The ‘Asset Appreciation’ Play has yet to Leave the Port

The so-called ‘asset play’ investment strategy, buying low and selling high, is a well-known way of generating outstanding profits in shipping. In an industry as volatile as shipping, where freight rates can expand or shrink by a multiple in a matter of months, asset prices can fluctuate substantially over time.  In the last decade, when the market was moving in one direction, asset playing was almost a guaranteed way of making obscene money in shipping.

Not to be held back by the market crash in 2008, the gospel of buying ‘cheap ships’ was the rock upon which many business plans in shipping were based upon. There were so many ships to be bought cheaply from distressed shipowners, from distressed shipping banks, from bankrupt KG funds in Germany, from shipbuilders that got stuck with contracts in default and ships at their slipways.

The ultimate opportunity for establishing a position for a possible asset play took place in 2016 when the BDI reached its lowest point ever since the inception of the index in the 1980’s. In 2016, there were days that good quality dry bulk ships for sale could not get an offer or an interesting party to send an inspection for a pre-purchase inspection. Ten-year old dry bulk vessels in 2016 were selling at a multiple of their scrap value; and tankers and containerships, although better appreciated, were selling at comparably valuations.

There were not many shipowners in 2016 that were not pounding the table for the buying opportunity of the decade if not of a lifetime; a couple of shipowners called for ‘blood in the streets’ buying opportunities at a few conferences. 2016 indeed was a year that many a shipowner would wish they could put behind.

Thankfully, 2017 is a better year, for the most part for dry bulk vessels and containerships, although tankers have been experiencing a deteriorating market at present. The dry bulk and containership markets have improved compared to 2016, and when compared absolute bottom of 2016 to a relative high in 2017, the BDI was up by a four-fold. So enthusiastically and strongly the dry bulk market moved up, that many shipowners with plans to buy ships were crying that the market took off and they were left behind: too late to buy anymore as the asset play boat had left the dock…

There have been a couple of examples whereby dry bulk vessels that were bought in 2016 and sold in 2017 demonstrably doubled in price and fetched their shipowners the windfall of a few million dollars of a profit within a year. Not bad. Not bad, at all. In the last decade, lots of money was made by just flipping ships. As painful as it’s to remind, modern capesize vessels were selling in 2008 well in excess of $150 million and a shipowner missed on the opportunity selling a resale VLCC at that time at an unheard of $200 mil price because he didn’t want to pay a full commission of 1% to a shipbroker. Modern capesize vessels had been sold last year as low as $32 mil and VLCCs can still be had at $80 million. As sweet as the market is when shooting up, it can be brutally ugly on the way down; especially when the asset play is levered to the hilt with ship mortgages and OPM.

From a purely investment perspective, asset play is mostly a speculative vehicle since it’s an opinion that an asset will appreciate and will be resold in a timely manner for a profit. When an asset play takes with shares, it can be easily levered with a margin account in order to amplify the profits. When asset play takes place with currencies or commodities, the leverage (since these are futures contracts, mostly) is astronomical by a multiplier of 100 or even more. In shipping in the last decade, it was a similar investment as ‘investors’ (whether shipowners or speculators) could obtain 90% leverage on loose covenants to speculate, effectively. The sorry state of the shipping industry presently can partially be explained by the ability to immensely speculate in shipping in the last decade with borrowed money.

As said earlier, shipping is a very volatile (variance between peaks and troughs) and we have no doubt that serious money can be made by just timing the sale and purchase of ships.  As long as an investor or shipowner or speculator is right more times than they are wrong, and make more money when right than lose money when wrong, no objections to such a strategy. Risk management will have to be outstanding, and possibly helped with some good luck for one who is a bit superstitious, but an asset play has been known to make money. But, also losing fleets and fortunes when done improperly or not done at all.

We have seen several shipowners in different degrees of exasperation in the last few months about whether it’s too late to initiate an asset play position in the dry bulk market or how right they were last year when ship prices were at rock bottom. And, for the twisted part, how narrow-minded institutional investors have been by refusing to invest now in shipping, especially the dry bulk market.

There are many “loaded” statements in the last paragraph, but we think that when it comes to asset appreciation and asset play, the boat has really never left the port. Two charts based on data for five-year old vessels from the Baltic Exchange (Karatzas Marine has been proudly been member of, and having access to such data) are provided herebelow.

