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

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

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

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

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

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

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

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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.

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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

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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.

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© 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.

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

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

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

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Unemployed and unloved… Image Credit: Karatzas Photographie Maritime

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

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

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

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

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

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


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


 

© 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.

Uncharted Waters for Shipping

Having returned from a lengthy business trip to Europe, one has the feeling that something is different this time with the shipping markets. We all knew that the market has been through some rough seas ever since the monumental collapse in 2008, but there almost always were slivers of hope and optimism, that the market would eventually recover and the market correction would just be a port call that didn’t pay well. However, ‘this time is different’ seems to hold water, but in a way that it’s promising.

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Reflecting on shipping … Image Credit: Karatzas Photographie Maritime

The dry bulk market has been the main culprit of the weak market, and the dry bulk freight market has been below operating break-even levels for more than a year now. Even when operating at just $1,000 per diem below market, this means that the owner has to come up with $350,000 per annum just to keep trading one vessel (there have been cases of capes losing $5,000 per diem per vessel, so one can imagine the cash drain for a twenty-vessel strong fleet); this calculation does not include routine maintenance and drydocking, which easily can be a multiple of the operating loss. And of course, the interest and principal repayment on the mortgage are still in addition to all that. For the typical private, independent owner of five dry bulk vessels, it means in the last year alone it burned a $3 mil hole to their cash reserves, just to stay in business. These losses are HUGE (indeed) since cash reserves were low to begin with, thus now many owners have started scrapping against the bottom of their wallet. It’s not only the losses in absolute terms, but also the fact that as one burns their last of their cash reserves, the pain and anxiety and the deathbed confessions start getting the worst of them, and their counterparties, and their friends, and their neighbors. It’s like a summer bush fire that doesn’t take much to get out of hand.

And the bankers of such shipowners do not feel especially comfortable seeing their clients getting another level deeper in the inferno, and having even less ability to survive the market. Lower freight rates have also brought down asset prices which has made the value of the collateral less valuable and likely has triggered anew loan-to-value covenant breaches. Thus, the weakness of the freight market has a spill-over effect on shipping banks. And, for anyone even casually perusing the business press knows that most shipping banks, or banks with shipping exposure in general, have been trying to exit the shipping markets. The present weakness of the market is not helpful or appreciated by the banks trying to dispose of shipping assets and shipping loans. The weakness of the freight market has been shaking, besides the shipowners, the financiers for the shipping industry in a way that allow for little tolerance or additional thoughts to come up with accommodating strategies.

And, as strange as this may this seem, the scenario of sustaining only operating losses is that of a ‘good’ dry bulk shipowner; there are several of this type of small, independent shipowners who also have ‘delivery pains’, so to speak, as they were sucked into ordering ‘cheap ships’ in 2013 without having the financing in place. Now that the deliveries are coming due and there is no committed financing, the option set is bleak: either walk away from the newbuilding contracts and forfeit the down-payment (which would be as high as 30-40% of a 2013-quoted contract, or about $10 mil for a panamax bulker), or raise money at any price and live another day to hope for a market recovery. Both choices are very very painful and both imply value and equity destruction and economic loss.

While dry bulk with its all-time-low record-setting BDI index and the associated news now on the pages of the mainstream business press, other shipping market sectors are not faring much better. The containership market, dear and close to many a German shipowner, primarily, earlier this year was showing signs for a recovery and renewed hope. Now, almost all segments within the containership market are weak, with the monster ultra-large containerships (ULCVs) making front-page news with them being lay-up (a $180-million piece of equipment getting parked, something one does not see every day) or $1.2 billion capital investment U-turns in just six months by major liner companies, while the Shanghai Containership Index having dropped from $2,500 to $500 in just six months (the actual cost of shipping a container from China to Northern Europe). And, the offshore market, which provided a crucial leg to many a shipowner, has now collapsed on the back of collapsing oil (and commodity) pricing. The offshore market also pertains to certain Jones Act assets active in the Gulf of Mexico (GOM) for drilling and support of offshore platforms, and also to modern drillships and semi-submersible offshore platforms – at last count, there are eight brand-new such drilling assets delivered from the shipyard this year with their owners contemplating cold lay-up (that is $800 mil brand-new assets, apiece, that have no employment and their owners will be spending many million per annum just to cold-stack them). Any way one sees it, the options are abysmal. And, the brown water assets in the United States have lost trading volumes due to collapsing of commodities (coal mostly comes to mind), which further negatively has been impacting the Jones Act market, a market that just a year ago was making front page news with its $120,000 pd charter rates for medium-range tankers trading in the shale oil business.

