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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Karatzas Marine Presentation at 1st MareForum Shipping Conference, Panama City

Conference host and Market Research MareForum has hosted their 1st MareForum Shipping Conference in Panama City on June 24th, 2016, just two days before the official inauguration of the expanded Panama Canal. Basil M Karatzas has been honored to participate and present at the MareForum conference on shipping finance and the investment opportunities present in the industry, titled ‘An Anemic State of Shipping, A Plethora of Opportunities’. The presentation can  be accessed by clicking on the image of the Bridge of the Americas herebelow. Images from strolling Panama City and from the celebrations of the Panama Canal opening celebrations.

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Bridge of the Americas (Puente de las Americas) straddling the Panama Canal by Balboa and the entrance to the Pacific Ocean. Image credit: Karatzas Images.

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His Excellency, The President of the Republic of Panama Mr Juan Carlos Varela Rodríguez at the Presentation Oficial del Canal Ampliado (ATLAPA). Image credit: Karatzas Images

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His Excellency, The President of the Republic of Panama Mr Juan Carlos Varela Rodríguez with Karatzas Marine Advisors & Co CEO, Mr Basil M Karatzas. 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.

Presentation_1st Panama MAREFORUM_Karatzas F JUN2016

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Posidonia 2016 at BDI 600

The biennal shipping exhibition of Posidonia in Greece just ended with another stellar performance for the venue, with 22,000 attendees and 1,800 exhibitors from ninety (90) countries. In terms of attendance, it was up by 14% from another stellar year, in 2014. It’s nice seeing that even at challenging times, executives in shipping have a traveling budget, and seeing that Greece still manages to be stage the biggest exhibition of the industry.

Besides the big crowds and numbers, however, one could see signs of an industry that may be coming apart at the seams. Taking Yogi Bera’s quote at heart that ‘one can observe a lot by just watching’, the overall mood was mostly defined by the words not said, the parties not held, and the shipowners who didn’t show up at conferences before.

Just to provide some background, the Baltic Dry Index (BDI), assuming that’s the whole industry’s benchmark, can be encapsulated by the following table:

  BDI (MONTHLY AVERAGE)
JUNE 2008 10,500
JUNE 2010 3,100
JUNE 2012 950
JUNE 2014 910
JUNE 2016 610
KARATZAS MARINE ADVISORS & Co.

Apparently, the index has been at its worst at present, at Stygian depths, and one would expect that pain is widespread in the industry.

Posidonia and celebrating in Greece are defined by late night parties at fancy seaside clubs and locales, and day cruises on shipowners’ yachts. Overall, the party scene this year has been fairly subdued, and the abundance of previous years did not make it to this year. Some parties were missed due to consolidation (mostly of shipbrokers and advisors), while quality of food and keeping the bar open for the whole night were hard to come about this year.

Again, when the freight market has been so low, every dollar saved at sea and ashore can be crucial. Thus, many parties seem to have been hosted in the spirit of being ‘present and still in business’, vs trying to convey the message that times are great.

IMG_2566The formal conferences and debates during the day had been dominated by discussions about the historic strength of the shipowning market and the industry, and the promise that there will be better days. Private equity funds and shipping banks took some beating for being the main cause of tonnage oversupply in the past, at least in the opinion of a few shipowners and advisors, which seems to be the theme of recent, at other shipping conferences too; that financiers have been the main culprits of the crisis, trusting with too much money the shipowners – at least, that’s how we understood it.

IMG_2591Several major shipowners claimed loudly that the market is a screaming buying opportunity, especially for dry bulk, and vessels are now historically cheap. China’s performance notwithstanding, it has been claimed there have been plenty opportunities for growth worldwide, from India to Africa, plus several potential causes for military actions (wars and volatility are traditionally good to shipowners); this is what it has been said, honestly. But again, for a couple of these shipowners, they have been noticeable in the shipping market by their absence, as they have not bought any ships in the last couple of years. And, there have been swirling rumors that a couple of these very same shipowners live at the mercy of their lenders, so it may make someone wonder whether they were dispensing wise advise or talking their books. For full disclosure, we are of the opinion that certain market segments are strong buying opportunities (for details, please inquire within), thus a bullish opinion is not necessarily un-qualified just because these owners have not acted on their own market assessment.

