Financial Times

Ship charter rate fall could hit Aitken Spence, Hayleys
A sudden, sharp down in ship charter rates has raised fears it could affect earnings of the Aitken Spence and Hayleys conglomerates whose container vessels have been generating handsome profits in recent quarters, helping to cushion a down turn in other core sectors.

Ships with charter hires that have a couple of years to run are not likely to be immediately affected by the downturn as they have locked in rates at relatively higher levels but those with charters coming up for renewal in the months ahead would certainly take a hit.

However, stock market analysts said they were still positive about the overall performance of the two groups given their diversified nature which should help them ride out the impact of a downturn in a particular sector.

“Overall, we are positive on the two groups but shipping, which has been a significant contributor to profit in recent quarters, could get hit as charter rates are coming down internationally,” said Anjani Waidyaratne, an analyst at Asia Capital. However, she said the transportation sectors of both Aitken Spence and Hayleys, which include shipping, agency work, freight forwarding and courier operations, would continue to benefit from the increase in the island’s external trade.

Both conglomerates have got into ship owning in recent years with the acquisition of second hand tonnage in joint ventures and have announced plans to expand their fleets. Hayleys set up a subsidiary called Hayleylines in a joint venture with Orient Express Lines and entered the business of ship owning and management with the acquisition of the 1152-TEU containership Orient Stride in November 2003 for $4 million.

It also acquired a second vessel, the 20-year-old, 1,150 TEU (Twenty-foot Equivalent Unit or container) container ship Marchallenger, renamed ‘OEL Hayley’, at a cost of $ 10 million.

Aitken Spence has ventured into ship owning in a joint venture with Ceyline Shipping and now operates five vessels, including the 1,200 TEU ‘Indonesian Star’, with plans to double the fleet.

Ceyline Shipping group managing director Capt Ajith Peiris said most of the ships acquired in their joint venture with Aitken Spence were on long term charter, so the current downturn in the charter market would have no immediate effect on earnings.“We have charters going up to another two years on almost all our ships and locked in rates at the time of purchase,” he said. “So our earnings have been secured.”

The joint venture bought the ships with existing charters as banks were more comfortable with that arrangement in giving loans than if the joint venture had to fix the ships ourselves.

The down turn had previously had been predicted only in 2008.
“It has not so much affected the ship sizes we have got but bigger ships,” said Capt Peiris. “The effect of the current drop in charter rates on 1,000-TEU ships is not that great.”

He said the Spence-Ceyline joint venture was still considering expanding the fleet. “We’re always looking for new tonnage and hope to see at least one addition in the near future.”

The charters of the two ships owned by Hayleyslines, however, are coming up for renewal and are likely to be fixed at lower rates. “In the last two months the charter market has certainly dropped – it has fallen by about 30 percent,” a company official said. “When we’re renegotiating the charter hire, it will have an impact.”

He attributed the downturn to supply-demand factors with global trade growth not keeping up with predictions, new buildings that have been deployed affecting the trade as well as decisions by shipping lines to delay service expansions owing to high charter rates.

“The worst affected are ships in the 1700 TEU range although the drop has a cascading effect. Overall, however, charter rates are still above the average highs of the previous cycle.”

Hayleylines also has plans to increase its fleet but will wait to see how the market stabilises in the months ahead. Waidyaratne of Asia Capital said there were concerns how the two conglomerates could sustain profitability in the medium term with the chartering business, which had been highly profitable for both groups, coming down.

“But both groups bought second hand ships, so their capital costs are low as a result of which their return on capital would be higher,” she said. Hayleys chairman Rajan Yatawara said at the time they bought the vessel, Marchallenger, that it still has a life span of nine to ten years and that Hayleys is confident the investment could be recovered in another four years.

Waidyaratne said that “overall, the transportation sectors (of the two groups) should do well as external trade is doing well. So we’re still positive.”
She also pointed out that the ships also have scrap value and should help Aitken Spence and Hayleys make money when they finally dispose of their vessels given high steel prices.

Container ship charter rates are still falling with medium-sized tonnage
being the worst affected. Brokers have reported a 1,597 TEU ship being fixed at $14,750 a day for six months compared to rates of around $25,000/day achieved by this class of vessel earlier in the year.

“The mid-sized ships have once again been the worst hit with those owners with ships in prompt positions being forced into relatively low rates, compounded by waiting time and either ballasting or positioning at discounted levels,” a broker said.

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