Shipping Asset Prices since 2010 (selective data). Credit: The Baltic Exchange and Karatzas Marine Advisors & Co.

The first graph shows asset prices since 2010, just after the shipping market started finding its footing from the 2008 collapse. There has been volatility in asset prices since then, and money could have been made if the timing was perfectly correct and prompt. However, there has been no clear trend of asset appreciation, despite the great debating that 2010 was still one of the worst years in shipping ever.

Shipping Asset Prices since 2016 (selective data). Credit: The Baltic Exchange and Karatzas Marine Advisors & Co.

Paying closer attention to the graph with asset price since January 2016, the asset value curves are practically as flat as any highway in the great state of Texas (we lived there for fifteen years!), despite the minimal improvement in prices in 2017. It’s correct that older dry bulk vessels (appr. ten years old) experienced most of the volatility and appreciation in asset values in the last twelve months – and not five-year old vessels, but again, two points are clear: a) when it comes to asset appreciation and playing the market to benefit from increased asset values, the boat – it seems – has never left the port, actually – the lines are flat, more or less; and, b) when it comes to asset playing in shipping, it’s easier said than done in times when there is no clear market trend, and a strategy best left to professionals in the market, especially to those able to be playing with their own money or substantially own equity or their seed funding, which would have to be substantial, in our opinion.

There are many more fine nuisances when it comes to asset playing, and given our expertise and line of business as shipbrokers to banks and institutional investors and independent shipowners, and as vessel appraisers and investors in shipping – on our own right, we have seen first hand what has worked in the past and keeps working over time and business cycles, and what ‘asset play’ projects act as a people’s exhibit that ‘a sucker is born every minute’ when it comes to ‘buy cheap ships now’.

But again, the volatility in shipping and its ‘saltiness’ are what they make this industry so easy to be passionate with. And, yes, the saltiness of the seawater is added bonus of what it makes this industry loveable, too!

There are many good reasons and ways to be invested in shipping at present; the ‘asset play’ boat has not left yet the port, in our humble opinion, though.

Idling harbor tugs hoping for a market whereby ‘asset play’ is an investment strategy! Image credit: Karatzas Images.


This article was first published on July 6th on the Splash 24/7 website, a well-respect shipping news portal with original content under the title “The asset appreciation play has yet to leave the port”. We are grateful for their trust in hosting our article!


© 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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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.

When Ship Scrapping is an Industry’s Best Hope of a Favorable Wind

Holy Scrap!

When one wants to express strong astonishment, ‘Holy mackerel!’ is a nautical expression that does the trick well. We heard this expression (in British English, that is) many many years ago by a Brit who had beached on the Louisiana coastline in the US Gulf a few decades earlier.

There are a couple of theories for the origin of the expression, but the most plausible holds that since mackerel is a fish that goes bad very fast, fishermen in old England were given extraordinary permission by the church to sell their mackerel catch on Sundays. ‘Guests and fish stink in three days’, the wise Benjamin Franklin astutely once observed, but mackerel is worse than that. And if the church is willing to grant permission to do business on the Lord’s day, there has to be a sacred excuse, and thus the expression.

The expression came to mind while reading a market commentary on the fact that the just passed IMO regulation demanding 0.5% sulphur content in bunker fuel by 2020 will lead to a scrapping wave strong enough to bring a much wanted tonnage balance in the shipping market. In a lousy shipping market, this was a ‘Holy mackerel!’ moment, the way we saw it.

Or, ‘Holy scrap!’ to be more precise; nothing could be more sacrosanct than scrapping in the present market!

The IMO regulation has the potential to be a costly catalyst for the shipping industry, by as much as $40 billion by some estimates. For an industry in distress, additional costs and mandatory investments are the last news one wants to hear about. Complying with the new resolution, a shipowner would have to retrofit a vessel to burn high quality marine diesel fuel low in sulphur, install scrubbers to arrest pollutants and lower emissions or, thirdly, convert the vessel to be powered by natural gas or another low emissions fuel; all pricey solutions that will cost a couple of million of investment per vessel, a tough proposition for a shipowner in a weak market.

Scrapping however is a long shot as an alternative course of action.

