That exposure is now hitting Greek sovereign debt:
Ominously for Greece, this is the first time its debt has broken its tight linkage with Italian bonds — which traded at spreads of 100 yesterday. The markets are now clearly singling out the country as the most vulnerable of the EMU members.
Related Links:
Wave of losses loom for shipping industry - FT.com
Bonds that go bump…- FT Alphaville
How not to (mis)read the Baltic Dry - Robert Wright for FT Alphaville
