Germany: Safe Passage Ahead - Is The Shipping Industry Unsinkable?

Last Updated: 25 February 2010
Article by Lars Westpfahl and Jan-Holger Arndt

A rough year, survived by most

When we published our report Surviving the storm at the German Ship Finance Forum this time last year, it was clear that the industry was confronted by some of the fiercest challenges in its history. Recent years had returned only growth to liners, ship owners, ship builders, ports and other associated parts of a sprawling, global sector. But the world economic collapse hit hard and weakened each link in the shipping supply chain. The reversal in world trade trends (see graph below) had a near-immediate effect on the need for transport to move goods around the world and prices tumbled as a consequence.

The shock waves rocked the industry all the harder for the fact that it was gearing itself up for continued steep growth: decline or even stasis had previously been unimaginable and therefore had not been widely planned for, even by the most risk-averse players. So, as world demand evaporated, the industry became burdened with unneeded capacity (see graph on next page) and the unwelcome prospect of brand new ships being readied for launch. As 2008 ended and last year began, the maths started to look pretty frightening. Both freight rates and charter rates slumped into loss-making territory. For owners, ships ordered just a couple of years back for, say, $50m might by last year have been worth $25m. For banks, assets were threatened and for investors, forecast returns were looking like fanciful dreaming in retrospect.

Yet the industry sails on. The catastrophic failures that were looking so distinct a possibility as the economic world stumbled did not materialise. No major carrier fell in 2009 and no bank imploded because of its exposure. Of course, that forms only part of the story... Although the shipping sector has shown its inherent strength in making it through the year with some semblance of completeness, there have been horror stories.

For liners and ship owners, 2009 was almost universally a year of loss. Although many shipping companies are private, those publicly listed reveal that the damage caused was significant. There have been pockets of comfort: ports, for example, have remained in a solid position and certain offshore companies even made a profit last year. For the majority of dry-bulk, container and tanker shipping, though, there was really only one direction.

But just as their world was rocked, so it can be seen that others have sought advantage. A shift in the way bulk markets work has been noted by Tim Jones, chief executive of international ship broking firm Barry Rogliano Salles. He points to businesses for which 2009 represented an opportunity for strategic manoeuvres: 'A suppliers' market has emerged. Forty per cent of the capesize fleet was chartered to deliver iron ore CIF [cost, insurance, freight] by the mining companies Vale, Rio Tinto and BHP Billiton.' Freight as a commodity has become integrated into industrial processes. And although there may still be dry-bulk capacity sitting idle and to be delivered, he points to the huge increase in China's import of steel and coal in 2009 as an indicator that the sector remains active.

Elsewhere, Jones notes the prescient actions of certain carriers, particularly Oldendorff – a company that sold ships and weathered the downturn with an increased reliance on chartered vessels, remaining poised to take advantage of cheaper assets as values fall in line with the reduced charter returns.

Though rare success stories are there to be found, tales of woe are abundant. Shipping newspaper TradeWinds continues to publish its 'Crisis watch' section – and there has been no shortage of content. Jan-Holger Arndt, a Freshfields partner who has advised banks and shipping companies throughout the recession, sums up the damage: 'There have been some total failures. In Germany alone, 13 one-ship companies have gone under. Companies with critical mass have faired better, but losses have been counted and debt has grown fast.' Arndt notes that the crisis has been a leveller – with the biggest liners and owners seeing fortunes sink in unison. But he is quick to speak up on behalf of the industry. 'We see an industry in crisis because of the global recession. The situation is as it is because of the behaviour of the market, rather than poor strategy.'

The clean-up operation, though, is a necessity regardless of the origins of the problem. 'We have seen impressive efforts on behalf of both the industry and the financial institutions to ensure that the storm is weathered,' he adds, 'and both sides have shown intelligence and resilience in defending themselves from collapse.'

Keeping the industry afloat

At the forefront of initiatives to survive the dual effects of increased capacity and decreased demand has been operational adjustment. Early in 2009, freight rates bottomed out. Since then, they have bounced back up – with the big carriers making a concerted move to slow-steam and withdraw ships to reduce capacity and restore higher prices. As the year ended, those companies with a balanced cost structure were trading at break-even or better. Of course, with capacity lying idle, it is inevitable that there are those who will see the downside of the industry-wide move to increase freight rates – and charter rates remain low. It is a point noted by Jesper Kjaedegaard, partner at Mercator International and chairman of Maritime UK: 'The huge drop in volumes in 2008 and 2009 paired with a significant new building programme has led to around 12 per cent of the world's container ship tonnage being laid up. As it tends to be favourable for the big carriers to keep their own vessels in operation, there are owners unable to charter out their vessels and who are suffering as a consequence. The German KGs have been particularly badly hit – and much of their capacity is lying idle off Singapore.'

