By Yang Huiwen

THE shipping industry is bracing itself for some major challenges that could radically alter the landscape over the next few years.

It has already been severely affected by the financial turmoil and faces the prospect of increased order cancellations as banks draw down their credit lines.

Falling asset prices, in line with lower earnings potential, will also fuel a wave of consolidation that will see weaker players with poor financing capabilities leave the market, said industry experts at a forum at St Regis Hotel here yesterday.

'Weaker shipbuilders are going to go bust and there's going to be consolidation,' said Mr Mark Pankhurst, Deutsche Bank's vice-president of the general industries group in Asia.

Mr Pankhurst said there were 'definitely a lot of opportunities out there' for well-positioned companies that have a lot of cash in their balance sheet. 'People with the cash will be able to sweep when the time is right.'

Mr Erik Valen, Asian head of corporate finance at Nordea Bank, agreed: 'The ones with strong balance sheets will use their power to grow.'

Mr Harold Malone, senior vice-president of Jeffries & Company, predicted asset values for container ships could drop by as much as 80 per cent from current values in the worst-case scenario.

His forecast was backed by Mr Pankhurst, who added that prices 'can go down close to the cost of steel'.

The shipping sector, which has enjoyed a boom in the past five years, is now gearing itself for slower growth.

Banks have not been willing to lend money to finance new projects and now 'it's almost impossible to get anything done', said Mr Peter Wallace, the head of shipping and a partner at Pareto Private Equity ASA.

However, some experts, including Mr Malone and Mr Valen, expect to see the return of institutional private equity capital, which is 'going to play a very important role', said Mr Valen. 'We're likely to see some consolidation that we've not seen before.'

The executives of Singapore's three listed shipping trusts told an earlier panel that they were concerned about the effects of the financial turmoil on their ability to secure financing.

Last week, First Ship Lease Trust (FSL Trust) said it is lowering its distribution per unit (DPU) guidance for the fourth quarter of this year after its lenders invoked a 'market disruption clause'.

This allows lenders to levy higher interest rates based on their actual cost of funds than on the lower three-month Libor plus margin.

FSL Trust's chief executive and president, Mr Philip Clausius, said he is 'optimistic the clause will not be invoked again' as the Libor market 'seems to be on a better footing'.

Pacific Shipping Trust chief executive Alvin Cheng and Rickmers Trust Management chief executive Thomas Hansen said they have received no indication from their lenders to invoke the market disruption clause.

This article was first published in The Straits Times on October 16, 2008.