GLG News by Craig Marston

Implications: Tradewinds reported that the list of suitors for the 50.4% stake being offered in Daewoo Shipbuilding & Marine Engineering (DSME) includes Hyundai Heavy Industry, Posco, the GS Group, and Hanwha Group.  Analysts expect a bidding war to result.  While a great time for sellers to unlock the value of the business, this is a terrible time for the competitors to acquire Daewoo. 

Analysis: The shipbuilding industry has enjoyed some very heady times the last few years.  Demand has been unprecedented, and most established builders have at least a three year orderbook.  Prices have doubled over the last five years and canceled orders can be refilled within days.

With three years to "coast," it seems a bit odd to be sounding a warning about shipbuilding equities.  The main issues are the excessive expansion of world shipbuilding capacity aligned with current demand against the inevitable drop-off in orders post-2011.

We have renewed the tanker fleet and have substantially expanded the drybulk and container shipping fleets simultaneously.  Shipbuilding demand cannot maintain the levels seen in the 2007-2010 time frame.  We have seen new orders placed this year at half the pace of last year, giving validation to the position that the good times are coming to an end.

The timing of consolidations should be in the 2010 to 2013 time frame.  The drop-off in new orders will make competition fierce and will spell the end for a number of competitors.  Consolidating now ensures that an excessive price will be paid for an asset that will have a very difficult time being profitable post-2010.

Implications: Jinhui Shipping & Transportation (Oslo:JIN.OL) reported record profits and simultaneously warned of weaker medium term prospects.  The company rightly cited macroeconomic concerns on the demand side, but is overly optimistic related to the supply side.

Analysis: Jinhui is mostly in the supramax market.  The conditions that the company cited related to the demand side of shipping are likely to have a greater impact on the Cape and Panamax sectors.  The shear range of products carried on Handy and Handymax vessels generally ensures that demand is more stable.

It is on the supply side that Jinhui is much too optimistic.  Discounting the extreme order book with the standard forecast of credit-related cancelations, delayed deliveries from new shipyards, and a creative forecast of substandard tonnage from new yards, Jinhui believes that some level of balance will be maintained.

The orderbook for Handymax vessels stands at nearly 63% of the current fleet, with the bulk of orders in the Supramax category.  Greater than 40% of those orders are due for delivery by the end of 2009.  While Jinhui is correct that the age profile will certainly lead to scrappings that will mitigate growth, the handymax fleet profile is substantially less than that of Handies.

Signalling the impending end of record earnings announcements is a prudent move by Jinhui.  Hopefully, their strategy for dealing with the rate environment in 2010 is better than their press release indicates.

Implications: Despite the 4b Euro "minimum" price that TUI is placing on Hapag, opposition from Hamburg, and a very conservative acquisition history, NOL is very likely to be the successful bidder.

Analysis: Profits remain difficult to achieve in container shipping in 2008, and next year looks even worse.  With shareholders pushing to unlock the value of the subsidiary, and a spinoff impractical, a reasonable offer will likely be accepted.

TUI executives are very aware that the value of Hapag-Lloyd will decrease in the falling container shipping market.  Waiting for another strong cycle will likely not be acceptable to the shareholders.  The incentive to sell is strong.

While the Hamburg consortia has a sentimental stake in acquiring the business, NOL has the much larger commercial stake.  While NOL clearly has the restraint to walk away from the deal rather than pay too much, the definition of "too much" for NOL is likely higher than the capability of the Hamburg consortia to meet.

NOL's chairman's remarks regarding the economies of scale in a weak market are somewhat puzzling.  After all, market leader Maersk has demonstrated that economies of scale will not prevent massive losses even in a strong market if integration goes poorly.  Perhaps it is more of a reflection of the market discipline that NOL is known for and their confidence in the synergies that a merger with Hapag will bring.

