New Market Landscape to Question Commodity Shipping

In a recent article in the Splash 24/7, a debate was initiated on whether shipping is a “commoditized” business. We define “commodity business” as any business or industry whereby there is little pricing power and the product can be procured from many different suppliers with little effort or additional cost (interchangeable product.)

Certain sectors of shipping, such as the cruiseship business, have positioned themselves as far from “shipping” as possible, and their relevance to the shipping industry is limited to the loyalty and romance and affinity they can offer on behalf of the differentiation of their cruiseship fleet to their guests and passengers. For those who have talked with vacationers who are frequent cruiseship passengers, we all have moved by their affection for the cruiseships individually and their loyalty to the brand collectively and the type of cruiseship they cater to. The cruise-line industry has managed to create a clear image for the industry and individual cruiseship companies have created a “brand” and appeal to a certain segment of the market, ranging from the luxury and discerning high-end of the market to the “cattle class” segment of cruising appealing to the younger crowd on a budget. The cruiseship industry is a clear example of a sector in shipping that has not been a commodity and it has created a brand and has charging a premium pricing for its product.

The dry bulk market, however, with the very long tail of charterers – with some of them trading in obscure ends of the globe and the freight cost being of paramount importance, is a highly commoditized business. As long as a dry bulk ship can transport a certain amount of cargo from port A to port B, price is the only differentiating factor: the age of the ship, the quality of the vessel management, the financial strength of the shipowner, and several more factors could easily be sidestepped. A ship with a shiny, bright smokestack would get almost exactly the same freight revenue as a ship with a heavily darkened-from-smog smokestack; and given that the former ship has a higher cost basis (the cost of the fresh paint, at the very least), the owner of the latter dry bulk vessel was enjoying better overall economics. Dry bulk is the least regulated of the shipping sectors and the sector closest resembling what economists call “perfect competition” and staying closest to a commodity business model has made sense. Charterers objectively would barely differentiate vessels besides pricing, and pricing was set by the market, not a shipowner or a ship.

But again, the last few years forced the shipping industry to take quickly many steps at a time: the freight market crashed and controlling vessel operating expenses became critical, new regulations came to effect (whether for emissions or ballast water, etc), bunkering costs could not be neglected by the charterers, etc Therefore, some differentiation started entering the market in an effort to separate the wheat from the chaff. And, large charterers and trading houses, under the luxury or pretense of a weak freight market, have been pushing for higher vessel and vessel management standards in terms of safety, performance, security, accountability, predictability, efficiency, consistence, etc which further allowed some shipping companies to differentiate their “product”.

The tanker industry, having to live with higher standards ever since the tanker MT ‘Exxon Valdez’ became a household name three decades ago, has forced shipping companies to be more cognizant of their “brand” and reputation. The tanker industry is also driven by a group of select charterers (oil majors, etc) who themselves are held to high standards and a few minimum standards we established for the tanker market (i.e. OCIMF, CFR, etc) Still the tanker market is far away from a “branding” strategy when tanker owners can differentiate themselves, but nevertheless there is a higher level of “name recognition” in this market sector.

The shipping industry is a “price taking” industry where the shipowner has to take and accept what price the market offers at any time. Unlike the yacht industry where the customer invests in a “I want” or desire product, in the shipping industry, the customer invests in a “I need” or mandatory product. In the first case, the level of desire can be graded and the optimal product and pricing can be found. In the latter case, the product is a basic need (transport of cargo) which by itself doesn’t allow for price differentiation. However, for shipping companies that have a strategy of differentiating the product at any market price, likely to be more successful in the future.

Since 2008, there have been tectonic changes in the shipping industry. What worked in the past likely will not work equally well in the future. There are many reasons for that and the fact that the landscape of shipping financing has changed is just one of them. It’s hard to create a brand in a commodity-driven market and charge a premium price, but charterers and financiers and the rest of the stakeholders will want to see distinct companies with a quality product. “Me too” shipowners of a handful dry bulk vessels will be pressed hard to stand out in a new market. Setting a shipping company apart from the competition will eat into earnings (once again, shipping is a “price taker” industry) and shipowners will have to deliver more value for every dollar earned.

It’s hard to create a “brand” in a commodity world, and there is little in extras one can offer for a basic need of transporting raw material (hard to abuse most of the time, never complains, doesn’t have any demand for comfort and pampering, etc). The only way really to differentiate and build a “brand” would be by providing the charter with the offering of a better product: a ship with good performance with tight ranges of consistency, performance, etc, by optimizing voyages and minimizing downtime and damage, by having a solid balance sheet and not jeopardizing vessel and cargo arrests, etc. And, in order to be able to offer these and any more attributes that would define their “brand”, they would need a critical mass of a fleet in order to be able to spread SG&A and overhead across many ships, and also being able to obtain competitive financing in a world where shipping finance is tough to be found.

Shipping is a B2B (business-to-business) model where the end consumer has little saying. It would be impossible to have an “Intel Inside” marketing campaign to differentiate the product and drive demand via “pull” by the end-consumer (except possibly in the containership sector), but still, charterers and financiers and stakeholders would like to see a product that stands out in terms of quality and value. Probably such a model may not offer the best profitability that the competition over time, but most likely, it may ensure survivability when the market takes another dive. Charterers likely to “fly to quality” and shipping companies that have moved away from a commoditized world with a better product have better odds of survival.


Article originally appeared in the Splash 24/7 website under the title: “New Market Landscape to Question Commodity Shipping”. 


