Is the Dry Bulk Tramp Shipping Industry at an Inflection Point?

As punishingly brutal as the shipping industry can be in bad times, it’s fulfillingly rewarding in good times. Who can forget the days from a decade ago when capesize bulkers were earning $250,000 per diem and the ships themselves were changing hands in excess of $150 million? We are a long way from those good old days but memories of and even hopes for prompt arrival of great times keep many a shipowner persevering in this business. It’s known that sweet memories and often hopes have on occasion been used to spruce up many “investment theses” in investment presentations.

The dry bulk tramp trade – whereby ships do not sail on a fixed schedule or published ports of call – has long been considered a textbook case of perfect competition in economics with its low barriers to entry and exit, minimal government and regulatory interference and taxation, an international market of price-takers for an un-differentiated product where no individual player – whether shipowner or charterer – has controlling influence on the market.

In such an individualistic market environment, fortunes have been made – and occasionally lost – when independent shipowners took timely risks and positioned their companies favorably on the dramatic upswing of the business cycle. Now that the dry bulk market is closer to the bottom than the peak of the cycle, there are calls to take risks for a market upswing.

Probably the timing is opportune for buying bulkers in expectations of an upswing in the market but one has to consider whether the dry bulk tramp market still is a market adhering to the rules of a perfectly competitive market. The last decade has seen many fundamental changes in the market that one has to wonder whether the old playbook is still working.

The greatest barrier to entry the shipping industry has been capital, given that this is a capital intensive industry. However, in past times shipping banks were providing generous financing in terms of financial gearing (leverage) and covenants, and even there have been cases of “name lending” and financing agreed on a handshake. Now that shipping banks have been departing the industry, and with the capital markets veering away from project finance and commodity shipping, private equity and other institutional investors have been depended upon to provide capital to shipping but at a much higher cost of capital, tighter terms and covenants and often for a share of the economics. The barriers to entry in terms of accessing capital have definitely been affecting the industry in an adverse way, in this respect.

In reference to government interference and regulation, for vessels having open registries (flags of convenience), the burden is still low in comparison to other onshore industries, but one can see the writing on the wall of higher regulation (and higher costs.) Emissions and the quality of bunker fuel have been making headline news in the last year resulting in both a higher financial component to the business and also technological and regulatory risk. Likewise for ballast water treatment plans, past the official deadlines, technology and approvals only now are getting sorted out. Likely, there will be higher risks for safety and security and ensuring that ships and the seaways supply chain are supported by hack-free systems (ransomware NotPetya have cost Maersk a few hundred million in losses in their last quarterly report, while the possibility of “hacked” ships became a prominent scenario in a recent wave of collisions involving US Navy ships in the Pacific.) And, while offshore registered vessels are taxed on the so-called “tonnage tax” system, many revenue-challenged jurisdictions and taxpayers have been taking a second look on the substantial differential in taxation in reference to domestically registered shipping companies and the potential loss of revenue. Taxation is a risk routinely mentioned in the prospectuses of all publicly listed companies in the US-capital markets and that the current favorable treatment by the IRS cannot always considered to be “a sure thing”. Thus, in an increasingly burdensome era of regulations (environment, safety, security, etc) and taxation, another of the legs of perfect competition seems challenged.

In theory, the “product” that dry bulk shipping companies “sell” is a “commodity” and “interchangeable” as all dry bulk shipping companies offer the service of transporting cargoes in bulk over the sea; as simple as that. And, although there are many charterers who only care for the basic good of cheap transport, an ever increasing number of quality charterers demand more than the “basic” service of transport: they demand quality ships and proper management systems and real time reporting and accountability, and also solid shipowners and managers free of financial risk of default. Thus, the “product” of the tramp dry bulk shipping slowly becomes less commoditized and more of a “service” whereby now ships and shipowners are not exactly interchangeable. Quality ships run by quality managers are preferred by charterers, but they still earn market price; and, in order to be profitable at market prices, critical mass of a fleet is required in order to access capital and also spread the overhead among a larger number of vessels. Thus, another tenet of the perfect competition model that dry bulk is a “commodity” good is slowly challenged.

At the end of the day, dry bulk shipowners in the tramp trade are “price takers” and will take what the market pays as there is little pricing power; again, a perfect competition characteristic. However, the case of just buying cheap ships and wait for the market to recovery will not necessarily hold true in this new market environment. One has to wonder whether the tramp dry bulk market, as a precursor to other asset classes – is slowly approaching an inflection point where “value added” services would be a differentiating factor.

“Hope is a good thing, maybe the best of things, and no good thing ever dies”, as the quote goes, but one may has to start thinking that just hope alone of a market recovery similar to recoveries in previous business cycles may not be the case.


Article was originally was published on The Maritime Executive under the title “Is The Dry Bulk Tramp Market at an Inflection Point?” on December 1st, 2017.