Implications: The impact of the "credit crunch," while real for individual companies, is not a factor for the overall shipbuilding industry.  The few building slots that have been canceled by owner default have been readily resold at higher margins.  The drop-off in post-2010 orders has its roots in oversupply of new ships and shipbuilding capacity.

Analysis: The extreme demand for new ships had its roots in the concurrent fleet renewals/expansion of container shipping, liquid bulk shipping, and dry bulk shipping.  Container shipping was a result of robust demand.  Liquid bulk shipping was an artificial early fleet renewal due to regulatory changes.  Dry bulk was a combination of fleet age and unprecedented demand for the Chinese steel industry.

As with other historical shipping cycles, we have overbuilt capacity in each of these trades.  Container shipping is already seeing weak rates.  Liquid bulk will be quick to follow, with dry bulk shipping a close third.  Each of these will experience different recovery times.

For shipbuilding, new orders are being placed this year at roughly half the level of last year.  These orders are being spread over an increased number of facilities.  These orders (2011+ delivery) are also much more suspect than orders during the 2005-2010 time frame.

While some yards are well-positioned to take advantage of the continuing boom in rig construction, FPSO conversion, and other E&P activities, we are already seeing facilities moving to take advantage of this market to replace softening demand for traditional shipbuilding.  Korean and Chinese yards have received orders in this area, and others will follow.

With the exception of a few, well-entrenched specialty yards, it will be a very difficult market post-2011.

Implications: Tradewinds reports that some six or seven bidders responded to the initial round of indicative bids for TUI's liner shipping company.  NOL will be the successful bidder.

Analysis: Despite the weakening liner market and a less-than-hoped-for price, shareholder sentiment at TUI will likely approve the sale of Hapag-Lloyd.  Despite the movement to retain ownership in Hamburg, money will do the talking.  NOL has the cash to close the deal.

Notwithstanding the poor history of large consolidations (Maersk and Hapag), on paper a merger of NOL with Hapag-Lloyd looks very smart.  Their trade lanes are mostly complementary and a merger would move the combined companies into the number three market share slot.

More importantly, NOL has outshone the competition in not only moving greater volumes, but doing so at a profit.  In the post-conference world on the important Asia-EU trade lane, and in a weakening volume-growth market, such discipline will be needed.  While integration problems will likely result, this consolidation makes the most sense.

Implications: Despite the change in leadership at both the PMA and ILWU, commitment to early negotiations, and a clampdown on rhetoric in the press, the situation is starting to resemble the 2002 talks that led to a 10-day lockout.

Analysis: Stevedore negotiations on the West Coast were supposed to be a stark contrast to the acrimony of 2002 that led to a 10-day lockout and massive backlog of ships.  Both the union and the PMA changed their leadership, and there was much public commitment to a smooth negotiation process.  This became even more important with West Coast container volumes down significantly from 2007.

The contract expiration date came and went, with both sides continuing to negotiate, and no evidence of work actions.  Both sides touted major points having been agreed to.

However, this apparently pleasant negotiating environment seems to be falling apart.  The American Shipper reports that the PMA is claiming that coordinated work actions, such as simultaneous coffee breaks and work-to-rule behavior is decreasing productivity by 20 to 30%.  For their part, the ILWU is minimizing the effect of the actions, while not specifically disputing them.

For those who remember 2002, this is eerily familiar.  We are only a couple of weeks past the contract expiration, and already the agreement to avoid public accusations and work actions has been abandoned.  Neither side can afford a repeat of the 2002 debacle, yet each seems destined to follow the same tired playbook.  Ironically, it will be US exporters who will lose this time, as the weak dollar has prompted a boom for domestic manufacturers.

Implications: Tradewinds reported that Rio Tinto and BHP Billington have finalized contracts with Baosteel for an 80%+ increase in the price of iron ore out of Australia.  This compares favorably to the Vale benchmark achieved earlier this year for a 65% increase out of Brazil and reflects the freight differential sought by the Australians.  The impact on dry bulk shipping is likely to be minor.

