The dry bulk market has almost doubled since reaching all-time lows in February; the bounce has been most welcome, but, honestly, not many people expect any meaningful recovery that could keep the market above break-even levels in a sustainable way for two to four more years. In other words, the prospects and consensus are rather poor.
There is little to be done in a structurally weak market; tonnage supply exceeding demand takes some time to swing back to equilibrium. Expectations of accelerated scrapping and market consolidation that can improve the market are true, but typically such outcomes take time to play out and depend on many external factors. Anyone who has analyzed the scrapping decision with a shipowner knows the ‘agony of the death’ of irrevocably sending a vessel to the beach, and market consolidation may offer operational efficiencies and market discipline, but it can do little about supply and demand in the short term.
Laying up vessels is another approach to face the weakness of the market, and there had been high hopes earlier in the year that a sizeable part of the world dry bulk fleet could be cold-stacked. By withdrawing vessels from the market, tonnage supply decreases and thus freight rates have to move up higher. It’s almost self-explanatory, at least on paper.
In reality, laying up vessels is not a logistically efficient and managerially easy decision to achieve. Whether stacking vessels under ‘warm lay-up’ (immobilized but with reduced crew and ready to go on relatively short notice) or preparing them for ‘cold lay-up’ (anchoring them in safe waters, water-tighting them, sealing off all appurtenances, draining engines of oil, installing dehumidifiers onboard, etc) cost money (sunk costs) and takes time to implement, and the savings are not as great as they seem.
And, of course, laying up vessels is eventually an altruistic decision: a shipowner committing vessels to layup incurs sunk costs and is guaranteed no revenue and only costs in a market upswing, while the remaining shipowners get to enjoy the increased freight market caused by the action of the first, ‘disciplined’ shipowner. For those of us in shipping for some time now, it’s a cardinal rule that egoism and strong personalities are the drivers of this industry, and altruism is mostly an abstract concept typically found in hagiographies. In other words, as once the President of a once-highflying publicly listed dry bulk company ceremoniously said at a shipping conference: “Shipping is not a team sport.” There you have it.
Possibly the concept of laying-up vessels will have to be seen through the case of the prisoner’s dilemma: in a classic example in game theory, the authorities, lacking conclusive evidence against two potential criminals under arrest in two different jail cells, make each one of them the offer to implicate the other party and walk free. Although the example is academic and controlled by certain rules, it’s clear that the optimal scenario for both crooks would be to think collectively about the common good and not ‘rat’ on the other party. If one or both crooks talk, then the authorities have at least one party to jail; if both crooks think alike and keep quiet, the authorities – lacking conclusive evidence against them, would let both of them walk free.
There are more than two crooks in shipping, so to speak, and the rules generally are not as tight as with the prisoner’s dilemma. However, given that the dry bulk market is not expected to recover in a spectacular way any time soon and lay up may be the best chance to find a tonnage equilibrium, it may be incumbent upon the dry bulk shipowners to come together and think like the criminals in the prisoner’s dilemma and put the common good ahead of the good of each individual.
With laying up vessels, the ‘disciplined’ owners get to suffer and undertake losses while the freewheeling owners get to enjoy the benefits of reduced tonnage and increased freight market. In prisoner’s dilemma, the criminal who keeps his mouth shut goes to jail, and the one who ‘rats’ walk free. Definitely, the outcome is completely asymmetric and there should be a more equitable distribution in order to be acceptable by the market.
One way on how this could happen if shipowners get together and ‘pool’ their vessels together. Then, they would decide that most of such vessels would go for lay up, and only a small fraction of the pooled assets would be available for further trading. Earnings from the few vessels trading would now be shared equitably by all owners who have participated in the pool, whether their vessels are at lay up or in trading status. It’s apparent that such a disciplined approach would be beneficial for all owners and the ship-owning market, presuming that the ‘pool’ is large enough to cover most of the market.
The dry bulk market is extremely fragmented by asset class (types of vessels), geography, cargoes, shipowners, type of ownership, etc, and accordingly our theoretical ‘jail’ has way more than two cells, making an agreement more difficult to obtain. On the other hand, one has to focus on the fact that there are appr. 11,000 dry bulk vessels worldwide and almost 2,500 shipowners, but 50 top owners control close to 80% of the market by tonnage, thus an agreement can be much easier to achieve than it looks.
But again, is there any precedent that shipowners can come together and take collective action for the common good? Especially for sharing the cost and benefit for laying up ships? I am glad that you asked! Actually there is a strong case for it.
Following the Great Depression, tanker and dry bulk freight rates had collapsed in the 1930’s. It is estimated that in 1932, 15% of the world tanker fleet was at lay up, while the dry bulk fleet had reached 28% lay up levels. Almost a deja-vu, one could say!
In 1932, shipping executive Harry Turner Shierwater of United Molasses (later Athel Line) came up with the plan bearing his name where revenue from trading tankers was shared with shipowners who had agreed to lay up their tonnage. The Shierwater Plan was widely accepted in 1934 by mostly Scandinavian shipowners (most active nationalities at the time with tanker ownership), most prominently among them by A.P. Moeller. In 1935 and 1936, the Shierwater Plan was expanded and unofficially blessed by the UK government via the International Tanker Owner’s Association (forerunner of today’s INTERTANKO) where tankers of British shipowners were scrapped in exchange for preferential financing for newbuilding replacement program. In the dry bulk market, where Greek shipowners were a major force since then, the Greek Shipping Co-operation Committee in London was established in 1935 to implement a similar scheme in the dry bulk market. Both the Shierwater Plan and the Greek Shipping Co-operation Committee lasted well into the late 1930’s and it World War II for the arrangement to fall apart.
Probably the age of the buccaneer shipowner has past. Our age is much more demanding than in the past and the market is now in such a slump that any recovery is sometime away. Since it would be too much to ask for sacrifice in shipping, probably some disciplined action may be easier to implement.
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