Of all the industries impacted by the 2008 global financial crisis, shipping may be having the toughest time crawling back up. In the years before, new ships meant to service the growing trade flows between Asia and the rest of the world were launched in huge numbers. Then Lehman hit, and those flows slowed, or even stopped.
More than four years later, the overcapacity built up in the days before Lehman has proven a lasting hangover for the industry. In 2008 the Baltic Dry Index, a measure of the daily rates merchant ships charge to carry raw materials and a key indicator of global trade, plummeted from 12,000 in May to 700 in December. It's still barely above 800, meaning that ships that might have earned $100,000 a day before the financial crisis now only make between $20,000 and $30,000.
For law firms that service the shipping industry in Asia, all of that has meant adapting to new realities.
"Our business at the moment is a lot bumpier," says Martin Green, the Singapore managing partner of Stephenson Harwood. "We certainly aren't growing as fast as we once were."
But Green and other shipping lawyers say the slump hasn't hit them as hard as might be expected. Firms that once drafted contracts for shipments or ship construction are now arguing over such contracts in courts and arbitral tribunals. The long downturn has also brought a tide of bankruptcies and restructurings.
"Last December was the busiest it's been for us, I'd say, since the 1990s," Reed Smith Richards Butler Hong Kong partner Andrew Brown says.
Though most also have other practices, firms like Holman Fenwick & Willan, Clyde & Co, Ince & Co, and Kennedys have become highly associated with the shipping trade. They are largely British, reflecting the prevalence of English law in the industry and the prominence of London as a maritime arbitration center. Moreover, two of Asia's biggest ports, Hong Kong and Singapore, happen to be former British colonies with inherited colonial legal systems. Pittsburgh-based Reed Smith joined the circle of shipping firms in 2007 through its merger that year with London's Richards Butler.
It wasn't always that way. Not long ago, shipping was a mainstay practice of most international firms. When King & Wood Mallesons Hong Kong partner Denis Brock came to Hong Kong in 1987 with Clifford Chance, he says the firm handled a great deal of shipping-related work. But that market contracted as technological advances such as global positioning systems shrank the number of vessel collisions and so-called P&I clubs, the mutual insurers that serve the shipping industry, kept much of their claims work in-house. As a result, many firms reassessed the viability of having a shipping practice.
"The market doesn't pay what Magic Circle firms demand, and there was an increasingly small pool of work," Brock says. "There wasn't enough work to keep everyone busy."
Asia-based partners at several large firms say shipping work remains relatively routine, low-fee work, even when it comes to disputes.
"Shipping disputes are not a priority for us, as our perception is that the market is quite specialized and commoditized," says King & Spalding Singapore managing partner John Savage, though he adds that the firm does occasionally handle them for clients in the oil and gas industry.
Disputes are now what keeps most shipping practices busy. Five-to-10-year contracts between major ship owners like China's COSCO Group or Korea's STX Group and chartering companies like Orient Overseas Container Line can be worth $20 million to $30 million, says Reed Smith Beijing partner Lianjun Li. Many contracts signed in better economic times specified chartering fees as high as $50,000 for a dry-bulk vessel, but those rates have since dropped to $10,000 a day or lower. As a result, many charterers are attempting to get out of contracts.
The shipbuilding side of the industry has likewise been hit by plunging prices, Li says. A 300,000-metric-ton crude oil carrier built by China State Shipbuilding Corp. or Korea's Samsung Heavy Industries that cost $130 million at the market peak in 2008 now fetches less than half that. Unsurprisingly, ship buyers are looking to courts and tribunals to try to get out of purchase contracts.
"Buyers are trying to find whatever excuses or whatever means to dispute [shipbuilding] contracts," says Li.
But the volume of disputes has evened out over the past year or so, as claims following the 2008 crash have begun to play out. Many firms active in shipping are now looking for growth elsewhere in the sector.
Though new ship financings are clearly down, Green says assignments now are more complex. Lenders are more cautious now about new deals and place far more conditions on them. Many of these banks are also now involved in labor-intensive negotiations over refinancing or restructuring.
"Most people would have experienced the slowdown in the new business, but we don't depend on new lending for fees entirely," he says.
Reed Smith's Brown notes that alternative sources of finance have started to appear on the scene. Private equity groups predicting a bottom in the shipping market have started to invest. Also, some multinational companies with shipping needs have responded to the lower costs by having their own ships built.
"Whenever there's a downtown, it creates opportunities for the right people," says Brown.
It is still very much a downturn, though, and the big question on shipping lawyers' minds is when things are finally going to turn around.
"I can't say," says Kennedys Singapore partner Karnan Thirupathy. "I've been asking lots of people that myself. Everyone's still figuring things out. That's the message I'm getting from clients."
Thirupathy says that some clients have pointed to 2014 in expectations that the Chinese economy will rev up again then. Some ship owners are even beginning to purchase vessels again.
"That's always a sign that people think things are going to pick up," he says.