Analysis: Australian iron ore ports are essentially half the sailing distance to China as their Brazilian competitors.  In a market where spot Capesize rates have recently spiked to near $300k/day, the freight portion of delivered cost is substantial.

Until this year, Brazilian and Australian miners have moved in lock step on iron ore prices, leveraging their unity to achieve significant annual increases.  The impact of the Australian departure from the "team" will be interesting to watch.

The impact on shipping is likely to be small.  Limitations on Australian export growth has kept this at the 2% annualized level.  As such, incremental demand for iron ore necessarily must come from other sources.  Brazil will still enjoy a lion's share of incremental growth, with a correspondingly higher demand in tonne-miles - the measure of shipping demand.

Of greater importance to shipping is the moderation in the growth rate for iron ore demand.  This is running at a lower rate than the last four years, and with the planned new deliveries in 2009 and 2010, is worrisome.  However, coal demand remains robust and is projected to remain so, which will offset iron ore weakness to a degree.

Implications: Tradewinds reported that Rhythm of Life Cosmetics has filed a "me too" law suit against Matson Navigation Company (Nasdaq:ALEX) citing the DOJ investigation into the Jones Act liner trades.  This is the first suit against Matson, whom does not participate in the Puerto Rico trade where most of the DOJ focus has been.

Analysis: While the DOJ seems mostly focused on the Puerto Rico trade, Matson disclosed that the company has been subpoenaed for documents at the same time as the raids on Horizon, Sea Star and Crowley.  Numerous law suits were filed by shippers following the DOJ raids, none of which cited allegations other than the DOJ search warrant indicated a smoking gun.

The Rhythm of Life Cosmetics suit goes further, and alleges a conspiracy to inflate fuel surcharges as a revenue enhancement tool.  Using unrelated statistical comparison, the lawsuit alleges that bunker fuel cost has increased 450% since 1999, while Matson's fuel surcharge has increased 3800%.

Outside of this self-serving comparison of two disparate measurements, the real-life calculations of BAF's are very complicated.  In Matson's case, there are a number of variables to take into account: different ships with different capacity and fuel consumption; multiple and variable trade routes; different average load factors; etc.  It is extremely complicated to come up with an "average" per TEU factor, especially in a volatile fuel price market such as we have seen.

Normally, complaints about fuel surcharge levels would be addressed to the Surface Transportation Board.  A quick check of the current levels against reasonable assumptions does not indicate to me that the current levels are obscenely out of line in the Hawaii trades.  The argument appears to revolve around Matson and Horizon typically moving in lock-step with adjustments.  Comparing the fleets in service, one would expect Horizon to require a large BAF than Matson.

In the end, I do not expect any significant result to emanate from investigations into fuel surcharge levels.

Implications: A significant percentage of the dry bulk fleet continues to trade past the normal retirement age of 25 years due to robust rates.  This will be corrected in 2010, when new vessels will push down rates and push out vintage tonnage.

Analysis: According to Tradewinds, 8.5% of the Capesize fleet, 12% of Panamax, and 7.7% of Handymax vessels are trading past their fifth special survey (25 years.)  An additional 8 Capes, 52 Panamax, and 30 Handymax's will cross that threshold during 2008.  Missing were Handy size figures, which are substantially higher.

Vintage tonnage creates more of a problem with underwriters, given the high correlation between vessel age and casualty rates.   Factoring in much higher asset values, we are seeing a significant uptick in the cost of annual casualties.

Since the maritime industry is largely self-policing (Class societies are hired by ship owners, and charterers can't afford selectivity with supply so tight) the burden is increasingly falling to Port States to ensure that substandard tonnage is removed from the trade.  Unfortunately, Port State resources have dwindled as Class has assumed a larger role in oversight and security issues have taken the main focus.

Given a reasonable choice, charterers will select a modern vessel over a 30 year old rust bucket.  With the heavy deliveries in 2009 and 2010, it is reasonable to expect that falling rates will drive older vessels to their well-deserved retirement.  In the meantime, casualty figures will continue to rise, along with higher P&I premiums for the entire industry.