Deciding to sell a vessel for scrap is one of the hardest decisions a shipowner has to make, and literally, this is the last decision they will make after exhausting every possible scenario. Selling a vessel for scrap is a terminal and irrevocable decision and quite often entails taking losses in today’s market. Even if there is a ray of hope and an alternative, the shipowner will decide to hold off selling the vessel for scrap. Old age, obsolete design, tonnage oversupply, new regulations, etc are not always definite reasons for scrapping.

With OPA 90, following the grounding of the infamous tanker ‘Exxon Valdez’, single hull tankers were given an expiration date for January 1st, 2015 to be totally removed from the trade. A long lead-time indeed for shipowners to plan for that resolution. What effectively happened was that although there were no single-hulled tanker newbuilding orders since the late 90’s and publicly listed and politically correct shipowners divested off of their single hull tonnage soon thereafter, almost 14% of the world’s tanker fleet was still single-hulled in January 2010, twenty whole years after the new regulation came into place and five years before the final ‘drop dead’ date. Regulations or not, shipowners, worldwide and collectively, effectively kept ‘obsolete’ ships in the market much longer than anybody would had anticipated.

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Scrapping activity is an inverse relationship of the freight market. Credit: Karatzas Marine Advisors & Co.

The first decade of our century experienced once-in-a-lifetime freight market on the back of China’s expansive growth and easy credit by lenders, which partially explains how single-hulled tankers were kept afloat for so long. Actually, all being equal, the strength of the freight market is a best predictor of the level of scrapping and tonnage withdrawals from the shipping market. As long as freight rates are cash flow positive, ships are not getting scrapped; when the freight market is cash flow negative and prospects for a recovery are poor, then demolition levels pick up. The following graph of the Baltic Dry Index (BDI), the proxy for the dry bulk shipping market, clearly shows the inverse relationship between the index and scrapping activity. There seem to be a two-three month lag, but each time the BDI drastically moves, the scrap yards in Alang, Gadani and Chittagong get to hear about it, one way or another. Earlier in 2016, when the BDI was flirting with all time lows, demolition activity had spiked through the roof, approaching 10% of the world fleet. A few months later with the freight market barely above break even for the dry bulk market, scrapping has more than halved, to the disappointment of analysts and investors who were drawing straight line annual projections based on the activity of the first few months of the year. Scrapping is high still today, to be sure, and comes from many sectors, including containerships, but the moral of the story is that scrapping does not seem to be the convenient and sacrosanct solution that always seem to be.

There is a third case of disappointment in scrapping: after the shipping market collapsed in 2008, still cash rich shipowners and institutional investors were aiming at buying dirty cheap ships from shipping banks. When the banks held back from selling at any price, at least then, many a shipowner and especially an institutional investor jumped on the wagon of ‘eco-ships’ being fuel efficient that would make ships held by the banks obsolete. And, a massive wave of newbuilding orders was placed. Fast forward five years later, and we all now know that the fresh deliveries of better eco-ships failed miserably to force older tonnage to the scrap heap. Brand new ships, and modern ships, and older ship, and old ships have kept floating and trading and depressing the freight market for all. The wave of demolitions triggered by the eco-design deliveries crowding out older tonnage, shown in Power-point presentations to Wall Street, has failed to materialize and save the market. Holy scrap was not!

We do not want to discount the importance of scrapping to achieving a balanced market. Actually, at this stage of the cycle, scrapping seems one of the most promising drivers for the market; shipping is so bad, indeed. And the new regulations by the IMO for lower emissions will push some shipowners to the edge, and some ships to the beach. However, likely, in our opinion, scrapping will be a slow remedy that will be more drastic with the level of the pain of the market, that is the state of the BDI and the rest of the freight market.

As they say, pain is beauty!

Holy scrap!

reflection-on-water_propellerrudder_red_piraeus_kpm_jul2015-3

Never easy to say ‘Good bye’ in shipping. Image credit: Karatzas Images


This article was originally was posted on Splash 24/7 under the title ‘Holy Scrap’ on November 1st, 2016.


© 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 abysmally low dry bulk market has a silver lining

Following article was originally posted on the Maritime Executive website under the heading ‘Silver Linings in a Cloudy Shipping Landscape’.


