Real Cancelations Of Dry Bulk Ships Will Be Minimal

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.