Dry bulk vessel about to go under a bridge. Image credit: Karatzas Images

© 2013 – present 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.

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Sailing Winds on Wall Street

Shipping is an industry full of surprises. And, volatility. While until February this year the surprise mainly had been about the really terrible state of the freight market, the last few months have shown a tendency for the market to surprise on the positive side. Freight rates for the dry bulk market have moved to cash-flow positive levels in the last few months and tanker freight rates have been fair despite some relative weakness.

It’s a long way from saying that the market has recovered, no doubt. Many shipowners still remain in financial distress and several of the options available to shipping banks can only have adversarial impact on shipowners. But again, when shipping has been in a miserable stage for the last eight years, there are no overnight cures – short of a major macro or geopolitical event.

Besides freight rates, the overall mood for the market seems to be improving; we do not mean only shipowners, who by nature are always an optimistic bunch and they seem pre-conditioned to be looking to buy more ships – always. The capital market seem to have gotten a sense of euphoria too after the presidential elections in the US, whether on a sense of a perceived catalyst of definitely a new approach to governing or on the hopes of an infrastructure investment spree. The fact that capital markets didn’t melt after the results of the Italian elections last week is a further sign of pervasive optimism.

And, we are glad to see that market optimism getting tangible for shipping companies, especially for publicly listed companies. After several years of a bone-dry draught for IPOs and secondary offerings, the last month, just in time for the holidays, brought several successful fund raisings. Most recently, Seanergy of Greece (ticker: SHIP) raised $15 mil in a secondary offering and Safe Bulkers still of Greece (ticker: SB) raised $14 million the week prior; both companies are active in the dry bulk market and intend to finance vessel acquisitions with the proceeds. A couple of weeks ago, Costamare of Greece (ticker: CMRE) raised $72 mil in the containership markets and Höegh LNG of Norway (ticker HMLP) raised $106 mil in the LNG tanker market. A month ago, Saverys in Belgium raised $100 mil in the US for a blank check (SPAC) to acquire dry bulk vessels via their Hunter Maritime Acquisition Corp (ticker: HUNTU) investment vehicle.

The amounts involved are a small fraction of the golden days of the capital markets for shipping companies a decade ago; however, until recently it has been a very quiet market in the capital markets for IPOs and secondary offerings for all types of companies. However, this is a positive development under any light seen. All the offerings mentioned above took some serious effort and / or a serious management team and sponsor behind the companies to raise the money; and still, some of the raisings took place at a discount to the market. Thus, not all news is as rosy and sunny as they appear. However, again, we want to take the view that a successful raising today for shipping is a major accomplishment irrespective of the circumstances. These are five successful attempts for different amounts of money and circumstances and in three different industry segments, two of which (dry bulk and containerships) were left for dead four months ago. It shows in our opinion the resilience of the capital markets and the investor appetite for shipping overall. To that extent, we tend to take the view that the news is just fantastic!

Hopefully the momentum will continue and there will be more offerings in the new year. And, hopefully, any fund raisings will be utilized to build solid shipping companies or strengthen balance sheets of shipping companies and the capital markets will not serve as a fodder for speculative newbuilding orders as it happened a couple of years ago, a course of action that has been detrimental for both the instigators and innocent bystanders whereby the freight market crashed under the burden of huge tonnage oversupply. Hopefully there is a lesson to be learned here.

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Smooth seas… Image credit: Karatzas Images.

Another lesson to be learned too, hopefully, by the recent developments is that the capital markets, especially the US capital markets, are deep and substantial and can be depended upon for shipowners to keep raising money; as long as they have solid management teams and transparent corporate governance and decent business plans. All the companies mentioned above successfully check almost all of these points. Taking a broader historical view of the capital markets and shipping, there has been a wide and diverse populace of shipping companies that opportunistically went public in the last decade and now a few of them ended as penny-stocks or and others soon will be delisted. One cannot blame the market for some of these companies falling into hard times, but there is plenty of blame to go around seeing the management of these companies aggrandizing for themselves by exorbitant executive compensation packages, usurious vessel management agreements and plain old-fashioned self-dealing. Hopefully the present success of shipping companies raising money will be a painful reminder to some of the ailing companies that greed is not always good as it can kill the goose that lays the golden eggs.

We long have taken the position – and have advised our firm’s clients accordingly, that shipping finance is facing structural changes; the old model of committing to lending in shipping based on a hand-shake is extinct. Raising money from shipping banks is and will be getting tougher and more expensive. Capital will be coming to shipping in different ways (capital markets, etc) whereby only few owners will be able to benefit from. The work for shipowners adjusting to the new market circumstances is not done yet.

As we said earlier, we are a long way from a market recovery.


Disclaimer: Karatzas Marine Advisors & Co. has advised or otherwise has been involved with some of the market transactions referenced above. This article is strictly intended for information purposes.