The precipitous decline of the Baltic Dry Index (BDI) and the multiple readings of all-time lows earlier this year have brought the state of the abysmally low freight market to the front pages of the international business press. Effectively, earlier in 2016, all dry bulk vessels afloat, irrespective of age, size and trade, were making $3,000 pd, if and when they could manage to find a cargo. $3,000 pd is below operating breakeven for all types of dry bulk vessels, well before taking into consideration the financial cost and drydocking provisions. For any business covering only variable cost, the future cannot be too effulgent.

While indeed low freight rates will prove too painful for many shipowners owners and shipping lenders, regrettably, we are of the opinion that the miserable state of the market is actually its greatest hope as well. Indeed.

The market collapse in 2008 was too fast and condensed to leave any survival agony; and, coming after the good years of the super-boom cycle with many owners were still in a very very good mood and with piles of cash in the bank, the impact and the lessons the collapse in 2008 were fast ignored. Shipowners and institutional investors alike, failing at sourcing cheap ships from the banks, went to the shipyards and ordered massive numbers of vessels in almost every segment. While the world fleet was fairly young in 2010 (slightly over ten years of age, on average), buyers of new orders were aiming at building fleets with a lower cost basis (lower shipbuilding prices than boom years, often also subsidized with export credit) and better fuel consumption (think ‘eco design’). As a result, at the end of 2013, the outstanding dry bulk orderbook ballooned to 22% of the world fleet, with certain asset classes (35,000+ dwt handies, 80,000 dwt panamaxes and Newcastlemax / capes topping 50% of the outstanding orderbook of same asset class). Given the required couple of years lead-time for the delivery of a vessel, the present implosion of the BDI is partially the result of the newbuilding wave in 2012-2014. However, in the present crisis, new orders for dry bulk vessels placed in 2015 dropped to appr. 18 mil deadweight from apprx. 67 mil in 2014, an almost a 75% decline. We see this as a silver lining in the world of the dry bulk market.

Covering only variable cost entails hard management and trading decisions, and none is costlier than dry-docking a vessel and having soon to see them on a beaching yard. The low dry freight environment saw a largely expanded demolition schedule in 2015, with close to 31 mil deadweight tons scrapped vs appr. 16 mil scrapped in 2014, an almost doubling of demolitions, courtesy of the continuously weak freight market. Checking the flip side of the coin, appr. 49 mil deadweight was delivered in 2015 vs. appr. 48 mil deliveries in 2014, a miniscule increase; again, courtesy of the weak freight market, cancellations, slippage and other market retardants.   Taking a combined look for deliveries and scrapping, in 2015 actually the rate of increase of the world dry bulk fleet decreased actually in 2015, an always encouraging sign when supply declines. Just another silver line in a cloudy sky.

Taking a longer look on the tonnage supply picture, there has been a shipyard consolidation in China in the last year, with many yards, admittedly many greenfield yards, going out of business. Accurate data out of China are always precious to find, but we estimate that the dry bulk shipbuilding capacity in China has shrunk by a third in 2015; there is always the danger that these simplistic shipbuilders can easily come back to the market, but we are encouraged in the silver lining of decreasing shipbuilding capacity.

A great deal of the outstanding orderbook has been fueled by China’s credit boom of the last years, including subsidies and export credit for newbuildings orders placed in China. Again, news about China has to be taken with a grain of salt, but it seems that easy credit and/or export credit will not be available any time soon for those ordering more newbuilding vessels; besides, it’s difficult to extend credit in a cash flow negative market. Just another welcome silver lining on the horizon!

The collapse of the market in 2008 attracted for the first time many institutional investors to shipping, who invested in second hand vessels, shipping equities and bonds, but mostly ordered vessels for all their heart could content. Opportunistic money bear partially the blame for the present state of the market, but such blame has been very expensive too: in general, most investments by institutional investors in shipping are under water at present, figuratively speaking; it’s hard to quantify the losses for the overall market, but for publicly listed companies, calculations can me made with certain degree of accuracy: Lloyd’s List recently published that Scorpio Bulk, backed by institutional investors, realized a $400 mil loss from the ordering and disposal of 28 capesize vessels, an approximate 30% value destruction on the original investment. Anecdotal evidence suggests that 30% is the present losses across the industry, realized or not by institutional investors in shipping. Based on the estimate that $30 billion were invested in shipping post-2008, $10 billion are now in the bottom of the ocean. One can be sure that after such losses, no many institutional investors want to hear about newbuildings, which in our opinion is the silver-est of linings in this bad market: keeping opportunistic investors away from expanding market capacity.

