Good Old Days for Shipping

The dry bulk freight market has put an impressive performance of late; the Baltic Dry Index (BDI) has tripled since reaching bottom in February. Now, dry bulkers are in cashflow positive territory, sufficient to cover daily operating expenses (OpEx) and, partially, the financial cost. On the other hand, for tankers, it’s a different story, as tanker freight rates have dropped significantly with primarily shale oil being the game changer; but still, in cash flow positive territory.

On the sale & purchase front, there has been strong demand by buyers for bulker vessels; demand for tankers has been lackluster on the other hand. Prices for bulkers have improved in the last several months by as much as 30% for certain types of vessels. Prices for tankers, on the other hand, have been softening. All along, shipping finance is getting ever more difficult to source; and more expensive.

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A listing ship and a church. Probably a good reflection of shipping today: lots of troubles and prayers in the same port… Image credit: Karatzas Images

Buying interest for vessels earlier this year had been dominated by a handful of big players who either had raised funds or had their own deep pockets to depend on. Such buyers have bought most of the quality, modern expensive (in absolute terms) ships that owners were forced to sell when the market was abysmal and cash flows were negative. Now, we see a great deal of buying interest from smaller shipowner who have to depend on expensive financing to acquire vessels and who actually will have to stretch themselves for acquisitions, even for still cheap at today’s prices – by historical levels. We have seen buyers putting all the resources together tightly to buy one or two vessels but with little cash reserves on the side for a rainy day. These are the typical speculative buyers who try to time the market by buying low and selling high, and who trade their vessels on the spot market in the interim.

If one were to ‘grade’ buying interest, the strong buying interest at present is definitely of low quality. Earlier in the year, there were substantial buyers with deep pockets buying several sistership vessels or fleets of vessels. Now, small players with no strategic or competitive advantage, with thin pockets and lots of dependence on luck and circumstance are looking to buy a cheap vessel here or a cheap vessel there. Now that freight rates have been improving and the market seems to breathe again some sign of life, they all rush to ride the wave. For bulkers it’s a ‘buy’ mode, but for tankers it’s a ‘stay away’ mode as in the latter market rates have going south and the momentum has been evaporating. All in all, a highly speculative approach to the shipping market, especially by the weaker hands who borrow expensively and they bet that the market will turn around sooner than their short runway will disappear.

We view with concern the recent resurgence of buying interest in the dry bulk market and the flip side, the absence of interest for the tanker market. Buying interest is not driven by access to cargoes or fundamental analysis of stronger demand; it’s mostly predicated on the fact that dry bulk vessels are cheap and the freight market is improving, at least in the short term. Pure speculation without much analysis; honestly, we are not the ones to judge on that, if that’s how one wishes to apply a market model. On the other hand, speculation has brought much of the present tonnage oversupply from owners who were ordering them to shipyards that were building them to shipping banks that were financing them.

Having experienced a cashflow negative market for almost two years which saw many shipowners burn their cash to survive or seen their vessels ‘re-allocated’ by the banks, the amount of speculative action in the market is scary. We appreciate that shipping and volatility (and speculation) go hand-in-hand, but one would had thought that two years of bleeding should had taught a lesson or two.

A sign of froth in the stock market is when small investors get all their little savings together and step to open a brokerage account and try to participate in a rally, buying odd lots of shares, and trying to ride the tail of the wave. It’s interpreted that when weak hands get the itch for speculation and getting sucked in, it’s when one knows that there is little more money to be pulled into the vortex.

We are all for entrepreneurship and active capitalism, but buy because ‘ships are cheap and the market will recover’ is not always the best business plan. Typically assets that are out-of-favor will again be back in favor, no doubt, but there is more to the story in order to make money by other than just speculating. Otherwise, it seems a sucker’s game.


This article was first published on the Seatrade Maritime News under the title: “Is it really the right time to buy ships?” on November 28, 2016. We’d like to thank them for their finding it worth publishing on their esteemed website!

© 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.

