Ship financing seeing sharper competition

Rivals Singapore and Hong Kong vie to win over major industry players

The largest finance hubs in Asia Pacific are working hard to attract more shipping companies and ship owners as they seek to become the most important finance centers for the industry in the region.

"It is difficult to say whether Hong Kong is more important than Singapore as a ship finance center," says David Cheng, honorary chairman at Credit Agricole Ship Finance Asia. "Hong Kong has always been one of the major ship finance centers in the world."

No single place generates enough business to make it worthwhile for a bank to focus on shipping finance exclusively, says Cheng. Rather, banks typically take a regional approach.

Hong Kong and Singapore have long dominated the industry, thanks to their role as global hubs and the large presence of shipping companies, ship owners and firms that provide ship financing - like banks, leasing companies and new entrants such as policy banks.

Tokyo and Seoul are also important centers for ship finance. Tokyo is a major player, but dominated by its large domestic industry. Seoul is also a relatively important ship finance center, thanks to the South Korean shipping industry, but it trails the others in the region.

The competition between Hong Kong and Singapore has intensified and governments have taken steps to benefit from the growth of the industry.

"The Singapore government has been very proactive in terms of attracting ship owners or ship management companies, and they have been very successful," says Cheng.

Singapore has been offering incentives for companies to locate their offices there and has been making it easier to invest. This has attracted 'commercial principals' such as ship owners. In turn, it has also attracted the service providers that follow these principals, such as the banks that provide the financing the principals need to carry out their business.

Singapore's efforts have not gone unnoticed.

"The news these days is all about Singapore and all the government there has done to attract ship owners it is a very busy hub," said Nigel Anton, global head of shipping finance at Standard Chartered during a recent Marine Money shipping finance conference in Hong Kong.

In the last year, Hong Kong has also started taking steps to give its shipping industry a boost, aware that inactivity could cost it its leadership position in a key sector of the economy, one in which the local shipping industry has deep roots.

"Hong Kong is home to real ship owners who have lived here for generations," Anton said.

To revitalize the sector, Hong Kong has plans for a new government bureau dedicated to the industry. The government wants to refurbish its port and provide better training and more investment. It is also looking to expand its ties outside of the Chinese mainland, where the industry is also growing.

A report on enhancing Hong Kong's role as an international maritime center was released in April and highlights the city's positioning in the sector. But the report also points out that it needs to strengthen its shipping-related institutions, including finance, and put more human resources into developing the sector.

Increasingly important for the global shipping industry and as a center for ship finance is Shanghai, where much of the Chinese mainland's industry is focused. Shanghai still trails, but the growth of the industry in the mainland has made it easier for the city to emerge as a finance center for shipping.

The importance of the Chinese mainland was highlighted in June when, in an unusual bit of assertiveness, anti-competition regulators there scuttled a deal that would have seen three of the largest shipping companies in the world pool their resources.

Maersk Line, Mediterranean Shipping Company (MSC) and CMA CGM had planned to pool their capacity in a joint initiative known as P3. Regulators in the United States and Europe had already approved the tie-up aimed at cutting costs by sharing ships on a series of international routes. The network would have controlled as much as 40 percent of all cargo space around the world - which concerned the Chinese government, as well as smaller shipping and logistics operators.

In mid-July, two of the three companies, Maersk and MSC, responded to the failure of P3 by joining together in a scaled down network known as 2M.

Like P3, 2M aimed to cut down on the huge amount of overcapacity that is curbing profits across the industry, a problem that is hitting Chinese companies in particular.

China Cosco Holdings, for example, reported a narrow profit in 2013 after two years of losses. Cosco is the largest shipping company in the Chinese mainland. The country's second-largest shipping company, China Shipping Container Lines, reported a 2.65 billion yuan ($430 million) loss in 2013.

Overcapacity means that shipping companies can eke out a profit in the good years but may have to deal with significant losses when demand drops, as it did during and after the global financial crisis.

Drops in demand and excess capacity led to huge falls in profit through 2008 and 2009. Demand has stabilized in the past couple of years but the industry is once again piling up capacity and prices are suffering and so are the bottom lines of shipping companies.

Low shipping prices and far too many boats on the water are making it hard for shipping companies in Asia and elsewhere to turn a profit. The low profitability is likely to continue even as more centers across Asia compete for business and more money becomes available for more ships in the largest ship finance locations like Hong Kong, Singapore and, increasingly, Shanghai.

The Baltic Dry Index, which tracks the price of shipping raw materials by ship, fell as low as 723 last month according to Bloomberg, having hit 2,337 last December.

Part of the problem is that even as shipping fees drop, companies continue to buy new and bigger ships, encouraged in part by the greater availability of finance.

The biggest beneficiaries might be the banks, which are lending more but typically to companies that they already have a relationship with, and usually with lower leverage ratios than in the past. A bank may only be willing to lend as much as 60 percent of the value of a ship - and at times just 50 percent - whereas finance deals before 2008 were for as much as three-quarters of a ship's value.

No single place is responsible for this newfound willingness of banks to finance ship acquisitions. The reality is that no bank can survive in that business by focusing on any one location. Rather, banks focus on the sector and take a regional view. For them, there is little difference between financing a ship in Hong Kong or Singapore.

"There is not sufficient business for a bank to operate in shipping finance in one city," says Cheng. "Ship finance is a very cash-intensive business. You need banks to do this business."

For China Daily

(China Daily Africa Weekly 08/15/2014 page15)