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CEO's Column - NORDEN News Magazine Spring 2009

Quicker balance in the market

In the midst of the deepest and most widespread recession in living memory, there actually are some bright spots in the market even though they are easily overshadowed by the challenges that dominate everyday life for all of us. The brightest spots are cancellation of newbuilding orders and scrapping of vessels in dry cargo.

According to Clarkson Research, 167 bulkers of 8.3 million dwt were scrapped from October last year to February this year. The amount corresponds to around 2 percent of the world fleet at the turn of the year, and you have to go several years back to find a similar level. I will chance my luck and predict that the scrapping will continue because the low rates have taken away the incentive to keep old and outmoded vessels sailing. And the scrapping potential is enormous considering that around 30% of the vessels in the world fleet are more than 20 years old.

You hear about cancellation of newbuilding orders almost every day. Several of the new ship yards are simply not able to meet the milestones in the contracts, and the shipping companies obviously use this as an excuse to cancel the orders. Furthermore, a large part of the orders from 2007-2008 are today worth less than the contract price, and therefore, the banks are withdrawing the financing. Other – and we talk about lots of – orders are not financed, and the ship yards and the shipping companies do not stand a chance of getting finance. And finally, there are shipping companies who buy their way out of orders because of the poor markets – or who are simply not able to pay the ship yards.

It happens so quickly that the analysts continuously have to alter their estimates. The most far-reaching estimate was made by HSBC in mid-March. They predict that out of the 234 million dwt on order in dry cargo for delivery in 2009-2011, only 108 million dwt will be delivered. In other words, 55% of newbuilding orders for bulkers will be cancelled or postponed.

Only time will tell how this will end, but I will not be surprised if 40-50% of the order book will never be realised. And both cancellation of new vessels and scrapping of old vessels are good news because it means that we are able to restore the balance between supply and demand in dry cargo more quickly. So in the long run, I am sure that we will appreciate that the crisis came so quickly and so roughly.

We also work on optimising NORDEN’s order book. We are not going to cancel 40-50% of our orders as the ship yards that we have contracted with know their metier and meet their deadlines so far. But less can also do the trick. Until now, we have cancelled orders for 2 50%-owned Handysize vessels, and our prepayments have been returned. Furthermore, we are in constructive dialogue with other ship yards where we discuss e.g. later deliveries or conversion to other vessel types.

We will inform about progress in this area in e.g. interim reports to the possible extent. But it is important to me to say that NORDEN lives up to its contracts, and amendments will only take place when we and the ship yards agree. And let me also remind you that NORDEN is able to finance its whole newbuilding programme through the Company’s cash deposits.

CARSTEN MORTENSEN

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