Implications: Perhaps a bit too late, we are seeing signs of a cut off in new vessel orders for the offshore service sector.

Analysis: When it comes to shipping cycles, few segments match the offshore service sector for repeating the process of ordering too many vessels in a strong market and thereby hastening the beginning of a soft market.

In the early part of the current cycle, restraint in new orders contributed to the very strong rates that peaked in 2006.  Alas, it was too much to hope that the industry had finally learned its lesson.  In 2007 alone, 97 new AHTS vessels were ordered along with 59 new PSV's.  In early 2008, Petrobras alone signaled that it would be ordering over 100 new vessels.

Currently, the order book stands at 24% of the AHTS fleet and 15% of the PSV fleet.  Compared to their larger brethren, these numbers do not appear too large, but these numbers essentially represent a 24 to 28 month orderbook.  Delays in equipment for smaller vessels have not yet reached the size of larger ships.

Of more concern is the potential for the newbuild rigs that these vessels were ordered to service being delayed or delivered after the new service vessels enter the market.  While a significant portion of the supply vessel fleet is well past retirement age, until rates drop significantly they will continue to operate.

As long as this restraint continues, the period of pain should be relatively brief, and may not materialize at all.  However, based on many years of history, restraint is unlikely to become a virtue in this industry.

Implications: The article highlights the limitations to slow-steaming and why this will result in diminishing returns as a mechanism for absorbing excess container ship capacity.

Analysis: Container ship supply growth has exceeded demand growth for over four years now, and will continue through at least 2010.  Several reasons account for the lack of a substantial downward impact on rates: higher growth on longer-haul trades; recurring congestion delays; fuel surcharge reimbursement; and slow-steaming.

Slow-steaming is basically taking an average 8 vessel Asia-Europe loop and adding a 9th vessel while maintaining weekly port schedules.  The entire loop of vessels is slowed, resulting in significant fuel savings.  Only in a very high fuel price environment will this offset the total cost of the 9th vessel.

There is a limit to how far this scenario can be taken.  As vessel speed is further reduced:
-the net fuel savings diminishes as combustion efficiency suffers
-cargo limitations come into play, as the greater transit time becomes unacceptable to perishable and time-sensitive cargoes
-main engine maintenance and the risk of main engine casualty increases.

Marine engines (and their attached propellers) are generally optimized for 85% of maximum RPM.  Above that level, specific fuel consumption increases rapidly.  Much below that level (current slow-steamers are operating at 70% MCR) and even modern, electronically controlled engines see significant drop off in combustion efficiency.  Further, the attached exhaust systems, which typically capture residual heat to fuel auxiliary boilers, start having problems.  Poor combustion results in soot deposits that retard boiler performance and increase fire risk.  In extreme situations, the exhaust gas boiler becomes inoperable, and the vessel must use oil-fired boilers to produce the necessary steam and thereby reduce the overall fuel savings.

In the end, nearly half of the container ship fleet belongs to charter owners.  These operational parameters fall outside of that allowed by the typical charter party, and require the owner's agreement to implement.  Unless the risk of operations is transferred to the liner company, this is unlikely to happen.

Implications: The charter market for post-panamax tonnage is hot as owners jump on the bandwagon of slowing vessels to save fuel cost.

Analysis: What began as an effort to hide excess capacity (we are in the fourth year of capacity growing faster than demand) has evolved into a strange iteration of adding capacity to save fuel.  Slow steaming of fuel-hungry container ships offers up to $40k/day in fuel savings, per ship.  For an 8-ship Asia-EU loop moving to 9 ships, this is significant.

However, this is a somewhat zero-sum game.  Load factors tend to drop when a 9th vessel is added, there is the charter/capital cost of the 9th vessel, as well as the operational costs and voyage costs.  It is beneficial to keep in mind that this strategy was originally implemented as a way of controlling capacity and has been fortunate to benefit from the high-bunker cost environment that has developed over the last year.