Bankers and financiers seemed to have been in season this year, as again, they got blamed for not financing vessels now that prices are historically low. Definitely there is some truth to it, as banks and financiers used to be much looser with financing vessels at much higher asset prices (but also freight rates), but now, with the exception of a handful of shipowners and corporate credits, it seems that shipping is an un-bankable industry. We have written about this topic in the past in this post, as this is to be a ‘complaint’ of many smaller and still well-capitalized owners, who happen not to check all the boxes in today’s world for shipping finance.

There is no doubt that shipping assets are cheap, as freight rates are low and there is a tremendous still outstanding orderbook (10-30%, depending on the asset class) of a relatively brand-new existing world fleet. Cheap assets may proffer a great investment opportunity given the motto ‘buy low, sell high’, but the ‘runway’ required for a cheap asset to appreciate may be detrimental to the survival of many shipowners and investors. And, quite frankly, there is a lot of junk that has been floating around that is passing around as legitimate tonnage (mostly bulkers built at ‘greenfield yards’ in the boom years of the cycle), and these vessels most likely will prove to be the graveyard of many an un-sophisticated shipowner and institutional investor.

And, as great and exciting shipping is, we all have to keep in mind that it’s a derivative industry, it derives its business and strength when charterers more cargoes, whether raw material, finished products, and crude oil and energy. As romantic as ships may be, they only make a good return when underlying industries and countries are doing well. And, taking a broader view of the world, one has to be careful: just this week, the OECD lowered its forecast for economic growth to 1.8% and 2.2% for 2016 and 2017, respectively (from 2% and 2.2%, updated just in February, 2016). For what it’s worth, a bellwether institutional investor, George Soros, has been in the news just this week, as he sees clouds on world’s macro-environment, and has started placing bearish investments by going long on gold. Just because Mr. Soros sees trouble ahead it does not mean that shipping investors should be running for the exits, but again, it’s tough to be getting too excited. And, further, it has been reported that central banks now are sitting on US$ 10 trillion of asset that are bearing negative interest rates (NIRP); negative interest rates have not been implemented on such massive scale before, and while it’s hard to predict how this will end up, it’s abundantly clear that central banks are running of options to stimulate growth, once again, a bearish notion to shipping.

Switching view outside economics, one can see that there has been a wave of protectionism and nationalism circling our planet, from the referendum about Brexit in the UK to building ‘yuge’ walls in the US, to imposing tariffs on China for ‘dumping’ steel in the international markets. As said, shipping is a derivative industry that needs cargo to move in order to prosper, and as skeptical we are that protectionism will take roots, one has to be concerned that that the overall frame is for more barriers than fewer barriers to trade.

IMG_2159Traditionally we have found Posidonia to be one of the most optimistic shipping conferences worldwide, with lots of high energy, excitement, vivacity and execution. In our opinion, this year the mood was bordering to pessimistic as people were very concerned with current developments: weak freight rates and low future expectations, complete lack of financing (with a few exceptions – once again, please inquire within), possibly a China that will be experiencing a harder landing than expected, plentiful of new-buildings on default and bleeding shipowners. And, for execution, just one major transaction was announced during the Posidonia out of Greece, worth just a billion of dollars.

And, taking a broader look at the Greek economy and society, the pain has been even deeper than in shipping. The honeymoon is over with the Tsipras / Syriza government and strikes are getting to be a daily fact of life, endless traffic jams reminding of capitals of ‘emerging economies’, and fruitless efforts of the Greek government to tax their way out of the crisis instead of attempting to increase the tax base by cutting down on the red-tape and stimulating entrepreneurship.

As always, there has been little sense of order or effort to change things.

Possibly, the best line of Posidonia 2016 came at the British Ambassador’s Residence hosting a reception for the shipping community; when time came to re-fill glasses with wine, people were queuing neatly to the bar, which made a Brit in attendance to comment: “You know you are on British soil when people queue to the bar!” It was an astute observation we had missed. And, there was another line to the sushi buffet the next night at the Japan Ship Export Association Reception hosted by the Japanese Ambassador to Greece. Quite frankly, these were the only two lines we experienced in Greece during our ten-day Posidonia attendance; everywhere else was less of an order…

But again, as once said by a shipping executive, ‘shipping is not a team sport.’