The chronically weak freight market and moral hazard

Low freight rates have been a concern for a great number of reasons and to a wide range of market participants: low freight rates entail weak cash flows for the shipowners who cannot perform on their loans and causing problems for the shipping lenders; investors in shipping having experienced poor returns on their investments contemplating asset sales and leading even lower asset prices; shipbuilders facing a great deal of slippage and defaults on existing newbuilding orders while demand for additional orders has vaporized; charterers and cargo owners have to be very careful that vessels chartered even in the spot market not only are seaworthy and commercially competitive, but also the shipowner is current with their financial obligations and there is no risk of seeing the vessel delayed or arrested and the cargo onboard not delivered on time; likewise, vendors to the shipping industry have to be experts with managing credit risk and keep their clients on a short leash (further curtailing market activity and their own business).

All the concerns mentioned above emanate from a single cause, a low freight market that radiates and affects every dimension of the shipping market. Despite the recent bounce in the dry bulk market, freight rates are still very low and at barely operating break-even levels. The freight markets have been too low and for too long, and shipowners, still in business, have had to dip deeply into their cash reserves or seen their equity overly diluted. There is little more aside in terms of cash reserves, funding from investors and financiers outside the industry, or for that matter, of patience.

Based on recent transactions and experience, now another concern has to be added to the long list springing from a weak freight market: moral hazard. Moral hazard in this case can be defined as the behavior where an owner is so much disengaged from reality as to act carelessly in reference to the asset and the parties with an interest in the asset. The most obvious example is when the owner’ economic interest in the asset is so minuscule that there is precious little to care about the asset.

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Neo-panamax containership MV ‘Hanjin Namu’ entering the Port of Piraeus in better days. Image credit: Karatzas Images

There has been moral hazard in reference to financing and outstanding shipping loans. When the principal amount of the ship mortgage is materially higher than the present value of the vessel (and any hope of market recovery thereof), the shipowner has little incentive to make any effort to fulfill their obligations according to the loan agreement. There is very little hope that they will ever see their money back and thus little incentive to behave. Several owners we know had been making good, more or less, on their loans for the last couple of years in the hope of a market recovery. Two years later, having thrown good money after bad money, and reaching the bottom of their cash reserve piles, now they are barely inclined to keep performing. There have been cases of shipowners who have stopped paying interest and principal of their loans despite having the financial capacity to do so. They are better off with shipping loans in default than with performing loans. First, they reserve capital, which they can deploy to new clean-slate shipping investments and let the legacy transactions sink. Second, for loans in default, shipping banks seem keener to grand concessions to shipowners with non-performing loans while they seem to uphold ‘good’ shipowners at a much higher standard. Thus, it pays to be bad. Thirdly, there had been traditionally an unspoken law in shipping that for a borrower defaulting to a shipping bank, effectively they were ostracized for life by the ship banking community, thus a very high incentive to behave: not to borrow more than one could afford, and, even when things turned sour, to make every effort to see the lender to recover as much as possible of the principal outstanding. Now with several executives at shipping banks being corporate officers with little knowledge of or affection for shipping or with a great deal of shipping banks actively exiting shipping, there is no longer the self-watching ship banking community to ensure proper borrower behavior and thus, plenty of room for moral hazard. Sort of, ‘what they can do to me?’

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Image credit: Karatzas Images

There has been moral hazard in reference to the maintenance of the vessels as well. When the freight market is low, economizing by cutting on expenses is required to make do with less and ensure survival in a challenging market. First goes the ‘fat’ and then ‘discretionary spending’ (spare parts onboard the vessel is the classic case) and then laying off people ashore, and then keeping vessel maintenance only to the extent that the classification society requires in order to renew the certificates. Talking to inspectors boarding vessels on behalf of charterers, the technical quality of the vessels has become a concern; and, this concern is highly troubling for tankers and for oil companies given the level of liability in the event of an accident involving pollution. Talking to inspectors boarding vessels on behalf of the port state control (such as the US Coast Guard), there is real concern about vessels that have been under-maintained. Talking to inspectors boarding vessels on behalf of buyers of ships in the secondary market, there is lots of concern about vessels that have been neglected for too long. With the freight market too weak for too long and with many vessels afloat ‘depending on the kindness of strangers’, there is little incentive to do anything above the absolutely minimum required in terms of maintenance.