The present cycle is really painful and it’s unavoidable that many shipowners will file for projection or bankruptcy; many investors and lenders stand to realize more losses in shipping in the coming year. It’s a pity, really, but that’s life. We are of the opinion that a protracted and extremely bad market is actually a good thing for the market in the long term; owners will default, banks will get aggressive with owners, ships will be forced to be scrapped sooner or later, and hopefully sooner than later, investments will start taking place on fundamentals and not on gut feelings and investment themes (‘eco design’ has to be one for the ages). Fewer people will be around in shipping when the bloodbath is over, but they will be bigger, better capitalized, better organized and managed, and better positioned for a changing future.

We want to view the present pain in the market as growing pains that needed to make one strong. BDI is bad, but no despair is needed. There is good to come out of this ugly mess.

Hamburg_Cranes Panoramic_Silver Lining_BMK_9721_FEB2016 @

Actually, there is a silver lining despite the lack of ships at the dock… Image Credit: Karatzas Maritime 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.

Shipping’s “This time it’s different…”

They say there is never a boring day in shipping, but, at present, we suspect that there are a few people who could do with just a tad of less excitement in this industry. The overall shipping market, as encapsulated in the Baltic Dry Index, has been on a race to the bottom.

Talking with shipowners worldwide, even with the ever ebullient shipowners in Greece, the mood for the market is of doom and gloom: persistently weak freight rates in the dry bulk market have burned cash reserves, eroded vessel values and brought on charter defaults and unilateral demands for negotiating down rates; filings for protection and announcement for restructurings are daily fodder of the trade press; a relatively young world fleet that may look prematurely old by an approximate 17% outstanding orderbook; mining companies have been warning investors for several years of weak cows in terms of recovery for commodities; anemic world economic growth and bloated balance sheets of central banks – courtesy of the credit boom years of pre-Lehman days – and interest rates in negative territory; and above all, the greatest riddle of all, a Chinese economy that has only been managing to deliver negative surprises of recent.

No doubt, the market is bad.

Hamburg_St Michaelis_Rickmer Rickmers_BMK_2582 FEB2016 @

The way it was… Image Source: Karatzas Photographie Maritime

Volatility is the shipping industry’s daily seascape, and bad days in shipping are nothing unheard of. Low freight markets happened in the 1980’s and 1990’s in recent memory, and actually the downturns in those times were bad enough to bring the undoing of many a ship-owning company and respectable names in shipping. The market collapse in 2008 was also ferocious and precipitous, and caused a few owners to seek protection or even go under. However the present down-cycle seems to be uniquely viciously painful.

For starters, this is the first real down-market that a whole new generation of people in shipping (including ourselves) have ever experienced. In 2008, the market dropped fast and ferociously, but it was a time of great uncertainty overall, and there was a synchronized effort to keep the broader system afloat; young people in shipping only got a chance to see a flash of a bad market. This time in 2015, there are no flashes but only fireworks from every direction, and there seems to be a limited arsenal of options to face this market, especially in a novice’s mind.

Post-2008, shipowners were still cash-rich from the great days of the cycle. Shipping banks only had to ‘extend and pretend’ and buy themselves some time, and central banks and regulators were still easy to accept amended definitions of valuations and performing loans. And, institutional investors and private equity funds were salivating to enter an industry that came down to earth, and plenty of money was on the sides. The collapse of 2008 seems, in retrospect, was a prova generale for a freak show that never arrived, or possibly arrived seven years later.

At present, after almost of two years of negative cash flows, many shipowners have burned a lot of cash just waiting for the market. Many have also bought dry bulk vessels in the interim, which at present, it seems to had been an overly optimistic act as both asset values have been decimated and also these acquisitions turned out to only burn cash, at least so far; thus, there has ‘negative carry’ for both old and newly established positions. While in 2008 shipping banks, for their own reasons, were willing to offer a helping hand, at present, many shipping banks have actively their shipping loans up for sale and they have been sealing their way out of the shipping industry. Shipping banks not only do not offer a helping hand any more, but they have left a huge funding gap behind them, with an immediate impact seen in asset pricing where buyers stay away from new acquisitions, partly due to lack of financing; partially, vessel prices have collapsed further feeding the negative loop. And lack of financing has been affecting newbuilding deliveries and further deterioration of the cash position of shipowners; the undesired result with such deliveries is that while they cost too much money for the owners and likely will cause some owners to default on a project or corporate basis, these vessels will eventually find their way to the market, providing more competition. And this is a market when mining companies warn for several years of weak demand, and a market where the balance sheets of central banks are bloated with assets-of-less-than-stellar quality while experimenting with negative interest rates in a desperate effort to kindle growth.

