What have Spanish Villas and Ships got in Common?

We are getting awfully close to a Banking Crisis!  German Banking System in Crisis

This week saw another piece in the jig saw of collapse that I have been warning of for nearly 18 months.  The ClarkSea Index (see below for details) has just registered its lowest level in its 23 year history. Although its weekly decline of $223 (3.04%) to $7,111 per/day charter rate, is a far cry from the record $5,000 (12%) drop in the 2008 crash, it has to be put in perspective that the daily rate fell from $43,000 per/day at that time.

Why is all this so important?

With an estimated 60% of shipping loans now in the `not performing` bracket  it is important to bear in mind the attitude of the lenders. The biggest lenders won’t foreclose even if ships are worth less than the outstanding debt and owners can’t meet repayments. They would much rather restructure with the belief that valuations will rise following an expected pick up in overall shipping activity. This process of protecting ship valuations (by not foreclosing) helps the lenders to make provisions rather than crystallising losses. Perfect sense in normal business cycles and has indeed paid off in previous shipping downturns. I believe this time things are different. (see my many blogs on the subject) This years 20% decline (in the ClarkSea Index) to the all time low, makes the process of restructuring more difficult. We are now close to a point where new restructuring deals will be impossible to stack up economically. The additional debt being laid at the feet of borrowers is futile. Additionally, previously restructured deals must now be looking shaky. All this looks remarkably like the Spanish Banking crisis which I predicted in some of my blogs at the birth of Finance-Reaper. Two/Three years ago Spanish banks refused to sell off foreclosed property which was piling up on their books. Instead they were offering special zero rate mortgages to buyers  (at book price of the asset). The rest is history. This prolonged the process of restructuring and even allowed some developments to carry on adding to the surplus supply. With 2013 seeing a further surge in new ships hurtling off the slipways of Korea, China, Japan et all, supply is growing. Yes, I hear you, older ships are being scrapped at the fastest pace in many a year, still not enough to change my opinion. Meanwhile, I believe world trade is contracting. Yes, I hear you, I am crazy! But I do not believe a word China says. I have written many articles on the Steel industry as a bellwether for China producing at a loss just to maintain employment. This is true of many industries in that country. Chinese steel inventories are mounting, now reaching 9 year highs. The EU is now threatening to impose further trade dumping duties of steep pipes from China. All non- Chinese steel companies share prices are close to 15 year lows with the likelihood of further production closures to come. All this whilst China is hitting all time high production output. IRON ORE will retrace the losses seen late last year when common sense prevails. Problem is, with 20 million farm hands joining the urban sprawl per annum, they need to have jobs. China needs to keep production of basic material like Steel and Aluminium at full tilt as they are such big employers. The longer the excess production goes on the bigger the downturn when it comes. All this is alarming for those bankers who are sitting on shipping loans with the hope of a significant pick up in trade. Confusing!

ClarkSea Index (Compiled by the worlds leading ship broker, Clarkson PLC)

A weighted average index of earnings for the main vessel types where the weighting is based on the number of vessels in each fleet sector.

UK…I will follow up on my many recent warnings about the economy and Sterling. The January Public Sector Accounts were on the face of it better. Believe me, they were not! I will review them next week.

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Sunday, March 3rd, 2013 China, Debt, Shipping, Steel

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