There has been moral hazard in reference to seafarers and the environment as well. There have been several stories recently in the trade press about seafarers getting abandoned, gone unpaid for months and malnourished, and even stories of vessels arrested due to outstanding crew wages. And, in a market place where the shipowner does not care much about the asset or the lender or the crew, it’s hard to envision how or why they would care much about anything else, such as the environment or adhering to sound navigational practices. Such is the risk of moral hazard.

There is no doubt that we are living through unique times in shipping; the present shipping crisis has been much more monstrous than others in the past. Examples of moral hazard is a known consequence of rapidly shifting economic structures and defaults (think of moral hazard in the subprime real estate in the US a few years ago). However, given that there is low expectation of a market recovery in the near future, issues arising from moral hazard will only get more complicated and perilous. After all, moral hazard in shipping can affect trade, human lives and the environment. When contemplating actions in shipping at present, one has to be cognizant of addressing alignment of interests and dissipation of moral hazard.

There is an anecdote of Shipowner A confiding to their friend, Shipowner B, that Shipping Bank X arrested four of their vessels. ‘Oh dear,’ replies Shipowner B, ‘I am so sorry to hear. And now, who is your best banking relationship?’ he asks, to which, Shipowner A dryly replies with relief: ‘I think I already told you, Bank X’!

As funny as the joke is, a market cannot function on such a basis.


The above article was originally published on The Maritime Executive website on August 30th, 2016, under the title: “Shipping’s Moral Hazard”. We are thankful to the Editors of The Maritime Executive for hosting our article.


bmti-1An abbreviated version of the article suitable for the weekly market report was published on September 2, 2016 by BMTI in Germany, under the title: “Concerns About Moral Hazard in the Shipping Industry”. We are thankful to our friends at BMTI (a well respected dry bulk market data provider, with special focus on smaller tonnages and MPP vessels, and the short sea market) for hosting our article. For more info on BMTI and their services please click on the image of their homepage to the right!


© 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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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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Shipping’s Structural Challenges

Article originally appeared on Splash 24/7 under the title ‘Canaries in a Coalmine’ on July 5th, 2016.


With the dry bulk freight market so low for so long, half of world’s dry bulk shipowners are trying to raise money in order to survive and the other half are trying to raise money in order to buy cheap ships. Both kinds of endeavors are commendable and that’s exactly the activity this market one would had expected to stimulate at this stage: a historically depressed and unexpectedly prolonged low market is about to wash out part of the ship ownership population while the better (and maybe luckier) part is using this market to grow and increase market share.

Historically, great fortunes were made for a propitious entry to the market and astute timing in this volatile industry. As some trading minds love to say, one makes their money when they buy: a hopelessly low price gives enough room for error for any miscalculations and takes much of the market uncertainty out of the investment.   To a certain extent, aspiring buyers at presently distressed prices are trying to do what always has been done in such circumstances, buy low and wait to sell high. So far, so good – as no one lost money with this investment strategy.

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An industry in a storm. Image credit: Karatzas Images.

However, buying low and selling high presupposes a normal business cycle, sort of a wheel of a bicycle rotating while the bicycle speeds on an even surface; just imagine, if you will, a leaf picked by the wheel from the road surface, span a bit, and let go when the wheel has turned half circle; the leaf is now at middle air, diametrically higher than the surface, thus with more energy (read value), as we would had said in elementary physics class. Actually, at any point higher than the surface, the leaf would have more energy (value), and that’s what many asset players have been trying to do over time. Visualize the bicycle wheel as a business cycle and substitute the road surface with the horizon over the oceans: the value of the ships varies relative to the position of the wheel over time.

A buy-low-sell-high investment argument presupposes of a normal, repeatable business cycle, immune to any exogenous shocks. Same wheel, more or less, over cycles, same level surface more or less, same enthusiasm and strength to pedal the wheel, more or less…

When today one makes the argument for buying cheap ships, as commendable and self-evident as such argument may be, one has to wonder whether everything else has remained the same… whether the surface is still even…

Protectionism and Isolationism

A thriving shipping industry depends on thriving trade, and one has to observe that at present there is a wave of protectionism and isolationism circling the globe. From the outcome of Brexit to supposedly building huge walls in North America to the polarization of the electorates in many countries, one has to wonder whether there is a tailwind or a headwind for shipping. Probably our lives and the world are too integrated at this stage and populist politicians may not get their chance to implement their simplistic and populist view of the world, but again, a big push for the shipping industry should not be expected in the immediate future.