The containership terminal of the Port of Piraeus: trying to get more efficient with commodity shipping under new ownership. 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.

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

Holy Scrap!

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

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

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

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

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

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

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

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

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

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

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

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

As they say, pain is beauty!

Holy scrap!

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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.

Hanjin’s History Lessons

‘Time is the longest distance between two places’ concludes the Tennessee Williams’ character at the end of the play The Glass Menagerie. For a large number of creditors, vendors, tonnage providers, and predominantly shippers – with $14 billion worth of merchandise packed in containers onboard Hanjin ships, this philological expression was a very hard lesson to put to practice when the company filed for receivership at the end of August.  At present, and with everything going well, the best estimate is that Hanjin’s vessels will be unloaded by the end of October. A very long time indeed for shipping containers ‘lost’ between ports at today’s age.

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In better days… Image credit: Karatzas Images

The developments with Hanjin are still work-in-progress that may take several months, if not years, to settle permanently. For now, it’s a logistical nightmare bordering a legal saga that, in turn, stands on the periphery of the self-feeding financial crisis. Each one of these three parallel worlds will have to run their own course and trajectory, but again, not too far apart from each other. Definitely many lessons beg be learned once all is said and done, and the containers get delivered and the bills get paid, eventually. The fact that Hanjin Shipping has been the largest containership liner company bankruptcy ever (the second biggest was that of the United States Lines in 1986, when the boxship world was still in its infancy) will provide plenty of lessons on where the ‘stress points’ are in the system and the supply chain, and would provide some insight on whether the containership liner industry is a ‘systemic’ industry to the world’s trade.  There have been numerous financial restructurings and bankruptcies in shipping since the crisis ensued in 2008, but almost all of them were in the dry bulk and tanker sectors, where the logistical head-scratchers were much easier to address: usually there is one charterer or cargo owner per vessel per voyage in the dry bulk and tanker markets and not the plethora of cargoes and shippers and vendors with their boxes onboard a containership.

While it will take time to know the fine detail of the numerous parts interacting together in the liner business, a perfunctory view of the case, based on info available so far, indicates that all the factors one would expect to see in the cause of a default in the shipping industry were present in the Hanjin case.

The company, going after market and trying to keep up with the main players in the market, had effectively became a house of cards in terms of over-leverage, financially and operationally. Almost one hundred vessels (out of the 140 vessels under management) were chartered in, effectively with off-balance sheet, non-recourse financing. When the banks and lenders stop lending when one’s balance sheet gets stretched, an ambitious shipowner can just turn to the charter market and can pile up abundantly on tonnage based on their ‘signature’ and their (unsecured) promise to pay. No more than that is needed. Just a ‘sterling’ name and a ‘first class client’, as the saying goes, can be of enough assurance for charter payments and place a tall house a cards in short order. This was once a big deal even back then in 2008, for those who recall.

And, there were plenty of companies and shipowners who had been just happy to offer their tonnage on long term charters to Hanjin, just to show to their own shareholders and lenders that they had cash flow visibility and they were not speculators. Nice long charters with juicy cash-flows that paid until they stopped, that is. It may be worth asking whether such business practice was the result of poor risk management or just a case when no-one really questions whether the emperor may be naked. ‘If so many other tonnage providers had found Hanjin to be a quality charterer, who am I to stop chartering to them vessels’, one almost may be able to hear in a boardroom discussion.

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When days were great… Image credit: Karatzas Images

And, Hanjin was not just any charterer. They had real substance since they were a liner company and had access to the end user. If things turned bad for the market, as they did indeed, Hanjin would have cargoes to move and keep the ships busy and therefore keep making the lease and charter-hire payments. They had access to their own terminals (at least partially), and they had preferential access to S. Korea’s promising and export-oriented economy, and thus, they were supposed to have a backstop if things were to get ugly. As we learn now, a bad market is a bad market and it burns cash for stand-alone owners but also burns cash for strategic owners, like Hanjin, too. Notions of an end-user charterer are great, but again, a bad market can pinch sharply enough to make the pain felt on the bone of an end-user.

And, Hanjin was part of a substantial industrial conglomerate with strategic access to the ‘system’, that is the government and the state banks; it had to, as being a chaebol company, they had the implicit ‘put option’ of the government itself. And beautifully this was played until when the cash burn topped US$ 2 million per diem, and all the constituents had to look for alternative solutions. You can support a company-in-need for so long, but again, all love in this world has to have some limits.  And with Hyundai Merchant Marine (HMM), the local competitor, reaching the restructuring altar in the summer first, there were one too many brides afterwards. There are still many more containership and liner companies that could be considered to have a quasi-government guarantee worldwide. Caveat emptor.

As much as we would like to believe that the Hanjin case will be an example to be held, one has to be doubtful. Time and again, defaults happen in shipping with almost metronomic frequency, and all the times, the same old factors drive those shipping companies to the ground, or the bottom of the sea for that matter: aggressiveness, over-leverage, poor risk management, over-reliance on fundamental assumptions that turn out to be fundamentally wrong, and wishful thinking.

But again, if it were not for all these surprises, shipping would be just any other boring industry. One-dimensional with ships floating beautifully over the ocean. Apparently, there is the dimension of time, at least until one gets their container delivered.


The article above was first published on Splash 247 under the heading ‘Hanjin’s Longest Voyage Yet’ on October 17, 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.

‘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.