Topical Insight and Current Developments in the Maritime Industry

Basil M Karatzas and Karatzas Marine Advisors Quoted in the News

We are delighted that Karatzas Marine Advisors & Co. and its founder Basil M. Karatzas have been the trusted and insightful source of market knowledge and intelligence for all things maritime; with prompt and accurate access to market information, a vast network of resources and paramount access to senior executives worldwide, in the shipping and complimentary industries, the company and its founding partner have had a front row seat to today’s developments in the maritime industry.

We always thought that we have had a strong advantage over the competition and nothing gives us higher pleasure than seeing our expertise appreciated beyond a constant deal-flow and boardroom discussions with our clients, and in the pages and the trust of the international business press.

Recent media quotations for Basil M Karatzas & Karatzas Marine Advisors:

Need help to buy a ship or jet? Credit Suisse looks to lure super-rich            (Reuters, November 6th, 2017)
This Reuters article explores Credit Suisse’s unique approach to shipping whereby only the top and wealthiest names in shipping that are worth of the bank’s prestigious private wealth management service can still obtain loans for commercial ships or a yacht or a jet… Smaller shipping clients of the bank, whether performing or not with their loans, are “encouraged” to take their business elsewhere.

Investment opportunities in shipping could perhaps be the best in over 30 years’ (Splash 24/7, October 17th, 2017)
“The prospects for dry-bulk have not looked so promising in some time now,” Basil Karatzas, a Splash columnist, said. However, Basil Karatzas qualified the statement by adding that “Hopefully the improved prospects for the market will not be another excuse to kill the market in the bud.”

How protectionism sank America’s entire merchant fleet                                            (The Economist, October 5th, 2017)
This year’s hurricane season and Puerto Rico’s predicament brought to the surface the politics and economics of the Jones Act market. Without necessarily taking a position on the matter, Basil Karatzas is quoted in the ever insightful and prestigious The Economist.

Shipping may gain from Mexico grain pain                                                                    (Lloyd’s List, September 22nd, 2017)
Anti-globalization talk is not always bad for shipping; counter-intuitive, but true. Just look at Mexico’s grain imports.

Shipowners Rejoice Over Rising Demand for Commodities                                      (The Wall Street Journal, September 22nd, 2017)
2017 has been good for the dry-bulk shipping industry. Not an exceptional year and actually the threshold was too low given the abysmal market in 2016. However, on the strength of commodities trading and importation, dry-bulk vessels, especially capesize vessels, have seen the market to quintuple.

Global Shipping Trends: China Cosco Buys Orient Overseas                                      (The Diplomat, August 16th, 2017).
An interview with Dr Mercy A Kuo and the esteemed publication The Diplomat, an international affairs magazine for the Asia Pacific.

China underlines shipping ambitions with $6.3bn takeover of HK group                (Financial Times, July 9th, 2017)
Commenting in the Financial Times on state-owned Cosco acquisition of Orient Overseas International (OOIL) in Hong Kong

China’s Cosco to Buy Shipping Rival Orient Overseas for $6.3 Billion                        (The Wall Street Journal, July 9th, 2017)
Commenting in The Wall Street Journal on state-owned Cosco acquisition of Orient Overseas International (OOIL) in Hong Kong

Trying to see through the fog…even from the shore, the sea can look overwhelming… but always a charmer and a generous giver to those who dare… Cape Cod, MA, USA 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.

Advertisements

Looking at Shipping’s Crystal Ball for 2017

We are pleased to reproduce an article that Karatzas Marine Advisors & Co. was invited to contribute for BMTI’s annual review earlier this year. BMTI is an independent research firm which produces daily and bespoke reports in the dry bulk market with special emphasis for smaller tonnage, MPPs, and other specialty assets. Their website can be accessed by clicking here, please pay them a visit! To read our article, please click on the icon herebelow.

pages-from-pages-from-b-2017jan-02-bmti-report-2

© 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.

pages-from-b-2017jan-02-bmti-report

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.

2016-10oct29-holy-scrap-article_graph

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.

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.

Panama Puente de las Americas BMK_0479 @

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.

Varela_Panama_The Great Connection JUN2016

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

Karatzas & Varela Rodriguez IMG_4537

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

Save

Save

Save

Save

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.

2nd Naftemporiki Conference

                                                      Basil M Karatzas

                                                        presenting at

                                     2nd Naftemporiki Shipping Conference

                                        Athens, Greece, January 26th, 2016

A4_banner_ENG_2

A crisis is a terrible thing to waste, it once has been smartly said.

Ever since the collapse of the freight market in 2008, the shipping industry has been struggling to establish a new baseline. It was not only the precipitous decline in the freight market, but also geo-political and macro-economic developments, fiscal and monetary actions and reactions, financial and banking industries’ new enhanced regulations that have been causing stormy waves for the maritime industry.

The recent establishment of all time lows by the Baltic Dry Index has been a chilly reminder that the industry keeps facing an inflection point. The present crisis may be an opportune time for the industry to strategically face and position itself for the new parameters that will set the work-frame for the industry for the next decade, especially for shipping finance, a crucial variable for this capital intense industry.

Naytiliako_728At the 2nd Naftemporiki Conference, the shipping finance panel will address the latest developments of the industry, and especially:

  • Shipping banks are ever more selective with the shipping industry. Is this the end of the ‘ship mortgage’ era? Would corporate finance be a better replacement?
  • Who and how the funding gap left by the shipping banks will be covered? Are alternative and credit funds a temporary solution?
  • Private equity investors have not fared well so far, on average, with their shipping investment. How they could react to their underwater positions? Will they double-down or exit massively at a loss?
  • What happened to the capital markets and the promising wave of Greek shipping IPOs of the last decade? Has the well gone dry?
  • Are the capital markets the way of the future?
  • Are presently the shipowners properly prepared to navigate today’s financial markets and requirements? How can they position themselves best?
  • Would a changing financial and banking market will force some shipowners to leave the industry?
  • How a small / medium-size independent shipowners office will be defined in five years and how such an office will be structured?

These and many more relevant question will be addressed and discussed in-depth at the shipping finance panel of the 2nd Naftemporiki Conference.

We are hopeful that the challenging times of the industry will be resourcefully navigated by the descendants of Odysseus, and the present crisis of the industry will be the springboard for ever greater success for our national industry.

We hope to see you at the 2nd Naftemporiki Conference.

A4_banner_ENG_2


© 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.

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

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

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

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

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

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

Prisco Elena_Tanker_Statue of LIberty_WM

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

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

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

Rudder, Propeller, Red Hull_reflection LR

Unemployed and unloved… Image Credit: Karatzas Photographie Maritime

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

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

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

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

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

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


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


 

© 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.