The international tanker market has been the bright star, so to speak, of the shipping firmament in the last year, but many an investor have been having second thoughts. Tanker asset prices have barely improved despite the tanker freight market having doubled over the last year, and many an investor seem keener at selling tanker vessels or stakes in publicly traded shipping companies, rather than taking a longer approach to the sector. Even in the bright tanker market, many an observer think that the present rally is just an OPEC mirage on the Saudi sands.

All in all, three major shipping sectors are under lots of pain and the bight spot (tankers) seem bright enough because the rest of the sky is hazy and dim. The dry bulk market has a long tail of distribution that affects many more owners worldwide, thus dumping the whole market sentiment by association. And, for the owners who are active in more than one market segments, they do not seem to benefit at all from fleet ‘diversification’.

We have been told in the past that shipowners are optimistic people by nature. And, our own experience socializing and dealing and closing deals with them tends to confirm such statement. However, the recent business trip brought to the surface anxiety that has never been seen before or made so patently obvious. They say it’s darkest before dawn, and definitely we sail through dark days. Some want to believe that the dawn is about to break. We certainly hope so. But the smart money seem to think otherwise.

This article was first published on the Blog section at The Maritime Executive website under the title ‘Uncharted Waters for Shipping‘ on November 25th, 2015.


© 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 great disconnect for tanker asset prices

This article was first published on October19th, 2015, at the Seatrade Maritime News, The Daily Insight into the Shipping World at this link: “The great disconnect with tanker asset prices”


The tanker market has been enjoying a robust freight environment reminiscent of the days of the great bull market in 2008, with rates for the flagship sector of VLCCs topping $100,000 per diem. The strength of the market is well-deserved, and one is content to see smiling tanker owners after the brutal 2011-2014 bear market when rates barely topped $20,000 pd for the VLCCs, as per Exhibit A.

2015 10OCT15 The great disconnect with tanker asset prices_EXHIBIT A_VLCC Freight Rates

EXHIBIT A: Average VLCC Earnings Worldwide; Karatzas Marine Advisors & Co.

There has been no real catalyst for the change of direction for tanker rates, but many factors have contributed to a better market. First, the shale oil story in the US has been a game changer in the energy industry, and this has cascaded to the tanker market: the US is not the biggest importer of crude oil anymore, and most of the oil now flows eastwards to China, slightly increasing ton-mile, but mainly, by disrupting established trading patterns and bringing more uncertainty to the market – and, we all know that uncertainty is always good to shipping. Second, the brutality of the bear market had caused immense pain to many a shipowner, pain that actually scared some people off and away from newbuilding contracts and investing money in special surveys which led to increased tanker demolitions, bringing some order of balance in the tonnage equation. And, Saudi Arabia’s decision in November 2014 at the OPEC meeting in Vienna to go after share rather than price margins, an action meant against high cost oil producers, effectively guaranteed a strong tanker market for the foreseeable future.

It seems that at least for now, the trade-winds are fairly favorable for the tanker market: rates are respectable throughout the tanker market, both for crude and products tankers, and the trends of oil trading seem to have some time to run, and crucially the tanker tonnage supply is well defined for the next eighteen months – more or less the time that would be required for newbuilding tanker orders to hit the water. Well, under such circumstances, both tanker stock prices and also tanker vessel prices should have been enjoying a rally commensurate to the freight market rally and the present expectations. However, that has not been the case, to the dismay of shipping analysts, ship brokers, investors, shipbuilders, and ultimately the shipowners.

It’s well known that skyrocketing freight rates always pull up with them asset prices, with some small time lapse of one-two months. Volatility in freight rates leads to ‘asset play’, the favorable way of shipowners hitting the jackpot. It’s well known that shipping asset prices can double, treble or quadruple in a matter of a few short years, allowing for enormous paychecks. Actually, this is the reason that many shipowners and investors and private equity funds have been attracted to this industry in the first place.

2015 10OCT15 The great disconnect with tanker asset prices_EXHIBIT B_VLCC Asset Prices

VLCC Tanker Prices. Karatzas Marine Advisors

The present pricing environment for tanker vessels has been a major head-scratcher. While freight rates have more than doubled in the last eighteen months in the VLCC market (Exhibit B), tanker prices have barely moved higher by 10%, or 20% depending on asset class and vessel age profile. The difference in the order of magnitude is just too big to be attributed to ‘statistical error’ or just to a market anomaly or temporary dislocation. Trying to find out the reason behind the disconnect is not a pure academic inquiry; it has commercial value in the short term, to say the least, and it may imply that the market has changed and new expectations / leads / drivers are prevailing now; and the sooner an investor deciphers the meaning of vessel values in the new environment, the sooner one can dodge the troubles of a changing market or the sooner one can position themselves better for the paradigm shift.