An edited version of this article has previously been appeared on the Maritime Executive 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.

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Ships are cheap: Please, think before you invest!

Shipping assets (vessels) are presently priced at historically low levels. Many pundits and shipowners have called for a ‘screaming buying opportunity’. And, it’s true, quite a few fortunes in shipping, in the past decades, were created by shipowners who expanded opportunistically at the bottom of the cycle. Probably, it’s not a bad time to invest in shipping, but there has to be more than just ‘what’s low, it goes up’ or ‘buy low, sell high’ in the investment thesis.

‘Ships are cheap: Please, think before you invest’ was originally published during Posidonia 2016 by the well-respected Greek business daily Η ΝΑΥΤΕΜΠΟΡΙΚΗ, in the special edition ‘Η Ναυτιλἰα των Ελλἠνων᾽, and reproduced here by permission. For more on Posidonia 2016, please feel free to visit our blog, Full Steam Ahead! The Maritime Blog.


2016 06JUN06 NAFTEMPORIKI Ships are cheap - Please, think before you invest

Ships are cheap!


© 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.

2016 06JUN06 NAFTEMPORIKI Ships are cheap – Please, think before you invest

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Shipping’s new dislocation: the banking system’s ‘safety trap’

Times for most shipping sectors are very tough, by many standards, even if one takes a long-term historical perspective. The Baltic Dry Index (BDI), the proxy for the broader shipping industry in many ways, is almost 100% up in the last forty days – and still, dry bulk vessels barely achieve operating break-even rates on the spot market.

Dry bulk asset prices, despite the recent rejuvenation of the last two weeks, are very low; bulkers older than ten-year-old typically change hands at multiples of their scrap price. The dry bulk freight market has taken most of the blame, since what kind of buyer would like to buy a vessel – irrespective of attractive pricing – and start losing money from the minute they touch them when the closing and delivery of the vessel is in effect.

No doubt the weakness of the freight market deserves lots of the blame. But, anyone, who has been involved with vessel valuations and shipping investments, knows that vessel asset prices are also materially influenced by several more factors, availability of cheap capital being the primary driver among them.

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Shipping’s Old Model. Image Credit: Karatzas Images

Financing for shipping projects at present is typically rather very expensive. Most shipping banks have already left shipping and a few more have been divesting shipping loan portfolios as fast as practically possible. For the banks still active in shipping, very few and precious, they mostly stay away from soliciting new clients – since their existing clientele can absorb their curtailed availability of funds, and without having to undertake the always challenging KYC approval, etc. For new clients to be considered, they have to be “strategic”, with critical mass of fleet of vessels, sound prospects of business success, and sometimes, already recognizable names from the bank’s private wealth departments. Lending against dry bulk vessels is of no interest to the shipping banks now, tankers older than typically eight years of age are too old to lend against, crude tankers are too risky to touch, containerships need to have long term charters, and offshore is off a cliff for now. In short, for a shipping project to obtain new financing from a shipping bank these days, the ship will have to walk on the water, not just keep afloat!

Obtaining equity for shipping is no much easier, as most funds have lost billions and billions chasing a market recovery in 2013 that never came – or was run over by their exuberance optimism and newbuilding contracts, and now they stay away from the industry. Also, equity funds often invest pro-cyclically, when the market is in recovery, and thus the dry bulk’s negative cash flows are a serious deterrent. There are many funds (credit funds) that provide lending in the shipping industry, and they often charge 6-10% interest rates plus some degree of equity participation. And, the market is so constrained for debt financing, that we know several owners (and actually our firm has arranged such financing for a few more), where shipowners are borrowing at such high terms in order to be able to expand and exploit the present state of the market and the historically low asset prices.

The difficulty of obtaining financing for shipping projects has to do with many factors, some originating from the shipping industry but some not. The excesses of the shipping banks, for example, of the pre-Lehman credit boom still have not worked their way through the banking system. There is still an amazing amount of shipping loan portfolios that are priced close to original cost basis, allowing for little else for the banks but to play for time and hope for a market recovery. There are cases where the ‘non core’ bank is not allowed in any way to assist a potential, legitimate buyer of assets with the ‘core’ department of the same bank – forcing many times deals to be scrubbed or consummated at terms clearly inferior to what could had been achieved if the ‘core bank’ could be engaged; the legal limitations and other considerations for need of lack of coordination between ‘core’ and ‘non core’ are appreciated, but one may be tempted to say that regulators have been overshooting in order to compensate for their undershooting a decade ago.