For companies absorbing new-build capacity, this makes sense.  What is harder to contemplate is that companies who did not order excess capacity are coming to the conclusion that they must charter-in tonnage, at very high rates, in order to adopt the same practice.

As we delivery a very heavy order book over the next two years, it will become increasingly difficult to "hide" this capacity.  Indications of weakness on the major trade lanes will only exacerbate this situation.  Unless economies recover very soon, 2009 and 2010 will be less rewarding years for container shipping companies.

Implications: Reports from the TSA indicate that their primary goal of the 2008 contracting season, floating fuel surcharges, has largely been accepted by shippers.  Their secondary goal, increases in the base freight rate, has largely failed.

Analysis: It has been a painful process for liner shipping companies in getting shippers to accept floating fuel surcharges in this rapidly escalating bunker price market.  The concept of service agreements, from a shipper's perspective, is to provide stability of rates as well as to secure slots.

Keep in mind that even floating surcharges will not provide complete relief for carriers.  The typical lag in adjustments means that they will be perpetually chasing that brass ring in a rising cost environment, but should limit the impact.  All in all this is welcome news for liner companies.

Base rate increases are much tougher in this market, will falling eastbound volumes.  Adding to the difficulty is the widespread earnings restoration reported by the liners in 2007.  However, the still-lucrative rates available on the Asia-Europe/Med trade lane means that some rate escalation was necessary to ensure available tonnage in the transpacific.  Further, cost escalations and currency losses on a falling dollar are transparent to shippers.

While fuel-neutral rate increases in all trade lanes are very modest, achieving better fuel recovery is a significant win for the industry.

Implications: There is no doubt that world GDP has a strong correlation to dry bulk shipping rates, but the short-term problem is impending oversupply, rather than slackening demand.

Analysis: Even the most optimistic pundits expect weakening dry bulk shipping rates by 2010 based upon the massive expansion in supply in 2009 and 2010.  The article questions whether diminished growth in the world economies will exacerbate the situation.

Dry bulk shipping is primarily driven by the three major bulk cargoes: iron ore, coal, and grains.  It has been the exceptional expansion of the Chinese steel production that has driven freight rates to their record levels.  While there is some evidence of moderation in the growth rate of demand for iron ore, there would have to be considerable drawback in world GDP for steel demand to significantly reduce.

Offsetting this is the rapidly growing demand for coal - primarily into China and India.  Neglecting the minor portion of this demand that represents met coal (and hence, tied to steel demand), the growth prospects for steam coal are enormous in the short term.  Utility demand should be relatively insensitive to economic conditions, short of a deep world recession.

The grain trade is relatively stable over the long term.  As grain trade primarily relates to animal feeds and human consumption, it is relatively insensitive to economic conditions.  People, and their livestock, must eat.

The minor bulks (cement, fertilizer, alumina, etc) are relatively sensitive to economic conditions, but this primarily affects the smaller dry bulk ships.  The handy-size segment of the dry bulk fleet is far and away the oldest group and a significant reduction in demand will see a large number of these head to the scrap yards.

Worry more about supply, and less about demand.

Implications: While the combination of escalating steel prices, inexperienced shipyards, and the credit crisis may conspire to effect the cancelations of some contracts, the impact on actual ships built will be minimal.

Analysis: There is little doubt that the sub-prime crisis is having an impact on shipping, and in particular shipbuilding.  From Shipowner's perspectives, credit has tightened up and has become more expensive.  For Shipbuilders, commodity (steel) and equipment prices have soared and dollar-denominated contracts have become much less lucrative.

However, ships are in demand, and prompt deliveries are at a premium.  A newly delivered Capesize ship sells for roughly $160m, while the same vessel can be ordered (albeit with a 2011 delivery date) for some $95m.  For every owner that has to walk away from a contract for lack of financing, several new owners will step forward and pay a premium for the building slot.

