Category Archives: Shipping Market Economics

Shipping IPOs

Capital markets and shipping IPOs are once again a hot topic in shipping; high prospects and expectations from a new crop of shipping companies, quite a few now sponsored by institutional investors. Hopefully, this new round of shipping IPOs will manage to bring to the public markets a more distinguished management style than the shipping IPOs of the last decade.

Interesting article in the Tanker Operator magazine, June 2014 issue.

2014-05may-to-shipping-ipos-timing-quality

Tanker Operator article on shipping IPOs – May 2014

Please feel free to access the article in pdf here!

Trireme_picture JUN2014

A watchful eye in shipping!© 2013-2014 Basil M Karatzas & Karatzas Marine Advisors & Co.  All Rights Reserved.


 

IMPORTANT DISCLAIMER:  Access to this blog signifies the reader’s irrevocable acceptance of this disclaimer. No part of this blog can be reproduced by any means and under any circumstances, whatsoever, in whole or in part, without proper attribution or the consent of the copyright and trademark holders of this website. Whilst every effort has been made to ensure that information here within has been received from sources believed to be reliable and such information is believed to be accurate at the time of publishing, no warranties or assurances whatsoever are made in reference to accuracy or completeness of said information, and no liability whatsoever will be accepted for taking or failing to take any action upon any information contained in any part of this website.  Thank you for the consideration.

 

A Reflection on Posidonia 2014

In ancient Greek mythology, Posidon (also spelled as ‘Poseidon’ and known as Neptune in the Roman mythology) was a major god of the Olympian Pantheon protecting the waters and seas. Posidon, although not as temperamental as his more famous older brother Zeus, was known from time to stir the waters for fun or just to raise hell – so to speak; his weapon was the three-pronged trident which not only caused major storms in the sea but also could shake the earth and cause earthquakes.

It’s only logical that Posidon’s name is metaphorically associated today with shipping endeavors, and a biennial conference in Greece in named in his honor. This year’s Posidonia was consummated shortly ago, and the waves of Posidon’s trident have yet to settle.

Posidonia_logo14For once, the attendance according to un-official reports has set a new high and reconfirmed Posidonia as the premier event of the shipping industry, and by association, Greece as a major shipping cluster. Close to 20,000 attendees visited the Expo where 1,843 exhibitors from 93 countries presented their businesses and products. It can be said with confidence that there has been an equally impressive amount of guests who never made it to the Expo and tried to enrich their visit by staying at the south suburbs, attending the many corporate events, enjoying great food and libations and talking shop and massaging deals at the deck of a yacht or the veranda of a private bungalow at the Astir Palace complex.

The mood was positively optimistic as the bottom of the market has definitely been considered to be behind us. While at Posidonia 2012 were still doubts about having found the market bottom, now the debate has been centered on where on earth the expected recovery is! The buoyancy and improvement of the freight markets in the second half of last year have really convinced market players that the market definitely was not dead at all but a fundamental rally was underway. As a reminder, last summer freight rates for capes VLCCs were well below operating expenses and well below $10,000 pd while by the end of the year rates has bounced fivefold. If an anemic market can bounce that strongly, what else could be the cause besides a fundamental rally? Asset prices improved by 10-50% depending on asset class from summer till spring this year and newbuilding orders were placed by the dozen, like the good old days of 2008. The rally had been impressive and the market slowdown since Easter has not been considered menacing, just a ‘breather’ for the market. A few hopeful IPOs failed to obtain a listing in the spring as well, but that’s part of the game, no more.

However, given that BDI has dropped by about 45% since March 20th (at 1621) to date (906 at present), Posidonia’s optimism had to be qualified. Yes, there has been abundant optimism that better days are ahead of us, but … several shipowners, including high profile publicly traded shipowners, openly admitted at panel discussions their disappointment with the freight market  and confessed that they were not expecting such low rates at this time of the cycle. The fact that we are heading to the summer, which seasonally is a weak freight period, it means that there may be two more months of weak earnings before the market shows any improvements. And, the rally since last year has not been ‘money in the bank’ in the traditional sense: the strong cash generated in last year’s rally has partially been used to make current shipping loans or was deployed as down-payment for newbuilding orders, thus, no excess cash has been preserved for a prolonged weak market. There even has been mentioning that some shipowners may be hitting the ‘panic button’ if the market ends the summer in such a malaise. But again, there has been the argument that trading patterns have been shifting and most of the trade takes place in the second half of the year in the last few years – such as Chinese re-stocking of inventories causing last year’s rally– and thus that no need to write off 2014 yet as not a good year for shipping; optimism has been strong that the second half of the year will be another strong positive surprise for owners and charters alike.