The article was originally appeared on the Maritime Executive under the title “Setting Sail (Again) on Wall Street on December 13, 2016.


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Where the winds are strong… Image credit: Karatzas Images

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.

Shipping is Sailing Against Trade Winds, and Other Protectionist Concerns

With the dry bulk freight market limited to bouncing along the bottom for now, most of the resources – when not afforded for ships to (figuratively) stay afloat – are devoted at buying dry bulk vessels at cheap prices in the secondary market. It seems that everyone is convinced that asset prices at present offer a unique investment opportunity not to be passed up. After all, freight market weaknesses come and go, but markets of cheap ships do not present themselves often.

The weakness of the shipping markets is mostly attributable to tonnage oversupply, whereby there are just too many vessels chasing few cargoes. In general, demand for vessels – that is trade and cargoes to be transported – is only un-inspiring at present. The main concern is that there are many more ships than cargoes, but trade is still existent, just not robust enough to employ all available vessels. Too many vessels were built because of too much speculative investment in shipping, and also because of too much available liquidity and that, at a very low cost.

Most potential buyers of ships believe that there will be tonnage equilibrium as soon as older vessels and less efficient vessels find their way to the scrapheap. Thus, effectively, it’s a matter of timing and awaiting for the immutable laws of nature to work their unique rejuvenation of the markets by way of aging. After all, it often has worked out just like this in previous business cycles in shipping. It’s true, newbuilding orders have diminished in the last year while scrapping has been as strong as it has been in the last seven years; thus, tonnage supply is coming down, and that’s easy to verify in most cases.

Demand for shipping is a much more convoluted analysis since there are too many commodities and cargoes and trading patterns, and permutations thereof, to analyze. Then, one has also to take into calculation macroeconomic factors, political events, possibly technological developments, changing consumption patterns, trade barriers, etc, and all of them, to varying degrees of seriousness, affect demand for shipping. Quite frankly, often analyzing demand for cargoes (and shipping) in detail resembles the so-called the Butterfly Effect model.

Trying to view demand for shipping from 10,000 feet, one has to identify the long-term trends and ideally be on the ‘right side’ of those trends. As a rule of thumb, growth for international trade is twice as much as economic growth (GDP), as commodities, raw materials and finished products have to pass international borders often to reach the end consumer as the economies grow. Further, growth for international trade declines much faster than economic growth in decelerating economies, while growth for international trade increases much faster when economies grow. It’s intuitive, as, when an economy is slowing down, need for trade comes down fast, while as an economy starts growing again, there is fast demand for trade for products to be brought together and reach the end consumer. The fact that the IMF and OECD keep revising downwards world economic growth has not escaped the shipping markets that have been trading at almost all time lows.

While we all hope that there will be robust economic growth soon enough to save shipping, one has also to pay attention to the fact that international trade thrives when there is a receptive ground and open-minded trading partners. And, international trade, much glamorized by free-market economists, demonstrably has been exerting a positive outcome on our societies. But often, international trade has to get clearance by politicians, and from their voters. International trade agreements can formalize trading relationships among geographic regions or bloc of countries, and make trade easier to happen. While the World Trade Organization (WTO) is the large overreaching umbrella for trade worldwide, trade agreements can be negotiated at local levels by countries or group of countries. The EU started as a quasi-trade agreement and has evolved into a political union (its end results to be seen, however), while most readers in the US can recall NAFTA, the North American Free Trade Agreement, between Mexico, USA and Canada, and its eventful passing despite the ‘giant sucking sound’ warnings of jobs lost to the south borders of the NAFTA countries.

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Shipping keeps an eye on trade patterns

On a macro-level, one today has to notice a wave at the international level whereby voters have been turning much more ‘isolationistic, nationalistic and ethnocentristic’ and against (free?) movement of people and cargoes. For instance, just recently British voters opted for Brexit, which, while driven by desire against free movement of citizens within the EU, eventually will have to have implications on movement of goods, if and when Brexit gets to be implemented. Most definitely this is not a positive development for trade and for the shipping industry, especially given the fact that Great Britain has historically been a beacon for openness and trade, being an island nation with long tradition in and institutions for maritime and trade. Moving on to the Continental Europe, there have been reports that in the State of Bavaria in Germany there is very strong anti-trade sentiment against CETA, the Comprehensive Economic and Trade Agreement, between the 28-nation EU and Canada, finalized in 2014. And, in the USA, while the Obama administration has spared no efforts to fast track the Trans-Pacific Partnership (TPP), both presidential candidates – including his presumptive legacy preservationist Hillary Clinton – have come against the trade agreement. One cannot be sure of the outcome for these trade agreements, especially since they seem to be driven by voter angst against migrants from poor regions and/or possibly terrorist risk underlining, but the writing on the wall is clear that free trade is a ‘zero sum game’. Irrespective of one’s political or philosophical inclinations, trade and shipping will have to face some headwinds, at least in the short term.