Sorting out the cause of a particular cancelation can be difficult.  Production delays can either be real or a thinly-veiled extortion attempt by the yard to force cancelation or achieve cost-recovery money.  Most of the orderbook attributable to "new" shipyards involve either expansions by existing, credible builders or existing block-constructing yards expanding to include new construction.  Further, the vast majority of the orderbook from "new" yards is directed to the smaller segments of the fleet: handy and handymax.  It is the Capesize orderbook prompting the lower forward freight curves.

In the end, there will be few true cancelations prior to the 2011 delivery year, and certainly not enough to keep rates from falling dramatically.

Implications: While Tidewater (NYSE:TDW) reported a year on year drop of 2.5% in earnings, the sky is not yet falling.

Analysis: Tidewater's annual earnings, net of gain-on-sale, actually increased.  The 2007 earnings included $20.8m in profits from the disposal of 14 vessels.  The 2006 results also benefited from the abnormally high day rates experienced in 4Q06 in the North Sea.

Tidewater is still the world-leader in the offshore support industry.  While competitors, such as Bourbon (Paris:GBB.PA) are expanding more rapidly and have newer equipment, Tidewater has an established market presence worldwide.  The advantages of scale enable Tidewater to have local operational control, while spreading this expense over a larger fleet.  Newer entrants in a region are at a disadvantage.

Tidewater also can easily move assets to take advantage of geographical rate differences.  While the redeployment costs are significant, the difference in 1Q08 day rates between the GOM and other regions is notable.

Some issues remain to be addressed.  An 11% fleet new order book is insufficient for the average age of Tidewater's equipment.  This concern is further magnified by the sheer size of the worldwide order book and the specter of an oversupply of latest-generation multipurpose vessels competing with Tidewater's limited vessels.  Perhaps the best way to solve this dilemma would be through acquisition.

Looking at Tidewater's annual numbers identify concerns.  While repairs and maintenance expense grew by 8.3%, reflecting the aging fleet and repair cost escalation worldwide, other numbers are more disturbing.  Labor, the single largest operational expense, grew at 14.7% and fuel at 14%.  G&A grew by 28%, accounting for nearly $28m of the overall cost expansion of $174m.

Tidewater retains many of their strengths, but certainly has weaknesses that must be addressed if they are to retain their market dominance.

Implications: A surprisingly quick, but predictable ruling by a Federal judge has created significant uncertainties for many Jones Act operators. 

Analysis: The Federal judge hearing the SCA's suit against the USCG has ordered the agency to revoke the Jones Act privileges of the Seacor Holdings (NYSE:CKH) vessel Seabulk Trader.  The vessel was converted to a double-hulled tanker in a Chinese shipyard.  A similar lawsuit against a Matson Navigation (Nasdaq:ALEX) conversion has yet to be ruled on.

The language contained in the Jones Act would appear to allow very little room for operators to repair the vessels outside of the US.  Despite the plain reading of the law, interpretations by the USCG have led to rampant abuse by Jones Act companies.  While Seacor and Matson are facing the immediate consequences, other operators are at risk.

Should the SCA choose to target normal dry dock activities under the same premise, numerous other companies would face similar consequences.  As the Jones Act fleet has aged, it has become increasingly common to perform repairs overseas entailing significant repairs and alterations to vessels.  When viewed in part  or in whole, these activities fall in line with the Judges interpretation of Jones Act restrictions.

An appeal is certain, though a legal victory is unlikely in this case.  The problem is the plain language of the law and an overreliance on the administrative interpretation by the USCG.  However, it is equally unlikely that a mass expulsion of Jones Act vessels will result.  Congress retains the power to restore trading privileges, which would be the most likely outcome if wholesale expulsions threaten.

The longer-term impact is that planned conversions by US Shipping Partners (NYSE:USS) and others have just hit a fatal snag.  Should the SCA expand their focus, the limitation to dry dock vessels domestically will severely hit some operators, such as Horizon Lines (NYSE:HRZ).