The optimism for the market could be sensed in the expectations for strong capital markets as basically every investment banker from New York active in shipping was in attendance and lots of meetings were noted on and off premises with IPO hopefuls. Apparently expectations are high that strong freight will return soon, and given the environment of exceptionally low interest rates and $780 billion ‘dry powder’ by the institutional investors in North America, IPO hopefuls should be ready on the runway for take off. The few IPOs that failed to obtain listing in the spring are considered one-off events and not a trend.

Private equity funds have been focal during Posidonia for the deals they have done so far in the Greek market but mostly for the ‘noise’ without deals that have done. It’s always great to have a rich partner to bankroll a venture, but there has been abundant complaining that ‘funds do not get shipping’; on the other hand, curiosity has been high on whether funds are done investing in shipping and what may be the ‘next big thing’ they may be looking in shipping: a neglected sub-sector, a local market, possibly a service industry possibly?

The strange thing is that since Posidonia 2012, the BDI has been literally flat at just above 900 points, despite some volatility within this interval. However, despite the freight market moving sideways, about 3,400 vessels have been ordered since the last Posidonia, that is about FIVE vessels each single day in the last two years.  No much happened about freight as far the indices are concerned, but tonnage supply has made a great jump.

One has to be an optimist in shipping, whether for Posidonia or not!


 

© 2013-2014 Basil M Karatzas & Karatzas Marine Advisors & Co.  All Rights Reserved.

IMPORTANT DISCLAIMER:  Access to this blog signifies the reader’s irrevocable acceptance of this disclaimer. No part of this blog can be reproduced by any means and under any circumstances, whatsoever, in whole or in part, without proper attribution or the consent of the copyright and trademark holders of this website. Whilst every effort has been made to ensure that information here within has been received from sources believed to be reliable and such information is believed to be accurate at the time of publishing, no warranties or assurances whatsoever are made in reference to accuracy or completeness of said information, and no liability whatsoever will be accepted for taking or failing to take any action upon any information contained in any part of this website.  Thank you for the consideration.

Newbuildings and the ‘eco design’ debate

So far this year, the newbuilding market has been exceptionally active. There are many reasons for that, primarily because shipping is entering a long-awaited recovery but also because ‘eco design’ vessels with their economic efficiencies are expected to send non-efficient vessels to the scrapheap.   No doubt that competitive markets always navigate toward efficiencies eventually (whatever they may be) and the ‘new’ render the ‘old’ obsolete (one of the inimitable truths of nature); however, the level of newbuildings placed on order in most shipping segments, not only this year, but ever since the market crashed in 2008, assumes that older tonnage will just disappear and will find some corner of the world where they would go and die off quietly.

There is no doubt that, during peak years of the cycle, owners were ordering vessels that they were expected to be delivered fast and start earning (big) money as soon as possible. Attention to detail for engineering and design and attention to workmanship were secondary priorities since any floating device with cargo carrying capabilities was making (big) money. Especially in the dry bulk market where there was and there is no ‘honor system’ of ‘major approvals’ (vetted and approved by oil majors) and in the market for smaller tonnage where a river bank and a crane were sufficient credentials to start shipbuilding operations (‘greenfield yards’), there is an unknown amount of the existing world fleet that will never reach their design life of about twenty-five years.  It is difficult to quantify the percentage of the world fleet (primarily dry bulk and containership vessels, and again, smaller tonnage) that will have to get scrapped much sooner than later, but our own shipbrokerage experience and also anecdotal evidence suggests that in certain, particular asset classes more than 10% of the world fleet – again for certain market segments, may have to be scrapped in the next five years.

However, does accelerated technological obsolesce combined with efficient modern vessel designs justify a world fleet outstanding orderbook of 17% across all market sectors when, in general, the world fleet is newer than five-years old?