Structural Changes and Disruption Risk

There have been interesting news recently as officials at the Port of Oakland in California are trying to do away with a ban to ship coal (mostly from Utah) to Asia (China), a proposal based on environmental concerns. This is about banning shipping for a commodity by a third party who effectively is not a party to a contract (between buyer and seller or even shipper of coal) on reasons of environmental pollution that will take place thousand miles away (in China, as Oakland is only transshipment center). We do not pass judgment here, and we are always for clean business practices, but see this event as a canary in the coal mine, literally, drawing attention to shifting tides in the shipping industry. Certain cargoes, coal in this case, are becoming obsolete as the world moves towards renewables and clean energy. Shipping volumes are affected and certain asset classes get to be at a greater disadvantage. And, the energy industry and energy storage are at the crosshair of many technology companies as the energy industry is deemed a mature target for disruption. The mighty Apple depends 93% for its energy needs on renewables, and has spent for R&D on renewables more money that they have spent on the iPhone, iPad and iWatch combined. Coal and oil and gas are prime cargoes for the shipping industry.

Mind the Money

In June alone, more than $1 trillion of sovereign and corporate debt has been added to bonds yielding negative rate, for a total of $11.7 trillion. There are 355 corporate bonds that have negative yields, meaning that the bondholders actually pay money for the privilege to lend to these companies. In macro-economics, sovereign interest rates at close to zero are defined as Zero Lower Bound (ZLB), and it’s often a sign of central banks running out of options. We are living in a world of increased risk with few fiscal options (and / or political will) where cash holders and savers are getting penalized for being frugal, whereas some borrowers are getting paid to borrow lots of money. But, given heightened regulatory environment in the banking industry, a great deal of borrowers is not the kind of clients the banks wish to finance. In short, in a world flooded with free money, most businesses cannot access it. We would think that this is a structural shift in the market, when our proverbial bicycle has stopped moving on an even surface and has moved to off-road terrain.

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Looking for a Captain. Image credit: Karatzas Images.

Many hopeful buyers are pounding the table that shipping asset prices are cheap and this is one-in-lifetime opportunity. And over time, cheaply acquired assets appreciate and generate huge profits; just a uni-directional bet and a view that history repeats itself, actually. But, this has been the logic that got us into trouble in the first place: ships were priced at once-in-a-lifetime levels in 2012-2013 when primarily asset players and opportunistic investors were ordering newbuildings by the dozen. Why the same logic would get us out of trouble, especially when canaries in the coal mine seem to be dropping dead in related industries?

Probably a higher level of logic may be required to make profits and save the industry from another shock, than just the buy-low-now mentality.


© 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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Master Limited Partnerships (MLPs)

Master Limited Partnerships (MLPs) are tax-incentivized structures ideally suited for the financing of capital assets, especially when those capital assets have long term revenue streams attached to them. Energy infrastructure, such as pipelines, has been the original template for such investments. Companies active in the maritime industry, such as shipowners of LNG tankerships, drilliships, offshore assets, and, even mainstream tankers, have also tested the waters of this yield-oriented market.

The collapse of the price of oil in the last year has seen many of the MLP companies halve their share price. Some investors may wonder whether there is a false association between energy pricing and service pricing in this case, as a pipeline company generates income based on volume passing through its infrastructure and not on value of the commodity passing through its infrastructure. Of course, there is the risk of lower volumes in a weaker market, or renewing charter contracts for tankers at lower rates in a weaker market, but is the risk so high as to justify such a dramatic drop in the Alerian MLP Index?

As a side-thought, since the article was originally published, it has been revealed that the master of value investing, Warren Buffett and Berkshire Hathaway, has taken a position in Kinder Morgan (ticker: KMI), a pipeline company that in the last couple of years has been expanding aggressively in the Jones Act tanker market.