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„Flüsternde Wellen“ (Whispering Waves): Image Credit: Karatzas Photographie Maritime

The presently bad shape of the market will take some time to play out given the structural imbalances in shipping, but also in the commodity and financial markets. Fiscal policies world around have little room to bring around a miracle. The crisis of 2008 that never came has fooled many people and pulled them into aggressively going long on the market. Shipping always has turned around in style, and it will happen again. However, this may be the time for shipowners to think strategically and with a long term in mind; the trading and transactional nature of shipping played well when ‘risk on’ was the theme, but now it’s the time – a bit late actually, but better late than sorry, to minimize risk and position strategically for a market driven by a new set of variables.


This article first published in February 16th, 2016, at Splash 247 under the title: ‘Shipping Reset’.


© 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.

Low and Dry: For how long?

Since the Baltic Dry Index (BDI) established all-time lows in February this year – as per graph herewith, the ensuing negligible recovery has only driven deeper the belief that the dry bulk market (and likely other shipping sectors) may be in a structural market trough. Rates have marginally improved since February, but the truth of the matter is that most types of dry bulk vessels barely earn their variable cost (operating expense), not to mention financial cost, capital repayment and profit. The market has been terrible for almost a year now, meaning that dry bulk shipowners are just bleeding cash; even at a small operating loss, let’s say at $1,000 pd, that’s $350,00 per annum per vessel, and for an owner of ten dry bulk vessels that’s $3.5 mil. This is before interest expense is factored in, repayment of the ship mortgage, etc While for the publicly listed companies their quarterly reports wash over casually over the computer screen as the Red Sea (or sea of numbers in red), it takes a ‘field trip’ and to ‘feel their pain’ of the private owners.

There is telltale evidence of anxiety about the direction of the market. There is anecdotal evidence that many shipowners have been cutting down on their vessel maintenance expense, spare part inventory on-board, and warm lay-up of the vessels. For the vessels that are inspected, there has been an ever growing concern that many vessels have been neglected and that ‘cheap ships’ may just be that: ‘cheap ships’ in need of keep-up. For the few shipping banks still open for business, the dry bulk market is a ‘do not touch’ market segment, irrespective of the prospects. Cyclical thinking and lack of liquidity has kept many buyers away from the market, further depressing asset prices, which in turn causes more owners to default in this death spiral. Asset prices for dry bulk vessels have declined by 20% to 50%; in a glaring example, a ten-year old panamax dry bulk vessel – as per graph herewith – has declined in value from appr. $21 mil in May last year to appr. $10 mil today, a precipitous drop and a halving on one’s net worth and economic value. Looking back at data for more than two decades, this is as low as that this particular asset class has even been, so at least on absolute terms, this is close to the bottom of the market. It’s hard to fathom that a ten-year old dry bulk vessel was once valued at more than $70 mil in 2008, so, if the market ever returns to its previous glory, theoretically, buyers at today’s levels will make a killing. But again, even a small bounce in the market can be a generous return of capital; asset prices and dry bulk freight rates move about fast, and if for some reason there is an improvement in a depressed market, a 10%+ improvement can take place very easily; at the very least, it will be completely unexpected.

Panamax Bulker 10yr old prices_KMA_JUN2015

Historical Prices for 10yr-old Panamax Bulker (Karatzas Marine Advisors & Co.)

Actually, there are ‘smart money’ out there that are thinking just about that. The dry bulk market is in very bad shape and the mood is terrible; not sure if the proverbial ‘blood in the streets’ describes the present bottom of the market, but definitely it’s a buyer’s market: bad prospects and confidence (for instance, almost nil interest for long term charters, indicating that charterers do not believe in a strong market recovery, etc), more sellers than buyers in absolute terms, more motivated sellers than buyers in ‘soft’ terms, consensus that prospects are terrible, no easily found debt financing or any type of financing, many institutional investors are putting their own pressure on the market as their premature investments in shipping are turning out badly. However, newbuilding orders have come to s screeching stop and fewer than thirty dry bulk vessels were ordered year-to-date. On the other hand, close to two-hundred bulk vessels were scrapped; as per attached graph, so far this year, the world’s dry bulk fleet has gotten smaller as more ships were scrapped than delivered, signifying that actually tonnage supply is contracting which is exactly what this market needs; and tonnage supply is one of the major drivers for asset pricing as we all know from Econ 101.