Why this big disconnect?

The overall shipping industry, dry bulk, containerships, and now offshore assets, have not been doing well; actually, the dry bulk market has been making headline news for setting all time lows at the beginning of the year, with little improvement to show since then. The dry bulk market has a much wider ship ownership distribution, with many more owners worldwide, all of them bleeding cash for almost two years now; dry bulk owners are based everywhere, they are conspicuous – despite their efforts to keep a low profile, and they are particularly visible in bankruptcy courts. When shipowners in basically all major segments of the shipping industry are doing badly, it’s hard to see how tanker owners and tanker investors can get exorbitantly optimistic and start bidding up prices to the tune of the freight market. By association, tanker owners and investors are pulled down by the malaise of the overall shipping market.

The years between 2011 and 2014 have been awfully bad for tanker owners as well, and many of these shipowners have burned more cash than they cared to; thus, now after three years of major losses, the focus has been on building up some cash, bring their loans current with the banks, and otherwise setting their financial house in order. Since the years 2011-2014 scared some of the tanker owners to bankruptcy, getting aggressive at this phase of the cycle is a bit too premature for many of them. And, accordingly, chasing tankers to buy and bidding up prices has not been the case; it’s understandable.

When the overall shipping market crashed after 2008, many institutional investors rushed to invest in shipping via joint-ventures with shipowners and vessel managers. Lots of money has been invested in shipping, and not a negligible amount of that investments in newbuilding contracts. The truth of the matter is that many of these investments have been under water, so to speak, and many of these institutional investors have been burned with their shipping investments. Thus, now that the tanker market has been performing well, many institutional investors still do not think that it’s time to bet the farm on the tanker market. They are about to book losses in the dry bulk, containership and offshore markets, or know funds with losses from shipping, and now that the tanker has been strong, the rally has been seeing with a great degree of skepticism.

And, the present rally in the tanker market, as delightful as it has been, it could be best described as a big yawn. It has been extremely timid and well-behaved, even exhibiting the classic signs of seasonality with a weak summer and a strengthening in the fall; there is no violent movement, exogenic shocks to the market like disruptions due to natural or political or events of that nature. A pretty boring rally, once again, extremely welcome and desirable, but with no urgency of the type ‘buy tankers now because tomorrow will be too late to buy’.

Most shipping banks have been departing the shipping industry at present, for their own reasons. It’s fair to say, that debt finance in the form of ship mortgages for tankers is tough to obtain, especially for tankers older than eight to ten years of age. Thus, another reason for tanker asset prices failing to follow up the freight market has to do with the state of the banking industry, and the financial markets overall. For institutional investors like hedge funds and private equity investors, the prospects of shipping have faded of recent, thus, taking away any hope for the asset market to sparkle.

Thus, there are collateral reasons that tanker asset prices have not drawn the strength and the inspiration that the freight market would imply; an overall shipping industry in malaise, with tanker owners looking to build their cash positions rather than expand, and the lack of outside investors and bankers to chase up prices.

One however has to wonder whether there are more fundamental reasons that the tanker freight rally has failed to be more inspiring. For starters, despite the fact that tanker newbuilding orders collapsed during the crisis, the world tanker fleet keeps growing at 3-5% annually, not a negligible pace – especially when given that this is the lowest it can get. And, of course, when tanker freight rates moved up, tanker demolitions almost became negligible, thus the tonnage supply and demand balance has started shifting unfavorably, Further, a commanding majority of the world tanker fleet is newer than ten years of age, a fairly young age, given that vessels have 25 years of design life; and, by now, all single-hulls and other poor quality tonnage have already been scrapped, thus the remaining fleet is young and virile. Additionally, the outstanding tanker orderbook stands at approximately 15% of the world fleet overall, while for certain asset classes like VLCCs, Suezmax and Aframax tankers, the outstanding order is higher than 20%, not a negligible number; almost all these vessels will be delivered with two years from now, thus that impact on tonnage supply cannot be ignored without consequences. Today’s rally is great, but there are headwinds expected before asset prices have a chance to pull up the market.

Looking a bit deeper into the market, one can discern the lack of the strong buying interest from ‘smart money’, shipowners and market players who have the reputation for sensing and timing the market over time, and placing the right ‘bets’. Most reference name Greek shipowners have been conspicuously absent from the sale & purchase market, and similarly for names like Fredriksen, Zodiac, etc It seems that the present rally has failed to impress this demanding audience to open up their wallets (some of these owners have bought tankers, true, but on a much smaller scale than their financial appetite would afford to saturate). Most prominent recent transactions in the tanker market have been with OPM (other people’s money) by publicly listed companies like Euronav and Gener8, companies that their stock price trades below their NAV (their net value of their fleet) in the hopes that they will be able to pull the asset market higher and possibly benefit their own shares.

