A shipowner dies and shows up at the Pearly Gates where St. Peter is holding guard. Upon the new arrival, St. Peter, taking a quick look at his notes, apologetically whispers in the shipowner’s ear: “My Son, I see that you led an exemplary life down on Earth; unfortunately, we have reached our quota of shipowners in Heaven, and I am deeply sorry that I will have to send you to Hell.” The shipowner, maintaining the ‘cool’ and nonchalant attitude behooving a seasoned trader, looks St. Peter straight in the eye, and asks whether he could be allowed in Heaven, even momentarily, just to ‘check in the place’. St. Peter, taking another look at his notes and seeing the record of a blameless life, is just too happy to give his consent. The shipowner enters Heaven, walks around for a few minutes, sees a few old friends and acquaintances, and then he decides to scream at the top of his lungs: “Cheap ships in Hell!” Immediately, a stampede of shipowners are exiting from the Pearly Gates heading straight to Hell, with our shipowner friend trying to catch up with the crowd. St. Peter, manages to grab him from the arm and shoving him into a quiet corner, thrilled to tell him: “My Son, it seems that now we will be able to accommodate you in Heaven, after all! You will never believe how happy I am for being able to let such a great soul enter Heaven for eternity!” The shipowner, a bit puzzled, casting a quick side-look at St. Peter, barely manages to burl out before he runs away: ‘Thank you very much, Father, but I’ve to rush to Hell! This rumor about cheap ships over there might be true, after all!”
As trivial and silly this joke may sound, there is an inherent truth to it: shipowners may be their worst enemies. Shipping is a poorly predictable industry that often requires on the spot decisions and ‘feel’ for the market. There are many variables to be incorporated into a model (once, a friend working at a research department of a major firm mentioned that there are more than 2,000 variables to be considered into a shipping model), and given the time-lapse for supply to catch up with demand (it takes about nine months to physically build a vessel, several years if there is an orderbook backlog), there have been constantly dislocations within shipping, just as a stand-alone industry. When there are amplifying factors like political events or crises in other industries (i.e. banking), the phases of the cycle can be completely out of sync.
Based on data compiled by Karatzas Marine Advisors & Co., a Manhattan-based shipping finance and ship brokerage firm, the following graph clearly shows that when times are good, shipowners order a lot of vessels, and when times are bad, shipowners still order vessels; fewer vessels, but still, plenty of them. The graph incorporates orders for dry bulk, containership and tanker vessels, and the Baltic Dry Index (BDI) is (very) liberally utilized as a proxy for the whole shipping market.
Given that shipping is a very capital intense business with a very high degree of volatility (for instance, the BDI almost topped out at 12,000 points in 2008 but the arithmetic average for that year was approximately 6,500 since the low of the year bottomed at 670 – and stands at about 1,000 at present), one might have expected a more counter-cyclical approach to contracting newbuildings; more orders in a bad market, fewer order in a great market. [Please click here for daily BDI chart from previous post of this blog, for a more representative view of daily volatility]
Year-to-date in 2013, there have been about 600 newbuilding orders; the same number of vessels was ordered in the WHOLE calendar 2012. So far, the arithmetic average for the BDI in 2013 y-t-d stands slightly below 2012’s average of 920. Clearly, 2013 has been an aggressive year for newbuildings, all things considered, especially for dry bulk tonnage. Freight remains weak overall, barely above cash break-even in most sectors, but orders keep piling up!
Where’s the way to Hell?
© 2013 Basil M. Karatzas All Rights Reserved
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