Let’s follow the industry practice: a charterer at any given market rate and at any given geographic location and within short chartering window (laycan) will charter on the spot market the best (commercial) vessel possible, that is the vessel with lowest fuel consumption and largest cargo carrying capacity for any given trade available at certain location and timeframe.  Nominally, a brand new, efficient vessel with cargo maximizing holds would get the charter at such rate; it’s logic and good business sense. However, a vessel that is a tad inferior in fuel consumption or in cargo capacity but with a lower cost basis (was cheaper at acquisition time, or has been written down through good freight rate markets or the mortgage bank eased off on claiming timely payments) can afford to underbid the competition (the top notch vessel) and accept a lower rate, just because her owner can afford to or because the owner is desperate enough. Thus, the ‘bad’ effectively drives down the market and gets the business from the ‘good’; and, even if the good vessel manages to get the business (charter) at market rate, still, they have not earned any premium over the market to compensate for the savings that can generate for the charterer; they have earned the preference of the charterer to earn their business, but no much premium over the market. For period charter market where vessels are employed for longer periods of time where financial calculations can be more rigorous and market transparency lower (and also vessel delivery location and charter window can be known well in advance and thus there is sufficient time to be addressed vs. the spot market), the charterer will give more consideration and preference for the modern vessel, but never really will pay much premium above market and definitely will not compensate dollar-for-dollar for the savings they will earn from a modern vessel. Likewise, for charterers / traders working on Contract of Affreightment (COAs) where the cost is predominantly seen as $/ton or $/bbl (vs $/d for time charters), efficiencies are more important and stronger preference for modern vessels; again, there is never dollar-per-dollar to the owner for savings reimbursement; just the preference of doing business with modern, more efficient vessels, but never an ‘obligation’ or definite commitment.  And, there always will be an owner with a lower cost basis or desperate enough to undercut the competition and any competitive advantage, and thus the whole ‘preference’ argument goes out of the window. Shipping is an almost perfect competition market, and there are very limited opportunities to earn a premium over market rate by providing superior product; shipping is a commodity business, a ‘need’ business and not a ‘want’ business like Apple’s (ticker: AAPL) where they charge for their latest cool phone exactly what the market can bear.

Another Newbuilding!

Another Newbuilding!

In the tanker market and the containership market where chartering standards and fuel efficiencies are a higher priority than in the dry bulk market, poorly designed and maintained tankers and containership vessels will become obsolete sooner than dry bulk vessels, ceteris paribus.  However, it does not mean that overnight, older tankers and containerships will become obsolete and magically disappear off the market. After all, the MT „EXXON VALDEZ’ accident in 1986 brought into effect OPA 90 regulations that forced single-hull tankers out of the market only in 2010, a cool 24-year later.  Usually, the charter market and the $ sign are more effective at driving the market than regulations, but again, scrapping a vessel, especially a modern vessel, is hard thing to do; it’s easier to give hell to competition and underbid the market first rather than irrevocably sell the vessel for demolition and take the loss.  For the dry bulk market, where charter and regulatory standards are lower and where there is a very, very long tail of charterers, those vessels can be kept profitably in the market for many, many more years to come.

MEWIS Duct Propeller (Image Source: Courtesy Becker Marine Systems)

MEWIS Duct Propeller (Image Source: Courtesy Becker Marine Systems)

Our argument is not against efficiencies (and savings and transparency) in shipping; we are strongly for it. However, we think that the newbuilding story has been taken to the extremes and accepted at face value. There has been the argument that equally commendable fuel efficiencies can be achieved by modifying existing quality vessels (with ducted / MEWIS duct propellers, etc) at a relatively low cost ($1-2 million per vessel, depending on vessel size), proposals that have been suggested or already implemented by companies like Danaos Corporation (ticker: DAC), Ardmore Shipping (ticker: ASC) and Euronav (ticker: EURN).

A potential side effect of the present newbuilding wave may be that market recovery may be longer in the offing than many market players would care to wish …

© 2013 Basil M Karatzas & Karatzas Marine Advisors & Co.  All Rights Reserved.

IMPORTANT DISCLAIMER:  Access to this blog signifies the reader’s irrevocable acceptance of this disclaimer. No part of this blog can be reproduced by any means and under any circumstances, whatsoever, in whole or in part, without proper attribution or the consent of the copyright and trademark holders of this website. Whilst every effort has been made to ensure that information herewithin has been received from sources believed to be reliable and believed to be accurate at the time of publishing, no warranties or assurances whatsoever are made in reference to accuracy or completeness of said information, and no liability whatsoever will be accepted for taking or failing to take any action upon any information contained in any part of this website.  Thank you for the consideration.