Intra-region free trade agreements (FTA) such as ASEAN (Association of South-East Asian Nations), RCEP (Regional Comprehensive Economic Partnership), MERCOSUR and UNASUR in South America seem to be faring better, but these being localized agreements, their big impact on global trade (and shipping) is rather limited.

If there was ever any doubt on the beneficial impact of trade to shipping, in the following graph we present trade data from the WTO website, for total world exports and for exports from the USA and China starting in 1980 (in 2015 US$ value). China became formally member of the WTO at the end of 2001, and it’s apparent that trading values have increased for the world, USA and China since 2001. Of course, increased growth in trade since 2001 cannot totally be attributed to China’s ascension to WTO, but there is no doubt that China has been the primary driver. On the same graph, on the right scale in red, the annual averages for the Baltic dry bulk market (BIFFEX and BDI) are shown, and it’s clear that since 2001, the BDI had been trading – for most of the time – at a different plateau altogether.

Trade and BDI since 1980 (large)

‘One great wowing sound’ for shipping following China’s acceptance to WTO.

There is no dispute that shipping asset prices present great investment opportunities and that eventually enough ships will be scrapped to reach equilibrium with demand. On the other hand, the demand side of the equation has to be given proper consideration, in the light of present anti-trade sentiment in mostly the western world.

And, as a disclaimer, trade and trade agreements in this article are being viewed strictly from the point of view of a shipping man without imparting any political judgment or inclination, but bearing the strong belief that all trade is good for consumers and citizens and the society and culture, not to mention good for shipping, too.

Trade is not a zero sum game.


This article was first published on Splash24/7 under the title ‘Where’s the Growth in Trade?’ on August 8th, 2016. On August 14th, 2016, following A.P. Moeller’s quarterly report, Bloomberg published an article titled World’s Biggest Shipping Firm Warns Against U.S. Protectionism’.


© 2013 – present 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.

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The ‘Shierwater Plan’: The equitable way for vessel lay-ups?

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.

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Idling propeller… Image Credit: Karatzas Images

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.

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Idling ship… Image Credit: Karatzas Images.

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.


© 2013 – present 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.

Turbulent Waters in the Country of the God of Shipping

In Greek mythology, Poseidon was the god of the waters and oceans, and bearing a trident, he was riding imperially in a sea-chariot or playfully accosted by dolphins about his realm. He was the one to grant calm seas and safe passage to ships, but his menace could also bring turbulent seas and shipwrecks; when the ancient city of Athens was looking for a guardian god, Poseidon thrusted his trident against the sun-baked rock of the Acropolis and water sprang from the rock; the Athenians opted for the more intellectual and diplomatic olive branch of goddess Athena to take them to the future. Given the events in Greece the last few years, and especially the recent developments, one is justified to wonder whether goddess Athena has been expending any of her divine powers at all at guiding her name-sake and capital city of Greece. Most of the news coming out of Greece have been turbulent for some time now, as if Poseidon’s nasty moods produce choppy waters that can shake even a supertanker.

Since shipping is one of the handful strategic industries in Greece, many people in shipping wonder how the industry will react, act or even evolve going forward. According to a 2013 study by The Boston Consulting Group, the Greek shipping cluster contributed €13.5 billion to the Greek economy and generated approximately 165,000 jobs in 2010; it is estimated that shipping represents more than 7% of the Greek economy nowadays. The statistics are a bit disheartening since, according to the same study, Greek shipowners control close to 4,000 commercial ships worldwide, representing close to 20% of the world’s commercial fleet; one would been tempted to think that 20% of the world’s fleet would have a greater output than €13.5 billion and 165,000 jobs.

However, shipping is an international industry, taking place well beyond national borders; inputs, outputs and repercussions can barely be contained or isolated.

Several Greek shipping companies are traded in the US, and more than an occasion, there is the perceived association that sovereign developments in Greece are impacting the business model and operations of the Greek owners; given that major functions of shipping take place internationally (i.e. international charterers, international banks and financing, etc) and all those transactions are priced in US$, frankly, any direct association between sovereign risk and company stock price should be rather loose. One cannot ignore the fact that many of these companies have become penny-stocks today and that they have shown dramatic drops in share pricing, but again, the BDI has been struggling to pull ahead from a three-decade low. One could also add ‘irrational exuberance’ in previous deal making, concerns for corporate governance and transparency, etc for poor stock performance, but again, any link with the present events in Greece is weak.

