Conflicting Signs in Shipping?

Since the beginning of the year, the shipping market has kept an active pace in almost all market segments; the prevailing mode is that the world economy is entering a growth phase and that logically shipping would be the major beneficial of economic growth and trade. Some market pundits have gone as far as to claim the worst is behind us in shipping, the bottom of the market has been reached, and now it’s the last chance to catch the boat before she leaves the port.

No doubt that shipping, in general, has improved as compared to the early part of last year. Freight rates and asset prices in the dry bulk and tanker markets have improved, helping cash flows, outstanding loans, loan covenants and the overall market psychology. The containership market is still a great, magnificent black hole that some people have even given up on any efforts to figure out: just too many vessels in default, of the completely wrong specification, of high fuel consumption, in an anemic market where the big gorillas on the top (like Maersk, MSC, etc) are re-defining the market and its economics with their 18,000 TEU vessels in search of lowest cost per unit and shaking out of the market the weaker players either by direct competition or by cascading the market; if one adds up the Panama Canal expansion and the new intrigue due to delays and disputes, the containership market black hole seems just a bit less esoteric than the Big Bang theory.

In the most recent developments, while China still remains that 600-pound gorilla that can move the shipping market with just a thrash of the dragon’s tail, there have been signs that the economy is slowing – despite the recently announced 7.5% official GDP growth for the next year; 7.5% growth is an absolutely fantastic number that most countries of the west can only dream of at present; and, China is the only country in the world that a growth rate is set in advance and then achieved by any means, unlike in most countries where growth is calculated ex poste facto. However, it’s interesting that the Chinese government has started devaluing their currency, the Chinese Yuan (CNY) and ending the ‘one way bet’ for the currency’s appreciation, and there has been the first major default of a real estate developer company in China for $500 million un-serviced ‘bond’; China’s shadow banking stands at an exorbitant $7.5 trillion or about 85% of Chinese GDP (the numbers from last week’s front page graphic of the Financial Times.) We are not arguing that China is about to collapse or about to have their ‘Bear Sterns moment’, but hitching a shipping market recovery on un-impressive ex-China world economic growth and decelerating growth in China, it may seem a bit preposterous. And just to re-emphasize China’s importance on the commodities and their importation thereof, has caused iron ore to drop more than 8% in two days last week, and the shares of all major mining companies lost more than 5% last week on news of Chinese lower growth.

And just last week, Scorpio executed on a really impressive (risky nevertheless) ‘asset play’ maneuver, flipping their seven VLCC newbuilding orders in Korean yards to a US-based buyer (Genmar and/or Peter G.) for a capital gain of about $50 million for holding the orders for just a few short months; the price per vessel has been $105 million or so, about $7 million higher than the newbuilding orders, and the first time in more than three years that a VLCC changed hands above $100 million (actually more than five years, if one were to count only ‘arm’s length transactions’ where there was no involvement of seller / soft finance.) Believe it or not, there was a bidding war among several buyers for these vessels; all the buyers were sponsored by financial players; we caught several ‘old salt’ shipowners scratching their heads on the acquisition and pricing, and we noticed that although the words ‘VLCCs’ and ‘Fredriksen / Frontline’ are synonymous, ‘Big John’ has been conspicuously absent from all the gerrymandering in the VLCC space; either he knows something that the rest of the market doesn’t or the buyers of the Scorpio VLCCs know something that the market doesn’t know. For sure somebody better know more than the market.

Keep Calm!

Keep Calm!

Trying to make sense of it all, the present strength and preponderance of activity in the shipping markets has mostly been generated from financial players active in shipping. To a certain extent, we are reminded of the analogy of the tail wagging the dog (rather than the charterers and cargoes moving the markets) since financial owners and companies sponsored by financial companies have been known to be placing orders and chasing markets that have been neglected during the present boom. Whether it’s the ‘eco design’ story that automatically renders newbuldings ‘efficient’ and existing vessels ‘obsolete’, whether it’s the (dreamful) assumption of China importing US crude oil in VLCCs, whether it’s the ‘greater fool theory’ that smart players will manage to get out of the market before 2016 (the next market peak), we have to admit that we not always fully convinced of the logic and the risks associated.

Shipping is beautiful industry, and never boring!

Walking on the Water! Jesus Lizards (Basiliscus genus). Flexibility dealing with sea water transport!

Walking on the Water! Jesus Lizards (Basiliscus genus). Flexibility dealing with waters and seaway transport!

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

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2 thoughts on “Conflicting Signs in Shipping?

  1. Sounds like the option to own a newbuilt VLCC in 2016 has been repriced upwards. The question is what are the factors that determine the value of this option? Your article mentions a few. But you seem to conclude that these factors – at present – do not justify the uptick in the recent trade. What do the Index Futures on Charter Rates say?

    • Dear Vasili,

      Thank you for your comment and insight; the forward market for shipping is not very liquid and only goes out for two years or so; the forward market in general is just above the average of the last year – not really a great bullish statement.

      A modern vessel such as one of the VLCCs mentioned in the article has 25 years design life, and given a tremendous upfront capital investment, any guidance by the paper market has limited value; besides, there are many factors that can affect calculations, such as new regulations (that can affect economic life), new designs for more fuel efficient vessels (several naval architecture firms are hard on the drawing board for better vessels than the ones on contract at present), and also political risk (given that the US has increasingly depends on shale oil, China will be importing an ever greater share of crude oil on VLCCs and having hard time seeing Chinese preferring western-controlled vessels vs vessels controlled in China – please refer to cape and Valemax situation).

      In short, the paper market cannot really be depended upon for real guidance on future performance, especially for the long term in a (very) volatile VLCC market.

      Basil

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