Tonnage demand and movement of cargo has been increasing all along; of course there have been revisions by OECD that world economic growth is slowing and that China has moved away from stock piling raw material inventories that used to spike the market on occasion. Volumes to be traded are still available and ton-mile is still increasing, thus demand is still there. Thus, the underlying fundamentals are still positive, it’s only a matter of timing that there is a mis-match of tonnage supply and demand.

Dry Bulk Feelt Development_KMA JUN2015

Historical World Dry Bulk Fleet Development (Karatzas Marine Advisors & Co.)

The smart money wonder whether the market swing has moved too much on the ‘half empty’ camp, with owners giving up on hope and charterers being too exposed to the spot market (with little long term coverage, thus making them trigger-happy once the market start moving the other direction). This can become a catalyst to magnify any market move to the upside as charterers will rush in to charter vessels (whether spot or short term) and driving artificially high tonnage demand with pent-up demand. With every weekly report of high demolitions, one can almost feel the collective deep breath of relief as this definitely helps the market find an equilibrium sooner than later; the news that no newbuilding orders are placed is delightful news both in terms of actual constraining of tonnage supply, but also it has the ‘sentimental’ value that at a time of crisis, no new ships are ordered, which is what is supposed to expect in a situation like this (and in 2002-2013, of course, but then between the eco-design and structural recovery and institutional investors rushing in, it didn’t happen). While tonnage supply can definitely increase over long term, at least for the short term, one can see that vessel deliveries are well known and accounted for, and likely to surprise on the downside (as some owners delay accepting delivery or push backward to the delivery deadlines). With every passing week of weak freight rates, more and more owners are making the decision to scrap vessels instead of drydocking and scrapping is not a stigma or more easily justified when the neighbors are doing it as well. Tonnage demand in the interim is constantly there and growing providing a support for the market; and the market has already been discounting bad news, thus leaving more surprises on the positive, that can move the market upwards substantially in the next year, especially if there is an unforeseen event that can drive the market strongly.

Yes, the dry bulk market is terrible. As we mentioned in a previous post, this terrible shape of the market may actually be a good thing over the long term; the smart money have started thinking that this weak market is a good thing in the short term as well.


 

© 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.

Data Analysis and Shipping

The state of the dry bulk market has been making big news to the extent that mainstream business publications have started covering the market and offering pontifications on what may have gone wrong; just a year ago, the mood was much more constructive, and effectively, people in the market believed – and voted with their wallets – that the darkest days were behind us.

China has taken some blame for their un-expected slow-down has negatively been affecting shipping; miners and captive cargo interests have been blamed for building up their own fleets and thus shaving the ‘peaks off the market’. Shipowners have been blamed for overbuilding (again), thus giving substance to the adage that ‘shipowners are their worst enemies’. And, institutional investors and the famous private equity funds are taking some the blame for supporting the oversupply wave as plenty of money has been invested directly at the shipyards or through strategic partners.

DSC_0011 copyProbably blame has to be shared among several variables, as usually no-one cause is ever the absolute factor for a market shift. We suspect however, that another cause for the present state of the market is the way markets and trades have been modeled and analyzed and have been expected to behave. In the aftermath of subprime crisis, it has been shown that residential real estate data in the US going back for a century were limited to certain areas of New England; that however didn’t stop analysts extrapolating the data for the whole US, east to west and north to south, agrarian, urban, suburban, industrial and tourist destinations, all in one single model and providing credit instruments on effectively unrelated asset classes under the same model; even for a novice, it’s not too difficult to see that a mortgaged farm house in Iowa has little to do with a mortgaged ocean front property in La Jolla, California, besides both being administered under US bankruptcy law. However, the need for data to analyze and model led to collecting and extrapolating wrong data (or limited data) and too many assumptions were made in order to built a business model. Likewise, the human factor was minimized as this is not easily quantifiable and easily correlated with market performance; one can see the human factor typically with stampedes and massive moves – which often are associated with black swan events – but otherwise are related to the footnote of the model.