Implications: As other likely strategic buyers seem to be backing away, NOL is emerging as the leading bidder for TUI's Hapag-Lloyd.

Analysis: Whether it is the all-too-recent memory of poor integrations by Maersk and Hapag-Lloyd or the current market, very few of the top container shipping companies appear to be showing an interest in acquiring Hapag-Lloyd.  This leaves NOL, which has be rumored to be in negotiations for months, as the leading candidate.

CMA-CGM and MSC have been very aggressive in this market in acquiring market share abandoned by Maersk, and it is surprising that neither seem interested in the boost that Hapag-Lloyd would bring.  Maersk is in the middle of a well-publicized retrenchment designed to return the company to acceptable profit levels.

NOL, with its heavy emphasis on the transpacific trade lane, would have the most synergies from this acquisition.  Hapag-Lloyd is very strong in the transatlantic, and the combined assets in the Asia-Europe trade lane would be complementary.Finally, a lack of interested parties will likely keep the acquisition price to a reasonable premium. 

Combined, NOL would overtake Evergreen for the number 3 spot in worldwide trade, at least in terms of owned capacity.  As one of the few companies able to turn very good profit in a difficult market, NOL may be better positioned to avoid the integration issues faced during the last mega-mergers.

Implications: Reports of stress fractures on the Hebei Innovator, one of the first VLOC conversions, is likely to be a common problem for other conversion vessels.

Analysis: The concept of converting a single-hulled VLCC, which faces a 2010 phaseout date and current weak rates, into a VLOC, which are achieving exceptionally high rates, is a wonderful idea - on paper.

In reality, there are significant engineering obstacles in achieving a workable end product.  A purpose-built VLOC differs significantly from a purpose-built VLCC due to the nature of the products that they carry, loading and discharging requirements, and different regulations that apply to their design.

The tale of the Hebei Innovator is a classic case.  The vessel carried 165,000 tons on its first voyage, then 200,000 and 209,000 on subsequent voyages.  Max converted capacity for the vessel is 210,000.  The cautionary approach to loading the vessel illustrates the unknowns associated with conversion projects.  While engineering can predict many of the potential problems, most ship designs have more than a few changes that resulted from actual results.

One of the largest problems is installing sufficient support members to offset the large openings required for loading and discharging the vessel.  These areas experience concentrated stresses which are aggravated by the very high loading rates at modern Brazilian iron ore terminals.  It is in these areas that the Innovator is experiencing problems.

While up to 60 vessels are potentially slated for conversion, the simple reality is that perhaps a third of that number are truly adequate conversion candidates that will have reasonable operating results.  With the first projects already experiencing problems, look for Classification Societies and Port States to increase scrutiny, requirements and monitoring of all follow-on projects.

Implications: Tradewinds reported that Brazilian oil major Petrobras is preparing to announce a $10b order for 100 OSV's to serve their offshore segment.  With a world order book already prompting experts to predict a glut by 2010, this is not welcome news.

Analysis:  Many countries have cabotage laws that restrict which vessels can operate in domestic waters.  In Brazil's case, foreign vessels may ply the domestic trades if suitable domestic vessels are not available.

With significant offshore exploration activity, the Brazilian oilfield support trade has been brisk for many international OSV companies.  This has been true for other major regions, such as the North Sea, west coast of Africa, India, and the Far East.  Historically high day rates have led to a significant expansion of the OSV order book (AHTS and PSV's.)

There are already industry concerns that deliveries of new supply vessels will precede deliveries of new rigs by several years, prompting expectations of lower day rates in 2009 and 2010.  Should Petrobras proceed with this plan, the addition of another 100 vessels to the world fleet will only aggravate the problem.

The only bright spot is the uncertainty related to the ability of the Brazilian shipbuilding industry to produce these vessels within a reasonable timeframe.  While deliveries as late as 2014 were cited in the article, the long lead-times for major components worldwide would make it unlikely that significant numbers could be produced before 2011.