The changing seascape in shipping has affected many fortunes and still will affect many more. There have been many variables and parameters that have been changing since the market crashed in 2008, and the present disconnect between the tanker freight market and the price of tankers has been an interesting conundrum. If tanker asset prices fail to follow the freight market, is this a paradigm shift for future valuations and benchmarking, or just an indication that the tanker rally does not have real steam for a long, full-sail run?


© 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.

‘Maritime CEO’ interviews Basil Karatzas, again

We have had the pleasure recently to have an exchange of ideas on market developments with the editors of Singapore-based ‘Maritime CEO’, an esteemed publication on international maritime matters with strong focus on the market developments in Asia, and specifically in China. Here are excerpts of our interview:

Karatzas Marine Advisors: ‘Many more ships are begging to be built’

New York: Shipping’s fragile recovery risks being rocked by a wave of new orders, while traditional shipowners are facing a severe funding gap, warns a leading New York-based ship wheeler dealer.

Basil Karatzas is the ceo of eponymous New York ship finance advisory Karatzas Marine Advisors, a regular voice in social media and across a broad range of shipping titles.

It’s not only tonnage demand concerns, but also tonnage supply issues that can limit upside potential for shipowners, Karatzas notes.

“With the forward orderbook getting thin for many yards,” he says, “a shipbuilding industry with effectively unlimited capacity to expand – at least for commoditised vessels like small dry bulk, with commodity prices falling like a rock – and thus lower steel plate and material cost, and newbuilding contract prices, combined with the appreciating value of the US dollar, many more ships are begging to be built; in a low interest rate environment and with many investors desperate for projects to invest, it will not take much to have another major wave of newbuildings.”

Karatzas feels the tanker market at present has gotten ahead of itself – the current rally unlikely to last more than a few months more.

Containerships, meanwhile, do not seem to have much to expect in terms of what Karatzas terms as “pure alpha” from a weak macro environment. “However,” he quickly adds, “absence of alpha does not necessarily mean lack activity in the market, whether consolidation, fleet expansion with bigger ships, etc, as the players in this market are preparing for the next battle.”

For dry bulk Karatzas reckons it is hard to see how the sector could get any worse. “By elimination, the market has to improve, but again, improvement is not always associated with strength,” he says.

Avoid newbuilds and buy secondhand, especially in dry bulk is Karatzas’s advice.

“Given our concerns on both tonnage supply and demand, ordering more vessels likely will not make for a profitable strategy,” he says. “Not only because shipping can ill afford more vessels to be ordered, but also newbuildings still cost too much and do not offer the best value proposition. However, we do think that there are business opportunities to start, grow and expand fleets with vessels in the secondary market.”

Such investment opportunities are all very well for those with ready access to capital, but this is something that is not so easy for the industry’s traditional owners these days.

“Banks implicitly discriminate against the smaller, traditional shipowners,” Karatzas says, “and they tip their hand towards the bigger owners with economies of scale and consolidated financials, critical mass and modern fleets, and encourage the prospect to be meaningful players in the industry for the decade to come, hopefully with prospects to grow and get bigger, and hopefully to access the capital markets and become public companies, if they are not already so.”

The traditional example of the shipowner borrowing from a bank with which they have done business in the past and have established a strong record or debt financing based relationship banking is getting to be a thing of the past, Karatzas reckons.

It’s not that banks have moved to the other extreme of the spectrum only and suddenly became too conservative, but that the new world of banking has changed; shipowners will be forced to change with it, there is little way around it, Karatzas thinks.

Nations such as Greece with some 1,000 owners will likely see a contraction in numbers.

Options for smaller owners are to put their own equity on the table, scale up, get financially sophisticated and look for new sources of capital through corporate finance, institutional investors, private equity and the capital markets. “This is not a turn of events that many smaller shipowners can afford, are willing or prepared to deal with,” Karatzas concludes.

Original text of the interview of the Maritime CEO can be found by clicking on following link: Karatzas Marine Advisors: ‘Many more ships are begging to be built’ 

The Maritime CEO had made us the honor to interview us in the past, in January 2014: Karatzas Marine Advisors: Owners must become more transparent and corporate 

Karatzas, Basil - Maritime CEO 2015

Basil M Karatzas, CEO of Karatzas Marine Advisors & Co.


© 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.