How come the present state of the dry bulk market caught too many people by surprise, including institutional investors who are seasoned in the game of predicting the market and turnaround situations, investors who typically are known to be the smartest people in the room?

A lot of decision making has been dependent upon modeling, typically by young analysts with little experience in the maritime industry and insufficient understanding of the ‘soft’ issues in shipping. Typically models for shipping projects are transplanted from other industries, and they are expected to work in shipping – since they have worked out in the past in other industries. Collecting and accessing detailed data in shipping is hard to do, and there are a couple of well known databases that are providing asset prices, freight rates, etc Such databases have become the ‘bible’ for many an analysts; shipping projects where databases do not provide twenty-year time-series are automatically rejected, even if it’s about the sale of gold bullion at discount price; if there are no long term data, sorry, no deal – indeed. By default, most investors populate the asset classes with most historical data, thus certain asset classes / segment projects becoming more competitive since funds now have the data ‘to get their hands around’ them. Regrettably, data are not always transparent and universal or of a liquid state; several reports, for instance, report one-year, three-year and five-year time-charters in certain asset classes; as anyone who has worked a single day at a charter desk can attest, long-term charter markets are usually illiquid, often extremely illiquid and quite often this rate is the broker’s gues-timate of the five-year charter – since there is no active market. This is the most extreme and obvious example where data are created out of thin air and investment decisions are made on data made of thin air. And, quite frankly, there have been projects of thin air in shipping just because of this. Go figure!

DSC_0080 copy_Alster_kenney bridge trainUsing market data in a superficial way often can be hilarious, or frustrating, but most unprofessional when done by professional investors and money managers. We were working with an institutional investor who after long hours of ‘educating’, they opted to buy two handysize bulkers from a Chinese shipyard at $16 mil each, at a time when a well-known industry database was quoting such vessels at $22 mil. This was the benchmark for their decision making, and they managed to buy at distressed price, as per the fund’s masthead on their website. How they could be wrong? For starters, those vessels were in the market for sale for more than six months and there were no takers; for people long enough in shipping, the Chicago School of Economics efficient market model is a theorem derived of experience: if you see a $100 bill in the street, likely it’s false as the market is efficient and someone else should have found it earlier; good priced vessels lingering in the market for six months never happen, even in bad markets. Then, these handysize vessels were the first vessels ever built by this Chinese shipbuilder (‘greenfield yard’) on their own account; again, the fund was happy, since the vessels were properly classed by an independent third body, the Chinese Classification Society. In our professional experience, we know that several million dollars are required to bring ‘greenfield yard’ projects to par, if that is doable at all – since a great deal of such tonnage will be looking for better days at a ship-breaker’s yard – that’s the sad sorry of truth. The morale of the story is that the institutional investor used a benchmark price to make an investment decision; although they obeyed their mandate to buy ‘distressed’ (or value, as it is advertised), they used wrongly the benchmark; for most people in shipping that was a sucker’s investment. And, do not let the model fool you for a second.

Data providers are building up their databases with additional information and timeseries, including discounted cash flows, algorithmic vessel valuations, market projections, etc While in the past operating shipowners were controlling the market, now financial investors are becoming more crucial, and thus the need to feed them with more data. We are very fond of more data and ‘big data’, but on the other hand, we are also suspicious of providing cookie-cutter models where there is little ‘checking under the hood’. It’s not that the data are wrong, but always accurate data in shipping are hard to get on timely basis and often there is the need for due diligence in qualifying the data – we see it every week in the sale & purchase market with reported sales and reported prices: not always what it meets the eye. Giving an analyst data, a model and assumptions to run, often all these provided under a sell-side business model, it’s a scary combination. Projects are qualified or disqualified for the wrong benchmarking, and the market is getting distorted for the wrong reasons.

We are not sure that the present shape of the market is caused by wrong benchmarking, but when the so-called ‘masters of the universe’ have a model even for the wind, probably there has been a butterfly effect somewhere that was missed.

But again, there will be more articles similar to ‘The Expensive Shipping News for Wall Street’s Smart Money’ recently published in the Financial Times.

Who said that shipping is an exact science?


 

© 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.