Elsewhere in operations, the future shape of fleets has been modified in reaction to shrunken demand. Flamboyant ship-building plans have been revised across the board – with companies looking to alter timings or costs or even to scrap new-build plans.

Stories of sharp contract negotiations abound – as is typical in an industry fighting for its very survival. In many cases, the detail of an original contract has been overruled for a 'best-case scenario' price – and one doesn't have to look far to find examples of ship owners chartering their assets out at a discount from what was promised. After all, it is easily argued that covering costs is better than tying a vessel to a harbour wall on principle.

The industry seems to have made a conscious, if slightly uncomfortable, decision that tough times call for practical measures. There certainly seems little appetite to take negotiations to court. Even if that might make legal sense, the cascade effect is such that one company's potential failure very obviously represents a threat up and down the supply chain.

Beyond operational streamlining and contract negotiations, companies have had to look for innovative emergency measures to help them cope with increasingly daunting liabilities. The inevitably extended period of over-capacity – our expert contributors predict recovery of supplydemand equilibrium arriving as late as 2014 – means that even the biggest players and the most prudent companies have had to look at significant restructuring. To an industry so used to growth, this has been a steep learning curve. Freshfields partner Lars Westpfahl has seen increasing urgency on both sides of the equation: 'As the crisis deepened, banks quickly became aware that they were facing the spectre of borrower default. Initially this would be dealt with on a case-by-case basis. But as the recession deepened, and likely recovery moved farther into the distant future, it became clear that this was a systemic problem that would require global solutions.'

Banks have, in general, shown a willingness to help the industry renegotiate the terms of their loans. With analysts believing that shipping will likely make a good recovery as global demand resumes, it is clearly in the lenders' favour to avoid write-downs when their troubled assets may well be returned to health.

The sector has also seen salvation in the form of faithful shareholders and new investors on the capital markets. CSAV, the largest of the South American shipping companies, last year pushed through a three-phase capital increase to cope with financial losses incurred. It found a total of $710m of new financing, initially from existing investors and other third parties, followed by further funds from German ship owners. Effectively a debt-for-equity swap, this robust series of moves – combined with operational adjustments – leaves CSAV in a strong position. In total, around 80 ship-owning entities were involved, showing just how wide-reaching such activities can be.

Pulling together

Shipping remains an area of concern to banks and, increasingly, to governments and regulators. Although wholesale governmental intervention has not yet occurred – there are isolated initiatives under way, such as Korea's ship purchase and finance programme – the industry is big enough in certain countries to ensure that its fate is of national concern. We have not yet reached the stage at which governments step in to prop up failing companies, as for the automotive sector, for example. But the industry is being watched. Regulators, too, in seeking to ensure banks are not dangerously exposed, will increasingly become a consideration for the shipfinancing sector. This year will likely bring closer scrutiny of banks' ship books.

Westpfahl spots a change in relationship between banks and the industry over the past year: 'Some borrowers previously had a tendency for coldness towards the banks. But both sides have seen their risk increase and we are now witnessing genuine efforts to work collaboratively. It has been agreed that fire sales and liquidations can present greater risk to both sides than renegotiation of terms.' Where there is a financing gap that cannot be resolved through such adjustments, low asset prices have already started to interest new players – particularly in private equity. 'It is very likely,' adds Westpfahl, 'that the capital markets will become more involved in shipping over the next couple of years. This will lead to enhanced levels of transparency to meet the demands of regulators.'

A natural target for investment is the ship-building pipeline. New money will come to the aid of companies struggling to comply with contracts set before the recession. Ship prices are now looking attractive and could bring good returns when the sector returns to health.

The industry may yet prove able to guide itself out of danger with collective determination and practical protective measures. And, as Tim Jones points out, assets are now eminently affordable to those with the means. Although it is certain that many will have to fight hard to survive, and the shape of the sector may noticeably change as a consequence, new opportunity is starting to take the edge off the gloom.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions