A Wishful Port Called Consolidation

The maritime industry has been facing headwinds for almost a decade now: chronic tonnage oversupply, intermittent demand growth, new trading patterns, heightened level of regulations, new technologies and vessel designs, and more recently, the prospect of a global trade war.  It’s not easy being a shipowner, if ever it was.

Besides the obvious “academic” solutions of self-discipline when it comes to newbuilding appetite and accelerated schedule of ship demolitions, little can be done strategically to alleviate the industry’s woes.

Since the early days of the present decade, the concept of consolidation has been mentioned as a solution with the best hope for mitigating the industry’s problems. Conceptually, fewer and bigger owners could better sustain the weak times of the industry by sharing overhead and expenses across larger fleets, by having higher fleet efficiencies, and by affording more competitive access to capital; a market dominated by fewer owners can also employ strategic efficiencies whereby fewer players would be more disciplined at ordering newbuldings and also providing a united front against the demands of charterers.

Notable names of the shipping and the finance worlds have been advocating for industry consolidation for some time now, most conspicuously then-private-equity-shipping-investor and now Commerce Secretary Wilbur Ross. Proponents of consolidation have drawn their conclusions mostly from other industries than shipping, such as the steel industry in the case of Wilbur Ross; and, there is a strong body of academic research and case studies taught at business schools supporting the case of consolidation. On the surface, consolidation has saved the steel industry from chronic losses (although ironically part of the current trade war discussion is driven by the consolidated state of the steel industry having cost thousands of jobs). Likewise, the airline industry, via consolidation (and also chronic waves of bankruptcies), have reached now a point of high utilization and profitability, as any weary traveler can attest to these days.

No doubt there are economic benefits for the players in a market that has undergone consolidation; on the other hand, we think that certain markets and industries are more prone to consolidation than others, for many reasons.

Let’s follow the empirical approach to see what has happened so far in this maritime field:

Wall Street and institutional investors are big proponents for consolidation in the shipping industry. Image credit: Karatzas Images

In the tanker market, after Frontline’s failed effort to acquire DHT, the got critical mass to defend itself by buying the BW VLCC fleet, catalyzing, in turn, Euronav’s acquisition of Gener8 Maritime (itself the product of merger of General Maritime and Navig8 Crude Tankers). There is little merger activity in the rest of the crude tanker market, with the exception of Teekay folding two “daughter” publicly-listed companies into one, and also  acquiring the Principal Maritime crude tanker fleet. In the product tanker market, Scorpio Tankers acquired Navig8 Product Tankers in 2017, while recently BW took a bow with publicly listed Hafnia Tankers. If there is a lesson to be learned from merger activity in the tanker industry is that these are a handful of transactions among already sizeable players who are publicly listed and/or driven by institutional investors or financially-oriented managers behind them. The typical, average tanker owner has been least affected, or bothered, at least so far. However one slices the tanker market, there are almost 15,000 tankers of all sizes with a few thousand shipowner groups worldwide; if all these tankers and owners were to be consolidated into groups of big companies, investment bankers in shipping would be among the richest people on this planet.

In the dry bulk market, Star Bulk, publicly listed and driven by institutional investors, have been growing the size of their fleet by acquiring Augustea, Songa Bulk, and Ocean Bulk in the past. Golden Ocean acquired the Quintana capesize-focused fleet, and potentially the acquisition of the CarVal Investors dry bulk fleet by Good Bulk can be considered a case of consolidation; there are a few more meaningful transactions with privately held companies (most the Angelicoussis and Zodiac groups) acquiring massively, and surgically, shipping assets in the secondary market.  There is no doubt that there has been much more S&P activity in the dry bulk, but nothing to qualify as consolidation. The dry bulk market is often described as the textbook case of perfect competition, and as such, it makes little sense to buy (and retire) dry bulk shipping companies – the companies have little to offer in excess of  the stripped assets. Again, zooming out on the sector, consolidation so far seems to be with mostly sizeable companies, publicly listed, often driven by institutional investors, and almost always payment taking place – at least partially – in shares. There is still a very ‘long tail’ of small shipowners in the sector. And, there are more than 12,000 dry bulk vessels and several thousand shipowners active in the market; once again, investment bankers in shipping should be voted happiest people on earth if consolidation was ever to take hold in this market segment.

Just like consolidation in shipping, the bigger, the better… or, the sky is the limit! Image credit: Karatzas Images

Onto a shipping sector with a more disciplined structure, the containership liner market, it would appear that consolidation has offered a proven solution to this market over time; from almost thirty liner companies in existence in the early 1990’s, the number now stands at fourteen (14), a clear trend of consolidation over the last two decades. Again, there does  seem to be the same consolidation pattern of this market segment: most of these companies were big companies to begin with, often publicly listed or owned / managed by sophisticated investors in a market segment with relatively high barriers to enter; nothing new here. Looking onto smaller regional market players, the market has been much more fragmented, and allegedly ripe of consolidation. Some of these regional players are publicly listed or some of them run by investors and financiers, but it’s hard to discern a consolidation pattern on the surface. Probably the transactions that stand out in this sector are those of KG owners that are driven by shipping banks to consolidate, most notably MPC Container Ships, the Zeaborn and the Claus-Peter Offen groups that have keep absorbing smaller players such as Cido (containers), E.R. Schiffhart, Rickmers Linie, Ahrenkiel, Conti, etc (some of these transactions involved also MPP vessels).  And, there has been the absorption of many more smaller KG houses and vessels that popped up in the last decade jus because of the exuberance of the KG market in Germany. What all these stories of consolidation have in common, in our opinion, is that most of these target companies had their financial base completely wiped out, the management teams had no ‘skin in the game’ but mostly, German shipping bank have effectively forced ‘shotgun marriages’ (read consolidation) in this market. Otherwise, left to its own devices, it’s questionable how much consolidation would had taken place in this segment.

Despite the obvious benefits in the shipping market by a less fragmented ownership distribution, with fewer and more stable players, it’s still a very long way, in our opinion, for the industry to really get to appreciate consolidation. It’s been vividly implied in the discussion above that each segment in the shipping industry is driven by slightly different factors, but it’s abundantly clear that consolidation so far has been driven by a confluence of financial owners (this includes shipping banks) building up on the critical mass of already sizeable companies and where egos can be forced aside by the prospects of economic benefits and payouts, often in the form of paper (shares).

For the several thousands of shipowners worldwide, especially when they are the founders of shipping companies or have some sort of competitive advantage (captive cargo, access to terminals, etc), consolidation would be a tall order. Consolidation favors bigger players, but still smaller players can be shaping the market for longer than hoped for.

Darwinism in known to work, but it takes a notoriously long time; economies of scale make for more efficient shipping companies, but again, this takes time. In Darwinism, let’s not forget, some species become extinct. Probably for some shipowners, unless extinction becomes their only choice, consolidation will be getting little attention. The financial markets and shipping finance can impose their will on shipping forcefully, but likely consolidation in the shipping industry cannot be material in the near future, at least for commodity shipping.

Article originally appeared in Lloyd’s List on September 7, 2018 under the heading “Consolidation Players Go Hungry“.

© 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 Maritime Industry Hopes for Silver Lining as Talks of Tariffs Escalate

Talk of possible trade wars has kept executives in a wide range of industries at the edge of their seats; this is even more true for people in the maritime industry, which  afterall is the hauling provider on a global scale. Trade wars imply lower trade volumes, which would be a monumental concern to the shipping industry.

The New York Stock Exchange. Image credit: Karatzas Images

Intuitively, trade wars are bad for the shipping industry; tariffs and higher barriers to trade result in lower trading volumes that lead to lower demand for ships, and that, in turn, results in lower freight rates. However, nothing is as simple anymore in today’s world: higher tariffs can also lead to disruption of established supply chains, which, in the short term at least, can mean longer and less efficient paths between manufacturers and buyers, which could mean a lengthier than normal supply chain.  Talks of dismantling NAFTA, for instance, has led Mexican importers of grains to substitute imports from the U.S. with imports from other countries, primarily from countries in South America. U.S. grains to Mexico are mostly shipped from the ports of Texas and Louisiana to Veracruz in Mexico in a week’s long sailing voyage; however, Mexican imports from South America take twice as long to transport, and, all being equal, this shipping trade has been beneficial for the (international) shipowners.

Trying to assess the impact of possible trade wars on the maritime industry and try to plot an optimal strategy are in the minds of small and large shipowners alike worldwide. If a shipping company, for instance, was planning for an expensive fleet renewal, the potential of trade wars likely to be a cause to chart a new course of action. Who wants to be investing in expensive new ships when the prospects are less than rosy?

There are many permutations of possible scenarios of international trade wars as there are many variables; mostly, however, there are many theories and lines of thinking, as well as egos involved, and also grave political implications to consider, or ignore that could affect potential outcomes. On one extreme, there is the scenario for maximum tariffs on an international scale that could lead to a complete collapse of trade; at least for now, the probability for such a catastrophic scenario seems slim, thankfully. Focusing on the more likely scenario of small to moderate tariffs but where logic and economic sense would still drive decisions for the most part, it seems to be a more probable scenario.

A consideration to ponder is that the U.S. strategy so far seems targeted on imposing tariffs mostly on finished-products imported to the country, and such tariffs seem to be encompassing many industries and also being most disruptive to the supply chains; for example imports from China often have been sub-assembled in other countries and the supply chain in these countries is impacted too. China, Canada and Mexico so far seem to apply a more surgical approach by placing tariffs on mostly raw materials and commodities that concentrated political impact and relatively small collateral damage to the supply chain.

International trade bridging the seas… Image credit: Karatzas Images

Under a probable scenario of moderate tariffs and under the current modus operandi, different segments of the shipping industry will experience a varying degree of disruption.  The containership industry likely to experience a direct negative impact as import containers are mostly filled with consumer and other end products. Head-haul trade routes from China, whether to the West Coast or via the Panama Canal to the East Coast of the U.S. seem to stand at bull’s eye, but the impact  will percolate to other trade to Europe and other smaller traders localized trades. Earlier in the summer, there has been a noticeable increase of input volumes in U.S. ports and strong export data have been reported out of China; this positive impact has mostly been attributed to seasonality, as some of the peak season volumes were moved forward to dodge the first round of tariffs imposed in early July. The heightened trade due to timing considerations is expected to taper off and eventually volumes to tick downwards. Liner containership companies with their modern, huge boxships, especially those with focus on the China to North America trade, stand to be impacted most.  Localized containership markets that feed on the main trading routes had been the bright spot of the long-challenged containership market in the last couple of years, but now there are signs that smaller feeder containerships are getting off-hire at an alarmingly high rate.  It seems that pro-actively charterers opt to stop renewing charters in anticipation of reduced need for trade.

One of the great surprises in the energy world in the last decade has been the success of the shale oil production in the U.S. that potentially can make the country a net exporter for oil. Energy seemed to be getting a free pass from tariffs, but with escalating threats, now it seems to be fair game as well.  China and Far East are the biggest consumers of oil these days, and slowly the success of the shale oil in the U.S. was forming into a new trade of exporting crude oil from Corpus Christi in Texas to China via supertankers (VLCCs); this potentially could had been a game-changer trade for the crude oil tanker market given the large ton-mile numbers involved and also given the overall disruption in the trading patterns for VLCCs. This trade now seems in jeopardy, although just earlier in the week it was announced that Trafigura was still considering building a deep sea oil export terminal in Texas; but again, just this week, Chinese stated-controlled Unipec was suspending oil imports from the U.S., rattling the crude tanker market. To the extent that long term contracts will be honored or competitive pricing for U.S. shale oil can be obtained, there is a scenario of petroleum product tankers benefiting from the trade as well, whereby refineries will be focusing more on export trades. The U.S. natural gas LNG trade could also be adversely impacted by tariffs, and this is most unfortunate as the LNG tanker market desperate needs some hope in chronically oversupplied market; in addition, U.S. LNG export infrastructure is still being built up, and talks of tariffs possibly will stall some of these much-hoped-for projects.

The dry bulk market seems to be least impacted from talks of tariffs as the trade concerns mostly commodities and raw material used in the first steps of industrial production. For now, these trades seem safe, and, in the case of the grain trade to Mexico mentioned earlier, and grain trade worldwide, this would be a downright positive development for the shipping industry. Tariffs on Chinese steel will eventually catch up with China’s imports of coal and ores from Australia and Brazil and could negatively affect big-sized dry bulk vessels (capesize and Newcastlemax vessels).

The shipping industry is impacted by a wide range of factors, and the impact of tariffs is not isolated or easily quantifiable, and definitely at this stage, still much is unknown on how tariffs will be applied in terms of products, levels, reciprocity or exemptions, etc; on the other hand, no doubt some shipowners will find talk of trade wars a convenient excuse to blame for the industry’s and even their own companies’ structural problems.

Shipowners internationally have maintained a sanguine approach to talks of tariffs and trade wars. To a certain extent, this is understandable as the shipping industry has proven to do better at times of conflict, high uncertainty and interrupted trading patterns. On the other hand, continuous talk of trade wars can sap investment and trade sentiment, and trading volumes, that cannot be good for shipping. Or, anyone else.

© 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.

Captain’s logbook entry for ‘strategic acquisitions’ and ‘smart money’

With the holidays behind us, shipping slowly returns to daily routine of moving cargoes (we should never forget what shipping is all about) and everyone having a stake in the industry is trying to figure out where the market is heading in terms of freight rates but also in terms of momentum, expectations and consensus thinking.

In terms of freight rates, the market’s proxy index BDI started the year by dropping anchors showing a 30% drop since the last reporting day of 2013 on Christmas Eve; the capesize index caused most of the drop with about a decline of 48% over the same time. The news is not as bad as it looks (really!) and actually it was to be expected, since charterers are ‘looking hope’ (as they say in auto racing) where cargoes have to be one month or more in advance, the run up in the end of the year was partly seasonal; also, heavy rains in both Brazil and northwestern Australia caused Vale to declare force majeure for iron ore exports over the holidays which pushed shipments into 2014; and, new environmental laws coming into effect in Colombia since the beginning of the new year have halted coal exports from the country.   Likewise, the implementation of an export ban of raw commodities from Indonesia has tied up in the country several vessels in laden condition unable to sail.   Tanker rates have also been softening since the end of last year with the exception of Suezmax tankers that have seen their rates jump to more than $70,000 pd due to heavy fog and delays in the Straits of Bosporus.  In our opinion, rates will drop more in the very near future before they start recovering going to the celebrations of the Chinese New Year.

In terms of market activity, the year started impressively with two transactions that were finalized during the holidays.

In the dry bulk market, the Scorpio Bulkers (ticker: SALT) has continued their buying spree by announcing the newbuilding orders of twenty-two more vessels (twenty capesize vessels and two kamsarmaxes) for a total consideration of approximately US$ 1.2 billion; all orders have been placed with Chinese yards and a couple of the vessels will start delivering as early as 2015 Q1, but with the majority of the orders delivering in 2016. No breakdown of pricing has been provided but it seems that capesize vessels were ordered at about $55 million per vessel and the kamsarmaxes at about $36 million per vessel. Based on this transaction, SALT’s fleet mounts to 74 vessels in three assets classes (ultramax, kamsarmax and capesize) with about eight million cumulative deadweight. Since the company’s inception less than a year ago, the magnitude of the orderbook is impressive and it’s an all-out ‘bet’ by the management and the equity investors for a sustainable market recovery in the dry bulk sector (in addition to the sustainable market recovery of the tanker market where sister company Scorpio Tankers (ticker: STNG) has also a nineteen-vessel strong existing fleet and 65 still one order and total deadweight of 7 million.)  Equity investors stand to profit handsomely if the market recovers as modeled, but there have been voices of concern that such extensive overall newbuilding activity could delay a market recovery, ameliorate any possibilities for intense, volatile or even sustainable recovery, and also that the vessel management of such a sizeable fleet may not benefit all parties involved equitably.

EURONAV VLCC MT FAMENNE (2001) (Image source: Euronav)

EURONAV VLCC MT FAMENNE (2001) (Image source: Euronav)

In the other headline news of the first week of the year, Maersk Tankers has finally found buyers for their VLCC fleet of fifteen vessels owned by their Maersk Tankers Singapore Pte Ltd subsidiary for a total consideration of US$ 980 million. The AP Møller-Maersk group has been re-aligning their priorities since the new CEO Nils Andersen took over the reins of the group in 2007 (joining from Danish brewery Carlsberg) by divesting businesses and assets that do not strategically fit the group anymore as the emphasis shifts to the containership and ports business; just this week, AP Møller-Maersk agreed to the sale of its stake in supermarket division in Denmark Dansk Supermarked for the amount of US$ 3 billion. Maersk Tankers has been looking into the sale of their VLCC fleet since early 2013, as matter of strategy, and Peter Georgiopoulos and General Maritime with Oaktree as the primary investor have been associated with the potential sale.

Early in 2013, the only way to generate any excitement in the investment community about VLCCs was to put the words ‘VLCC’ and ‘demolition’ in the same sentence; however, the fortunes of the market improved in the second half of 2013 as rates more than tripled from the year average of $16,000 pd by the end of the year, mostly for reasons that we do not exactly deem them to be ‘fundamental’, including the premise that China will be buying excess US shale oil on VLCCs if/when an oil ban export materializes in the US and also the premise that ‘things cannot get any worse in the VLCC market’ and thus a contrarian bet was appropriate. However, the resurrection of the VLCC freight rates caused a few transactions in the secondary market to take place, notably the acquisition of four VLCC tankers by the Navios Group, one vessel by the Capital Group in Greece, and the ordering of seven newbuilding VLCCs from none other than Scorpio Tankers.  These transactions tried to instill some degree of conviction in the market, and mostly managed to establish an updated record of vessel valuations in the VLCC market; sale of modern VLCCs in the secondary market as arm’s-length-transactions has been a dead market in the last four years, so, any valuations were mostly extrapolations and pontifications from broker reports. Pricing of the fleet has been crucial for many reasons as many institutional investors were keen in a ‘contrarian investment’ in the VLCC sector but only at pricing to reflect such probability. On the other hand, despite Maersk’s impeccable name as a vessel manager and operator, buyers were/are extremely selective in terms of vessel specifications and quality when freight rates have been hovering at break-even points; also, it is known that Maersk Tankers owns a few of the most expensive VLCCs in the world at present as they placed their last orders in September 2008 at the very top of the market, and certain market reports had those vessels ordered at US$ 140 million, each, at that time; obviously, exact details cannot be known, but there is a chance that Maersk may negotiated a price discount afterwards given the severity of the financial meltdown post Lehman Brothers and the strength of their signature.



The fifteen vessels acquired by Euronav have an average age of fours years and an average price of about US$ 65 million, which is considered to be a very strong price based on broker report benchmarked prices (about 12% higher than ‘market consensus’.) Obviously, there is a ‘transaction premium’ since this is a transformative transaction for Euronav with a pre-acquisition fleet of 35 vessels (only 12 of which are VLCCs/ULCCs) and quite a few of the vessels were sisterships and coming from a ‘good stable’. Also, a ‘transaction premium’ had to address the sellers’ relatively high cost basis and any accounting issues. The vessels were MT „MAERSK NAUTILUS”, MT „MAERSK NAVARIN”, MT „MAERSK NEPTUNE”, MT „MAERSK NUCLEUS”, MT „MAERSK NECTAR”, MT „MAERSK NAUTICA”, MT „MAERSK NOBLE” and MT „MAERSK NEWTON” (307,500 DWT, 2006-2009 built at Dalian Shipbuilding), MT „MAERSK ILMA”, MT „MAERSK ISABELLA” and MT „MAERSK INGRID” (318,500 DWT, 2012, Hyundai Heavy Industries), and MT „MAERSK SANDRA”, MT „MAERSK SONIA”, MT „MAERSK SONIA” and MT „MAERSK SIMONE” (323,000 DWT, 2011 & 2012 built at STX Shipbuilding.)

Euronav will finance the acquisition with an immediate capital increase of US$ 50 million and a total capital increase of US$ 350 million (to be authorized by the Board) issuing additional shares at about EUR 6.70/share, US$ 500 million debt facility and US$ 235 mezzanine financing; the following funds BHR Capital LLC, Glendon Capital Management LP, GoldenTree Asset Management LP, Solus Alternative Asset Management LP, and York Capital Management Global have committed to the immediate and future capital increases.

There are couple of observations from the transaction: buyers expect that the VLCC market will eventually improve substantially and that the acquisition will be accretive to the investors; Euronav operates the Tankers International pool that has access to cargoes and COAs; however, the company is still an independent shipowner whose success and financial performance will be highly correlated to future freight rates and market conditions. A bigger fleet post-acquisition offers economies of scale and operating efficiencies, but efficiencies will get so much mileage out of any acquisition; also, Euronav will be hopeful to use this opportunity to have a secondary listing on the exchanges in the US and springboard their access to the deeper draft capital markets. The ‘wisdom’ of this transaction will have to be evaluated in the future and will be highly correlated to market conditions.

The second observation is that both strong contenders for the acquisition, Euronav and General Maritime, were dependent on the participation of institutional investors and private equity funds. It seems that one of these buyers got a better reception this time from the investment community, but again, it has to be noted, none of the institutional investors in the Euronav acquisition have institutional knowledge of the shipping markets.  As a corollary to this observation is the conspicuous absence of certain potential buyers: there were no oil companies or traders or refiners or any type of companies that have great access to cargoes that would like to hedge their freight costs. For example, wouldn’t a Chinese oil company or a Chinese shipowner affiliated with crude oil imports to China be a strategic buyer? Why not? The price of the deal was not right or do they have better plans?  Also, one cannot talk about VLCCs without thinking of present market ‘shipping king’ John Fredriksen and his VLCC companies Frontline and Frontline 2012; with the Norwegian over-the-counter market superhot last year, probably it would have taken a quick stroll for ‘Big John’ to round up a billion clams to get the deal wrapped in very short order. Fredriksen is not shy of acquisitions, whether for assets or companies, and of his existing fleet of about 240 vessels (under different corporate entities and market segments) with about ninety-six (96) vessels on order, lacks any newbuildings in the VLCC market, not even as a specimen (actually sold for demolition recently 1998 & 1999 built VLCCs.) And, as a matter of track record, VLCCs operated under the Fredriksen umbrella (Frontline and Frontline 2012) have been known to constantly outperform the Euronav fleet, on certain quarters by a long league of US$5,000 – US$10,000 pd per vessel.

One can observe that there have been no ‘smart money’ interest for this transaction, at least at the prices that took place.

Quo vadis?

© 2013-2014 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 herewithin 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.