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A beautiful sea… (Image Credit: Karatzas Photographie Maritime)

The Greek banks have been closed since June 29th and ‘agw, ucae’ as we say in shipping (‘all going well, unforeseen circumstances always excepted’) are scheduled to open again on July 20th; the direct impact to the Greek economy has been devastating in terms of economic activity, in terms of curtailing growth points from the GDP given peak tourist season, in terms of social stability and insecurity (many old people made recall their painful youth experiences of WWI, WWII and the junta), but mostly, the closing of the banks and capital controls will affect Greece’s sovereign credit and ability to borrow competitively in the international markets for many decades to come; closing of banks and capital controls is one of those events when the mirror breaks and cannot be returned to the previous condition, no matter of how much glue and good will and effort and remorse one is prepared to expense. Again, the direct and immediate impact from the Greek banks and their closing to shipping is small, as many people (especially the wealthy, mobile and educated, etc) had seen the writing on the wall and had moved deposits and operating accounts with international banks, and mostly, with international banks and the accounts based abroad. Local ashore personnel has been affected as they cannot withdraw full amounts of their paycheck from local ATMs, but otherwise, the operating accounts and deposits are safely abroad, in US$, and mostly, immune to any haircut that may be imposed to local deposits. Most of mortgages of Greek owners are primarily with international banks, thus no direct lending or FX impact. There are four systemic local banks in Greece at present (Piraeus Bank, Alpha Bank, National Bank of Greece (‘NBG’) and Eurobank Ergasias) and it’s estimated that they hold approximately $15 billion shipping loans (out of a total international market of $420 billion). All in all, a small share of the total pie that can have minimal effect on the overall shipping market; likely local banking to be of greater impact for shipowners operating in the cabotage ferry industry serving the Greek Islands, but nothing to worry about for the international investors in the Greek shipping companies.

However, going forward, the Greek shipping bank market will never be the same; most importantly there will be no market since the banks are and will be unable to raise capital, attract deposits and lend. One step further, in the current spiral of negotiations between Greece and their international creditors, Greek bank recapitalization will be the next big battleground; this recapitalization likely will not be limited to a new round of capital injection from international investors, but it may very well be the experimental first step of European banking integration; Greece’s creditors allowed €25 billion for Greek banks this past week, which will be provided through the European Stability Mechanism, and as such, it would have to arrange for a ‘bad bank’ to absorb toxic assets, recapitalize and inject capital to the good portion of the banks, but with shifting control of the banks to Europe. Thus, for any owners who were betting on Greek banks and ‘relationship banking’ to obtain shipping loans, the probability would be thinner that sails will be back in fashion for commercial ships. For the owners with mortgages with Greek banks, they better be current and in full compliance with all covenants.

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Ready for new horizons? (Image Credit: Karatzas Photographie Maritime)

Under the current negotiations with international creditors, the Greek government have been pushed to reconsider taxation for Greek shipowners; this is clearly a heavily politically charged and sensitive topic with good arguments from both sides of the aisle, creation of jobs and all. The Law 89/67 which exempts all income derived from shipping activities in Greece has been the red flag (or a ‘red line’ as the present Greece government with its curiously curvaceous appetite for lines might had wished to say). On the other hand, as stated earlier, 20% of the world’s commercial fleet contributing €13.5 billion to the Greek economy flags that something is fanky with the numbers. Most of shipping internationally is taxed based on the ‘tonnage tax’ (how big is a ship) and not on income (how much money the ship makes), and the Greek tonnage tax system, despite the Law 89/67, is nothing exorbitantly unusual. Shipping is one of the few industries that internationally has managed to outsmart the taxman, and the Greeks are not better than any other nations at that. However, given that a crisis is a terrible thing to waste, as they say, and that Greece is under the pressure of the creditors to act, probably it may be high time to develop a well-thought-out strategy on how Piraeus and the Greek shipping can become the tip of Poseidon’s trident to lead Greece out of the present shipping crisis. There is tremendous know-how and skilled force in shipping in Greece, the weather and the sea are evocatively alluring for the industry, cost is relatively manageable, and likely no many Greek shipowners really mean to leave Greece for tax purposes alone. It’s not nationalism that keeps them anchored in Greece and neither the desire to pay fewer taxes will prompt them to set sails for other jurisdictions. Probably that ‘vision thing’ maybe a good point to start when dealing with the present situation.

Fleet Street is associated with publishing, Fifth Avenue with high-end shipping, Madison Avenue with marketing, and Akti Miaouli (literally, Miaouli’s coastal road, Miaoulis being an admiral and hero in the Greek war of Independence against the Ottoman Empire) is associated with shipping. It’s a street where many shipping fortunes were created, a cluster where each floor of every building had housed another shipping company, and I have met seafarers internationally imagining Akti Miaouli as a gold-plated road…. For those who have been recently to Akti Miaouli, reality could not have been any further from inspiration (as the City of Piraeus has failed to keep up with technology and infrastructure, most shipping companies have left from Akti Miaouli which presently resembles a typical downtown street in America in the last decade). It’s not a tax issue, it’s a sovereign crisis.

Maybe this crisis will not go to waste…maybe Athena with her intellectual and diplomatic skill and Poseidon with his skill to tame unruly waves and steer ships to long voyages can bring the shipping industry to be what it deserves with its standing in the world and with its standing in the Greek society and economy.

Maybe. Or, maybe not.


2013 10OCT BCG Impact Assessment of Greek Shipping on the Economy and Society

© 2013-2015 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.

 

Summer Doldrums and Endangered Tradewinds?

Hard to believe, we are already in the middle of the summer, a time typically associated with dialing down on stress and appreciating a more leisurely aspect of the sea, whether from the deck of a yacht or a lounge chair on the deck of a beach house. While shipping seems to be having reason to enjoy this seasonal breather, there are two developments at present on the world arena that threaten to make this summer too hot to enjoy completely.

Front pages of world newspapers have been monopolized in the last month by the developments in Greece and efforts to find a solution, a solution for the Greek state mostly but also a solution that will assert the Euro and the Eurozone as a solid pillar and counterweight on the world scene. There is little doubt that Greek politicians have been exhibiting conspicuously a childish and narcissistic attitude (the former adjective is used rather generously), but a failure to have a timely solution would have repercussions in Europe beyond Greece’s borders. At present, the Greek banks have been closed since June 29th with no announced plans of date and manner that would open again. In short, the strategic importance of the Greek banks and their involvement in shipping is getting of less significance by the day. The immediate impact is rather contained since a great deal of shipowners have moved their operating business accounts outside Greece some time ago, and since the US Dollar is the denominating currency of shipping, there is little direct concern. On the other hand, the indirect impact is well noticed, although not easily quantifiable; with long queues to withdraw €60 per person per diem, and the political uncertainty, most players in shipping are ‘battening down the hatches’ to survive the storm rather than thinking of their next moves. For starters, there is empirical evidence that sale & purchase activity has slowed down, especially from the smaller mom-and-pop shipowners; of course, this partially also can be attributed to seasonality, in all fairness; but, to buy a ship and go long the market, it always takes a vein of hope and enthusiasm, which is hard to find in Greece at present. Besides the privately held shipowning companies, for Greek-managed publicly- listed shipping companies, there has been a great concern from institutional investors about the developments in Greece; once again, the direct exposure of publicly listed shipping companies to Greece is negligible as they are decoupled from the Greek banks and the Greek reality, they are incorporated abroad, as this is the case with their charterers, and of course freight revenue is collected in the Almighty Dollar; only the vessel management partially takes place in Greece, which can be both rather expeditiously and anodynously moved to another country, if things get out of hand. But again, you cannot share the concern of the investors of Greek shipping companies about sovereign risk and exposure, and in the weeks that followed the announcement of the referendum, the drop of share prices for many a Greek publicly-listed shipowners has been painfully onerous; it’s to be seen the impact of hopeful Greek shipping companies trying to have private placements, access institutional investors for new projects and eventually accessing the capital markets for IPOs and bond offerings.

Another factor of political uncertainty is that Greek shipowners have been enjoying a perceived lenient tax treatment in Greece, and there have been pressures – mainly from the creditors of Greece – that changes are needed so that shipowners contribute a higher share than presently to the Greek coffers. As usual, there has been lots of talks from Greek shipowners and their union (UGS) that if there is too much heat, then they would ‘get out of the kitchen’ and sail to calmer jurisdictions. None of the previous governments and neither the present government in Greece has made any efforts to systemically make the shipping industry a properly treated, in all respects, including taxation, strategically and nationally important industry; once again, it’s left to foreigners to tell the Greek government that shipping is just another area that could use an open-minded approach. And, while many a shipowner have been exploring plans to relocate, this past week the UK government ironically was taking another look at the tax benefits of non-dom, which likely eliminated the most obvious and preferred option of Greek shipowners to run their business out of cozy offices in Mayfair, Belgravia and Kingsbridge in cosmopolitan London. Political uncertainty in Greece, when combined with other factors, may also catalyze or at least influence the timing of contemplated transactions, such as RBS’s recent announcement to sell their Greek shipping loan portfolio of US$ 5 billion (it’s well known fact that RBS is retreating from shipping and the sale of the Greek shipping loan portfolio, allegedly the crown-jewel of their shipping exposure, had been expected; one wonders whether the events in Greece had anything to do with the timing of the announcement).

Given that Greek shipowners control more than one-third of the world fleet, developments in Greece, as much as detached from shipping as they are, would definitely be affecting shipping activity.

Shifting one’s focus on the globe, half–a-day ahead of Greece to the East, and almost a whole world apart, there is the second friction point that has the potential to make our summer a bit too hot: the Chinese stock market has been experiencing a roller-coaster reminiscent of the ‘dot com’ deflation in the US fifteen years ago. The Shanghai Stock Exchange Composite Index has more than doubled in the last six months, when the People’s Bank of China lowered interest rates in order to stimulate the economy; the index has dropped more than 25% in the last month, shedding more than US$ 1 trillion in market capitalization. It’s to be debated whether the Chinese stock market is in a bubble, but the majority of Chinese stocks are held by small, retails investors (the asset management and mutual fund market is not developed in China), and there has been anecdotal evidence that a great deal of those retail brokerage accounts had been highly on margin. Again, to erase any doubt, the Greek and the Chinese economies are as far apart as they can get, but developments in China can have an effect in shipping. China’s stated policy has been to shift the economy from heavily depending on industrialization and exportation to services and consumption (and redistribution of disproportionally allocated wealth from the last decade). A collapsing stock market cannot have a stimulating income on consumption by the average retail investor. Given that the Chinese economy had been acting as the prime driver of world economic growth, especially where commodities and raw materials were concerned, the ripple effects are visible in the world economic activity: the price of iron ore has dropped more than 10% in the past week and the FTSE mining index is lower by 15% so far this year. All along, the International Energy Agency (IEA) predicts for plentiful supply of oil throughout 2016, by way of weak oil pricing. It seems that demand for iron ore (and other minerals and metals, especially copper) can be driven even lower given that an accommodating interest rate policy by the People’s Bank of China would kill the ‘carry trade’ where traders used lines of credit in foreign currency (primarily US$) by domestic banks in order to finance inventories and stock piles of commodities and raw materials.

Shipping has never been an easy industry to understand and ‘model’; often little appreciated variables have shown that they could make a material impact to the market, but most of the time they remain ‘dormant’ and overwhelmed by great events. On the other hand, several years after shipping had presumably reached bottom, the still anemic recovery can afford little chances of ‘exogenous shocks’. But again, it’s times like these that have made fortunes.


 

© 2013-2015 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.

Smart Investments in Shipping

At a recent shipping conference, we were asked to present on the topic of smart investments in shipping given the present phase of the business cycle. The shipping industry is ever changing and the so-called investment thesis for shipping investments can change structurally in much shorter periods than in other industries; what looked awfully appealing a year ago can be facing challenging winds now. The opposite can be just as true.

More than $30 billion have been invested in shipping by institutional investors in the last five years, not to mention the commitments by independent shipowners, charterers and cargo interests, shipbuilders – directly or indirectly. For the investors who had in mind a relatively timely and well projected exit strategy, a reality check of their investments in shipping at present rings rather disappointingly; for the investors who had in mind the long term, a marked-to-market analysis is of less importance, but still, unfavorable clouds have replaced, to a certain extent, the optimism of the tradewinds for a smooth sailing. Whatever the goal and the timeframe, shipping investments of the last five years have genuinely been a disappointment.

The Dry Baltic Index (BDI) has been flirting with thirty-year lows and shipping asset prices seem temptingly low, whether for dry bulk, containerships or even tankers (which have been trading much livelier than any other sector.) For certain asset classes such as panamax dry bulk vessels, ten-year old tonnage can be had as inexpensively as twice their scrap value. There is no doubt that asset prices are getting at ‘interesting’ levels. For those believing in the adage ‘buy low, sell high’ it seems that the present asset pricing environment is a no-brainer for outright purchases of ships.

Could ‘going long’ the market be the best way to invest now? Whether investing for ‘alpha’ or trading for ‘beta’ would seem equally obvious choices to ‘play’ the market, since asset prices are historically low.

But again, why one would like to invest in equity in shipping?

The world fleet in all asset classes is rather new, newer than five years of age in certain asset classes such as the capesize market. A great deal of vessels were ordered just prior to the crash of 2008, and many more were ordered ever since, with a massive newbuilding wave in 2012 and 2013. A relatively young world fleet cannot precipitate an accelerated level of demolitions, and likely the owners of young vessels, however un-economical, would hold onto them for as long as possible. It’s well known to traders than when there is plentiful of ‘inventory’, the probability in price spiking is rather weak.

Looking just beyond the existing fleet, the outstanding orderbook is not negligible either. Since not all asset classes ‘picked’ at the same time, there are waves of varying strength of newbuildings in different asset classes, but still the overall orderbook is a robust at 20% of the world fleet; some asset classes seem better balanced in this respect (containerships and tankers), but still, there are almost no mainstream markets where the outstanding orderbook is nor higher than 10% in terms of the existing fleet in the same asset class. Linking together a young world fleet and a meaningful existing (that cannot be cancelled) orderbook, one has to wonder that tonnage oversupply will always keep a lid on pricing, at least in the next year and possibly longer.

Maritime Heritage Trail_BMK_3585

Cayman’s rich maritime history can accommodate more than cruiseships! Image Credit: Karatzas Photographie Maritime

One may be tempted to say that in two years then, when more demolitions will have taken place and the presently outstanding orderbook will have been delivered, it’s a reasonable horizon to aim at for asset appreciation. And, in any event, vessels ordered today likely cannot be delivered before then, within two years, considering that it takes about nine months to physically build a vessel and the existing backlog of newbuildings. But again, shipbuilding capacity, especially for dry bulk vessels, seems to be un-limited; Chinese shipyards can keep building commoditized dry bulk vessels day-in, day-out, including Sundays and holidays. Yes, some shipbuilders seem too weak financially and can survive; on the other hands, it doesn’t take much to expand shipbuilding capacity for commoditized vessels. And even for bigger sized vessels, Chinese strategic interests like China Merchants (CMES) and with Vale, didn’t seem to be a problem for obtaining fairly prompt slots for VLCCs and possibly fifty more Valemax vessels.

Thus, the world fleet is relatively young, the outstanding orderbook is relatively strong and shipbuilding capacity is potentially there to accommodate a market expansion; all these three factors do not pertain well for the market, at least as equity investments are concerned.

But, if tonnage supply is to expand, is there sufficient finance available?

Cayman sunset_BMK_6156

A Sunset from the Caymans. Image Credit: Karatzas Photographie Maritime

Private equity funds and institutional investors are still there to consider equity investments in shipping, possibly for ‘doubling down’ on existing investments, or possibly to enter the market with a lower cost basis than their competition or even possibly to feed on the distressed opportunities presenting themselves form time to time. If newbuilding capes (of the eco-type) were a bargain at $58 mil, why newbuilding contracts for capes at $50 mil or even lower cannot offer a better opportunity, especially since additional fuel savings and other improvements can provide an incremental benefit (beyond the price) to the newly ordered tonnage? And newbuilding prices can stand to drop, as commodity pricing (read: iron ore) has been heading south and likely to remain weak; and, China (read: good news for Chinese shipyards) have already produced too much steel plate in the past, so much so that are getting close to formally be taken to World Trade Organization (WTO) by the US for ‘dumping’ steel plate in the international markets below their cost. Private equity funds and institutional investors do have the dry powder to invest, shipbuilders can afford to lower newbuilding prices; and, the low interest rate environment can have a magnifying impact on making many projects appealing when the discount rate for NPV calculations can be awfully attractive.

And, there is always the question on demand! China, the horse that many an industries and projects are trying to hitch their wagon at, has been at a decelerating growth curve; long forgone are the days of double digit growth; the growth rate of 7% achieved in the last year is expected to reach 5% within a couple of years, and some educated projections are looking for a growth rate meaningfully lower than that.

It seems then that investing in equity in shipping (going ‘long’ the market) is a tricky way to invest, given our litany of factors mentioned hereabove. We think that there are opportunities to invest in equity in shipping and still have a good chance to make money; however, any such play will require expert knowledge of the market, ability to act fast, to select high quality vessels and pay cash; such play would require strong chartering relations, operational expertise, and certainly strong conviction and some luck. In our opinion, such opportunities likely to be few and between.

Cayman Yacht Club Lighthouse BMK_5753

A Lighthouse for Guidance! Image Credit: Karatzas Photographie Maritime

However, the flip side of our argument, that a weak freight market is likely to persist, then investing in credit may be the optimal way to invest in shipping. For starters, most traditional shipping banks have left or are vacating the shipping industry, leaving behind them a huge gap to be filled. Additionally, the weak freight market generates an ever-increasing need for financing, as shipowners are running low on working capital, to operate vessels on a daily basis and also capital for mandatory capital expenses such as drydocking and special surveys. Such funding needs are never to be considered by traditional lenders, since they entail a balance sheet and the borrowers are typically are of lower credit standing. There are also the ‘legacy transactions’ where newbuilding orders were placed on speculation with no financing in place, as incredible as it seems now; for such projects, the option set for the shipowner is tight: either default on the newbuilding contracts and lose 10-30% of the down-payments on the original price or borrow (with the vessel as collateral) at hefty rates in order to get the vessels on the water and get to live another day, hopefully a day of strong freight rates to pay for the costly mortgage. In our business practice, we routinely see shipping projects in need of financing that can provide the vessel as collateral that can allow for 7% return with strong covenants and very favorable loan-to-value ratios; for projects with some ‘hair’, returns for credit investments can be double-digit and can also allow for convertible to equity or upside potential based on market performance.

The question to be asked is why credit investments in shipping wouldn’t be ‘smart investments’? Favorable terms and tough covenants that allow for high single-digit returns with the shipping asset as a collateral, minimal or little market risk, and with the option to convert for the riskier projects. Could ‘debt’ be the new ‘equity’ (or preferred equity) in a weak, risky, unpredictable shipping market environment?

An abbreviated version of our presentation from the conference can be found here.


© 2012-2015 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.