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A newer, better model… Image Credit: Karatzas Images

Another interesting observation on misplaced actions by banks (shipping banks in our case) due to regulation is that at a time of low or even negative interest rate policies (NIRP) and still extensive quantitative easing (QE) by the European Central Bank (ECB), banks go for few, selected, concentrated credit risk, especially when such risk is perceived to be superior that would lead to no losses for the bank. As a result, banks (shipping banks) end up chasing a handful of accounts, whether super-major independent shipowners or top-tier corporates, at razor thin margins. Banks these days would rather lend US$ 1 billion at no more than 150 bps spread to an account they deem superior rather make originate several mortgages of US$ 20 mil each, to solid accounts that do not tick all the boxes, at spreads of 500 bps. For the sake of being optically correct and allegedly minimize the probability of originating a loss-making mortgage, banks concede to cut their margins to the bone and accept concentration on a handful of accounts, while 90% of the lending market remains virgin territory. It’s amazing that our office, in our capacity of advisors and private placement agents, habitually is fielding calls these days from American and European and Asian banks desperate for new projects, but always for deals where credit is superior and always at increments of hundred millions. No project finance, no small or medium owners, no private companies: oil companies, large corporates, stand-out clients of private wealth, substantial end users.

We cannot name names but one can peruse the list of serial buyers of modern tonnage, often tonnage unloaded by publicly listed companies and private equity investors, to get an idea who are the clients the banks (shipping banks) want these days as clients. Rumor has it that such names have billion dollar lines with banks at barely higher than 100 bps spread; a ridiculously thin margin and a ridiculously low cost of funding given that interest rates by central banks are at almost all times lows.

Banks seems to have been boxed not by a “liquidity” trap but by a “safety trap” where regulators and central banks demand high credit assets as collateral, pushing banks to do business for what it is considered safe and not necessarily economic (at a price); some say that present policies have even been contributing to stagnant growth overall. Taking a narrow-focused group on shipping, one may wonder whether the banks (shipping banks) are shooting themselves on the foot and whether they are laying the ground for the next bubble: banks prefer to lend US$ 400 mil to one lender for the purchase of ten modern cape vessels at excess 80% leverage and at 150 bps spread, while will not even contemplate doing forty (40) mortgages at 50% leverage at 500 bps spread for ten-year old bulkers priced at 3x scrap value. Over-concentration on one account and asset class and trade at historically low margins (that likely to hurt the banks when interest rates increase) are clearly preferable, in bank’s point of view today, to broader diversification at robust margins that offer better prospects in the long term but also support the shipping market (including the shipping banks themselves in the short term).

In our humble opinion, the shipping finance market is highly dislocated at present (offering many investment opportunities), but more crucially, it seems that the elements of the next crisis are already incipient in the waters.


Article was originally published in the Maritime Executive Newsletter on May 2nd, 2016, under the title: “The Banking System’s “Safety Trap”“.


© 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 ‘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.

Anchor_hanging

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.

Strategic Developments in the Jones Act Market

The Jones Act market had regularly been front-page news a couple of years ago when, at the top of the market, a Jones Act products tanker achieved $120,000 daily rate for an one-year TC by a major oil company. With shale oil production going strong and cheap money aplenty, lots of attention was drawn to the Jones Act market, and much of such attention was from different type of players, outside the typical ‘shipowner market’ – the seaways transport providers, the providers of one link only in the long supply chain. In the article originally published in Marine News magazine in December 2015 under the title “Trailblazing Transactions in the Jones Act Market”, Basil M. Karatzas contemplates on the market trends of the Jones Act industry.

Given the weak state of the Jones Act market (widely defined to include ‘brown water’ assets, too) and the energy and offshore industries at present, the trend of well-diversified and well-capitalized players expanding in the market is likely to continue…probably the topic of a new article in the near future!

Article can be accessed by clicking on cover page of the December issue of Marine News herebelow.

Article is copyrighted material of Marine News and New Wave Media.

COVER_2015 12DEC MN Trailblaizing Transactions in the Jones Act Market


© 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 MN Trailblazing Transactions in the Jones Act Market