In a recently penned article for the Caribbean Maritime magazine, Karatzas Marine Advisors explores the MLP market, especially from the point of view of the Caribbean Basin where energy infrastructure could benefit from the MLP structure.

2016 02JAN CARIBBEAN-MARITIME MLP Down_COVER2016 02JAN CARIBBEAN-MARITIME MLP Down, But Not Defeated


© 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.

Jones Act: the U.S. shipping market that foreigners love to hate

Most countries with coastal line have enacted laws that mandate special rules for vessels that trade in territorial waters and flying their national flag (cabotage laws). Typically, cabotage laws offer certain degree of protection from vessels flagged under foreign regimes in exchange of commitment to operate and crew the vessels locally. Most often than not, cabotage shipping pertains to vessels that are engaged in local, specialized trades (such as ferries, tugs, push boats, etc), and by the volatility standards of international shipping, typically cabotage shipping is considered a backwater business of interest to a few local investors and shipowners.

The cabotage law for the United States’ territorial waters (Merchant Marine Act of 1920, better known as the “Jones Act”) could easily fit the mould,  most of the time; the market is stable over the long term, varying normally around the historic average with a commanding majority of the assets not even capable of international trade (such tug and push boats, harbor tugs, and plenty of OSVs for coastal trade). However, the Jones Act market is probably the most talked about cabotage market, since vessels suitable for international trade, where comparables exist, typically can have exorbitant economics such as charter rates of $120,000 pd for a year’s charter by an investment grade oil company. Many people, mostly shipowners form abroad, have been calling for an un-competitive or inefficient market.

Recently, Basil M Karatzas penned an article at the request of the Editors of the Shipping Network, the magazine for the UK-based Institute of Chartered Shipbrokers, titled “Jones’s American dream divides opinion”. A copy of the article, courtesy of the Shipping Network, can be accessed by clicking here!

MT OHIO 2@

LNG-ready Jones Act chemical / products tanker MT ‘Ohio’ (2015 built) has been valued at $150 mil; high quality international-flagged tankers (sans LNG-ready) cost $35 mil. Some people fail to see the value. Image credit: Karatzas Photographie Maritime


© 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.

2015 12DEC Jones’ American dream divides opinions – Shipping Network – December 2015

Errant Thoughts on the State of the Sale & Purchase (S&P) Market

While a lot of attention has been given by the mainstream business press to the all-time lows set by the Baltic Dry Index (BDI) recently, the collateral damage on shipping asset prices has only been perfunctorily mentioned. Freight rates can fluctuate widely and driven by short term considerations, while asset prices take a bit longer to catch up with the newly expected revenue stream.

Freight rates for dry bulk, containerships and offshore assets have been anemic for some time now, meaningfully below cash operating levels at present. Although the state of the market has deteriorated since last year, really it was coming off after the rough markets of 2010-2012, which were after the monumental crash in 2008. The only way for such ships to keep operating in the spot market is by having the shipowners accessing cash reserves and lines of credit, if and when available. Tankers have been doing better this year, the only bright spot, but again, they had a continuously terrible market ever since the market crash in 2008 until the turn of this year.

Cash has become a matter of survival for many shipowners in shipping. Earlier attempts to have JVs with private equity investors have not played out profitably, and access to funding from institutional investors come with a high cost. All along, the traditional funding source of the industry, shipping banks, have been ever more biased in favor of clients with balance sheets, and not just ships in need of financing.

As one would expect, prices for ships have been submerging fast, typically 10-50% since the beginning of 2015, depending on asset class and vintage of vessels. Even for the tanker market that has seen a doubling of freight rates since last year, tanker asset prices have disappointed miserably all those hoping for a quick asset play bet. The weak freight market in the dry bulk has overshadowed many prospects, either directly or by casting a long shadow over the while shipping industry, with buyers staying away from new opportunities.

Since vessels in most asset classes operate below cash operating break-even levels, any new acquisition of ships would entail an operating loss for the foreseeable future by the hopeful buyer. It’s a hard sell for many buyers, including institutional investors who typically buy with the prospect of instant earnings in mind, to take the additional risk of a lousy market. A cash-flow positive market not only allows for instant gratification and satisfaction, but it’s easier to justify and rationalize, easier to structure and finance, and frankly, sexier to talk about at the yacht club. There is always the risk that a positive cash flow market can become a negative cash flow market, such as life, but a negative cash flow market takes much more conviction and effort, and possibly time, to turn around. Thus, a negative market it’s easier to keep drifting than finding support to turn around.

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Lady Liberty and the US capital markets still have faith in the shipping industry…sort of… Image Credit: Karatzas Photographie Maritime

It’s not that weak cash flows alone take the winds off the buyers’ sails. As existing shipowners have been bleeding cash for some time now, one – especially a perspicacious buyer – has to wonder, what is their staying power. Losing money on operating basis daily will eventually force owners to sell and stop bleeding money, implying a lower asset market and likely a better buying opportunity tomorrow. Thus, buyers can afford to take their time before they shop; the time they wait for is the time that runs at the expense of the shipowners who carry the market to recovery. Case in point, one can see Scorpio Bulkers selling resale capes since late last year: they started selling at $45 mil and their recent sales have been at $38 mil. How would you like to be the buyer of the $45 million cape a year ago, having burn more than one million in operating losses and several million in interest expense, and now seeing you neighbor picking up a vessel at $7 mil less sans the operating aggravation. Probably, one of the few cases that procrastination has tangibly positive results.

Besides the weak freight market, shipping banks and other financiers have been highly differential to shipping these days. Shipping mortgages, even when they are available, come at a cost of proportionally high advance ratios, spreads over Libor, and much stricter covenants. Quite often, cost if financing is in the high single digits for straightforward mortgages. It’s hard for an opportunistic buyer to get excited about the market when financing is neither plentiful nor inexpensive, and when interest rates are just about to get on an ascending trend.

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Unemployed and unloved… Image Credit: Karatzas Photographie Maritime

It’s an unbalanced market for now, with more ships for sale than to purchase. There are many actively marketed ships for sale, including newbuilding resales from China, but there are many more vessels for sale just for the asking. These are vessels in the dry bulk, containership, tanker and offshore markets. They are ships that could be developed for sale from operating shipowners, financial shipowners, shipowners in distress, banks selling shipping loans to sell the vessels, banks that ‘have the ear’ of the shipowner and can ‘motivate’ a ship sale. There are blocs of ships for sale and even shipping companies, with or sans management. It’s a buyers’ market.

And, as the market keeps soft for a prolong time, even more vessels can be shaken loose which could further pull asset prices lower.

“It’s tough to make predictions, especially about the future,” it was once said. World economies have been barely growing which likely would make for an un-inspiring freight market for a while. On the other hand, political and fiscal question marks keep popping worldwide which always spice up the shipping markets. Would such expectations carry the day and encourage buyers to step up their purchases?

It’s interesting to observe that although the few buyers – still active in the market – have been ever more choosy about the vessels they are willing to buy, asset prices have dropped universally across the market. Buyers demand good quality tonnage, and also inexpensive pricing. And, why not? After all, it’s a buyers’ market.

Given the state of the market at present and the overall negativity and pessimism, low asset pricing begs the question on whether there is a buying opportunity at all. Yes, the prospects of a recovery seem anemic for now, but again, waiting for the perfect time to buy a ship is an art mastered by few asset players and traders. One may not be prepared to bet the farm, but when ten-year-old, quality vessels sell at a small multiple of their scrap values, it’s hard not to get tempted. With some extra cash in hand to weather a rough market for a year to come and cover operating expenses, it seems that selectively asset prices at present offer a fairly favorable asymmetric bet: bit rewards if one is right but small downside risk if the investment is poorly timed.

After all, it’s better to buy cheap ships in weak markets and have the cash to see the market recover than to buy expensive ships in a market pricing great prospects; much to earn in the case of the former, much to lose in the case of the latter.


The article hereadove was originally published under the title ‘The State of the Sale & Purchase Market’ on the Global Maritime Hub, Getaway to the Global Shipping Industry, website on December 8th, 2015. Please feel free to visit them for insightful aggregation of articles on shipping and other useful information!


 

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