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

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

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

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

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

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

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

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

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

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


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


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

© 2013 – present Basil M Karatzas & Karatzas Marine Advisors & Co.  All Rights Reserved.

IMPORTANT DISCLAIMER:  Access to this blog signifies the reader’s irrevocable acceptance of this disclaimer. No part of this blog can be reproduced by any means and under any circumstances, whatsoever, in whole or in part, without proper attribution or the consent of the copyright and trademark holders of this website. Whilst every effort has been made to ensure that information here within has been received from sources believed to be reliable and such information is believed to be accurate at the time of publishing, no warranties or assurances whatsoever are made in reference to accuracy or completeness of said information, and no liability whatsoever will be accepted for taking or failing to take any action upon any information contained in any part of this website.  Thank you for the consideration.

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Waiting for the Shipping Market Recovery

The Baltic Dry Index (BDI) is in the news as it keeps setting new old-time lows recently; on Friday February 13th, 2015, the index settled at 530 points; hard to fathom that on May 20th 2008, the index reached an all time high at 11,793 points, dwarfing the present reading to just 1/25th of its past glory.

The market consensus is fairly bearish at present; unlike the drop of the markets post-Lehman Brothers that was fast and furious, the present decline is excruciatingly slow and painful, almost like torture. No-one has been claiming that shipping had worked out the problems of the super-boom years of the cycle, but frankly, most of the problems had been concentrated in the containership market, mainly with KG ownership and mainly financed by German banks, with the rest of the market doing marginally well for most of the time, give or take the typical ‘animal spirits’ of the volatile industry getting our of control on occasion. The ‘pain’ of the (bad) market was contained; however, dry bulk vessel ownership is widely distributed both geographically and also in terms of shipping-owning companies. The BDI is considered a proxy for the overall shipping industry for the reason that the dry market is bigger and broader than any other segment of the industry.

The consequences of the low market are expected to present themselves in the market place sooner or later. Already, the Danish vessel operator Copenship A/S was forced to file for liquidation and return their chartered-in fleet to their owners. Publicly listed dry bulk owners are reporting diminishing cash reserves, fast draw downs on their lines of credit and continuous negative cash flows from operations. The weak state of the dry bulk owners and the prospect of bankruptcies add to the headaches of the shipping banks, thinking that the worst was behind them and only containership problems remained before moving forward. Dry bulk owners with an eye for long term prospects and value-priced vessels have completely withdrawn from the sale & purchase market, at least until they see a bottoming of asset pricing, further pulling lower asset prices and jeopardizing any shipping loans with strong asset-value covenants. Shipowners with strong dry bulk orderbook and imminent deliveries are facing the prospects of employing their brand-new ships at charter rates well below their operating break-even; and, just last week, Scorpio Bulkers (ticker: SALT) announced the conversion of three capesize newbuilding contracts to product tankers and an immediate write-down of $22 mil from the transaction.

What has gone so wrong? Looking at the demand side, world economic growth is not remotely close to that in the late 1990’s or ten years ago (2004 – 2007) when the economies of developed countries were growing by several hundred basis points annually, and the economies of developing countries, BRICs and all, were leapfrogging forward at rates well in excess of 5%. Over the couple of years, it has become apparent that the lost decades of the Japanese economy are not over yet, Europe has been dragged back by political and monetary concerns, China has been slowing too much even by their own standards in their effort to shift their economy from investment to consumption (and get rid of corruption in the interim) while only recently the US economy has been a bastion of growth (mostly driven by consumption and boosted by plummeting energy costs) at rates moderately above 1%. In the interim, since January 2010, the world’s dry bulk fleet has increased from approximately 460 million deadweight to 760 million deadweight, that is 65% over five years, more than 12% average annual growth. In terms of number of vessels, the world’s dry bulk fleet moved from 7,350 vessels in January 2010 to approximately 10,500 vessels in January 2015, keeping pace tantamount to the deadweight growth. Given the minimal level of demolitions, tonnage supply outstripped demand by a league.

Graph_Dry Bulk Freight Market Snapshot

Dry Bulk Freight Market Snapshot (Baltic Indices since 2009) Karatzas Marine Advisors & Co.

What brought such exuberance, irrational or not? In the dark days of the business cycle, the debate was on whether the recovery was going to be ‘L-shaped’ or ‘W-shaped’ or ‘V-shaped’. As per attached graph with the Baltic Indices, by 2010 there was a picture of optimism for a market recovery, strong hopes indeed that this was going to be a V-shaped recovery and that those were the times to go long. The market had stabilized and capesize vessels on occasion managed to reached impressive freight levels, boosting even more hopes for a ‘V’ as in Victory. Shipbuilders lowered their prices, the ‘magic of the eco-design ships’ promised to make newbuildings money makers from the day of their delivery, and institutional investors rejected by the banks to buy ‘cheap ships’ found solace by piling up on orders at the shipyards. All along, shipowners keen to prove the adage that shipowners are their worst enemies did their own piling up on orders, whether with sweat equity, co-investments or sponsored by institutional investors, on the premise that ‘shipping is not a team sport’ but rather a ‘zero sum game’, thus orders of efficient vessels do not matter if they increase supply as long as fuel efficient ships crowd out existing tonnage (whether good, bad or indifferent).

Hindsight is perfect as they say, and the purpose of this article is not to assign blame on how and why the orderbook got out of hand. However, looking around, one has the sense that history teaches little over the cycles. Still, one can see lots of money on the sidelines waiting be to be invested, in shipping or not. And, as long as interest rates are low, it takes little for potential investments to look profitable on the drawing board. The outstanding orderbook has dropped by a lot over the last year given the state of the market, and there is even talk that shipyards will be going out of business. We opt to see the low outstanding orderbook as a concern causing more headaches to the markets rather solving the current market slump. In less than a year, the shipbuilders will be very low on their forward book and will be dropping margins and prices to get new orders; and shipbuilding capacity in the dry bulk market is very elastic, especially for smaller tonnage. There is plentiful supply of iron ore and coal as the miners have invested exorbitant amounts of money to bring big projects to market (and thank for shipping, it will be dirty cheap for a while to bring raw commodities to the shipbuilders). Thus, there is money to be invested, there is shipbuilding capacity available and plentiful and cheap commodities to keep the shipbuilding assembly line going.

So much for the V-shaped recovery.


© 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.

 

BMTI Outlook 2015 – Shipping Finance Prospects in 2015

We were honored recently to contribute an article on ‘Shipping Finance Prospects in 2015′ for BMTI’s Outlook 2015 Annual Report,a annual review where market practitioners summarize the evens of the year past and attempting to foresee developments in aspects of the dry bulk market overall and its several niche markets, from freight rates and asset prices to developments in shipping finance. We republish excerpts from the report herewith, our article on shipping finance trends already in progress or likely to be of importance in the coming year.

Winter waves

Beautiful but choppy waters… (Image source: Karatzas Photographie, http://www.basil-karatzas.com)

Articel can be found be clicking here!                                                                             2015 01JAN BMTI ANNUAL REPORT_Karatzas 2015 Outlook

BMTI GmbH is an independent research firm and international shipping dry bulk market data provider based in Berlin, Germany. They produce daily fixture reports, market reports, Shortsea shipping reports and customized upon request reports in the dry bulk market. For more information on BMTI GmbH, please feel free to visit their website as per below:

BMTI – Daily, Independent, Dry Cargo Shipping Markets Analysts & Reporters

BMTI – Daily, Independent, Dry Cargo Shipping Markets Analysts & Reporters


© 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.