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.

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Consolidation and Shipping: A Cure for All?

Since the initial collapse of the shipping industry in the second half of 2008, many remedies have been proposed for a market recovery, ranging from pragmatic (slow steaming, etc) to utopic (accelerated demolitions for older tonnage, shipowner self-discipline and abstinence from newbuildings, etc). Depending on the point of view, remedies proposed included M&A, market consolidation, selective financing from banks and financiers, etc

The consolidation theme has been particularly in the news for the last several years, and now that five years into the crisis there is no clear light at the end of the tunnel, consolidation once again has been commanding the headlines. At a recent shipping conference in New York City, eminent institutional shipping investor Wilbur Ross once again re-iterated the need for market consolidation.

Consolidation definitely has its usefulness as any investment bank can attest to. An industry with a relatively low number of companies controlling a rather large market share can have a better control of the cost structure, quality, product differentiation and more importantly better pricing power than an industry that is fragmented and controlled by numerous small players. Shipping, especially the dry bulk market, has often been offered as an example of perfect competition with minimal barriers to entry, minimal regulatory and taxation concerns (at least until recently), an internationally open and competitive market; in other words, a industry as antipodean to consolidation as one can get.

Many ship-lending banks have repeatedly raised the point of market consolidation: supposing that as a lender one has a portfolio of several similar vessels in default with several borrowers, it makes sense to consolidate the borrowers (shipowners) simply from a cost basis benefit: instead of having to deal with several borrowers and explaining, negotiating, formalizing the same ‘procedure’ several times over, there will be just one discussion with one counterparty; such an approach not only saves time, overhead and bank resources, but sometimes putting several problems together to form one big problem, the big problem can have solutions not available to many smaller problems of the same kind – critical mass is an obvious benefit of consolidated owner versus the one- or two-vessel special projects.

Still with the ship-lenders’ point of view, a consolidated owner can not only save resources for the lender, but also can economize for their own benefit by spreading the cost of running the business over a bigger pond of vessel ownership. IT, accounting, admin services are the obvious candidates for cost savings, not to mention that savings can be obtained from suppliers and third party providers based on greater purchasing power. And such savings can be detrimental to survival in a market where many vessels are earning at or below operating break-even levels.

A consolidated industry with fewer shipowners also has benefits when dealing with charterers in terms of maximizing revenue and obtaining favorable terms in the charterparty. Larger shipowners can have better control of the market and provide a better orchestrated approach when chartering vessels instead of having to deal on fixture at a time, one vessel at a time, one port at a time, one day at a time. The benefits of a consolidated market can best seen in markets that have been ‘sort of consolidated’ based on their nature, such as the markets for large vessels like VLCCs and capes, and niche markets with few players like asphalt carriers, cement carriers, heavylift vessels, etc Typically in such consolidated segments, not only broad market trends are identifiable – just like in the commoditized shipping industry – but also the cargoes themselves can be identified and accounted for: i.e. Saudi Arabia’s crude oil production is known or very well expected (barring macro-, political events, etc) and since most of crude oil our of major exporting crude oil countries is on VLCCs (each holding two million barrels of oil), chartering VLCCs is a game of chasing specific cargoes at specific points in time; thus, an owner with fifty VLCCs under control can optimize the fleet position to access those cargoes versus a shipowner of one VLCC who has to be satisfied with what the market would bear each time their VLCC reaches a loading port in Saudi Arabia.

So far, so good. Consolidation then it seems makes great sense and it almost looks like panacea for an industry of distress.

There are more than six thousand and five hundred (6,500) handymax and handysize dry bulk vessels in the world, with more than one thousand (1,000) shipowning groups active in this segment worldwide. The top one hundred owners control only two thousand of these vessels (appr. twenty vessels per owner) or less than 30% of the world fleet, with an apparently very long tail of ownership. As much as consolidation may make sense, it’s impossible to ever get close to a consolidated market from a practical point of view in this market segment. Lots of these shipowners will fail to see any economic benefit from getting consolidated, amalgamated, merged, acquired or otherwise voluntarily get off of their present equilibrium; not to mention that most of the shipyards can build handymax / handysize vessels for anyone who can afford them (and sometimes cannot afford them), thus the market could not stay consolidated for long, even if forced into a consolidation due to poor present dynamics. Further, handymax / handysize vessels effectively can trade any type of dry bulk cargo in the world and can access all the ports of the world, thus there is an infinite number of cargo and port permutations. And, we have not talked yet about the charterers of these vessels, which is an equally impressive of long tail of charterers, with the common denominator among them their desire for the lowest transport cost for their cargoes, condition of the vessels, well-being of seafarers, regulatory environment be damned by a great deal of these charterers – the sorry state of the truth, politically correct or not [this statement is not an opinion or comment in any way, just a sharp-tongued observation]. In certain markets, consolidation seems it is not practically doable given the existing dynamics of the market and the prospects that such dynamics can change in the long run.

And for the markets where consolidation can be feasible, the argument’s prime mover is that larger fleets call for efficiencies, efficiencies ad infinitum according to certain presentations. We all know that life and business is not a straight line, and a fleet of forty uniform vessels is not twice as efficient as a fleet of twenty vessels which is not twice as efficient as the fleet of ten vessels, etc Clearly fleets of fewer than five vessels are completely inefficient, but where the marginal benefit of adding more vessels to a fleet stops being worthy the additional consolidation? We are not aware of any academic studies but empirical evidence from many markets concentrates around the number of thirty vessels. Some publicly listed companies want us to believe that fleets of one-hundred vessels are the most efficient, but we are not convinced that the magic number one hundred is the result of business amalgamation rather than a convincing coherent business strategy.

There are so much in savings from IT and admin to be derived and so many synergies and discounts to be obtained, that a lousy freight market can save. A shipping company in a consolidated market segment may have a higher probability of survival in a bad market, but the law of gravity is universal and when gravity exceeds buoyancy, the result is a downward movement.

Consolidating or not, the shipping industry has proven that it’s not always like other industries; what has worked in other industries is not always applicable to shipping, at least not for the broad ocean of vessel ownership in all markets and corners of the word.


© 2012-2015 Basil M Karatzas & Karatzas Marine Advisors & Co.  All Rights Reserved.

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

Shipping IPOs: Diamond S Shipping

This past week, the sponsor and primary shareholder of Diamond S Shipping Group, Inc., WL Ross & Co., decided not to proceed with the Initial Public Offering (IPO) due to unfavorable obtainable pricing. The company was planning to issue about 14 million shares at the $14-16/sh range.

Private equity funds have been the rage of the shipping markets recently. The present filing, it is indicative that private equity funds sooner or later will be looking for ways to exit their shipping investments, and the capital markets likely will be the most popular venue. Capital markets may soon be the ‘next big thing’ in shipping as there are already several filings in the US for shipping companies.

The ‘failure’ of Diamond S Shipping to go public at this stage is not a sign that the capital markets are not receptive to shipping companies. Some of the reasons for the ‘failure’ may have been due to circumstances pertaining to this company and issuing, especially concerns about proper pricing, valuation and expectations thereof. There are legitimate concerns that the MR tanker market is getting too crowed – which is affecting pricing; on the other hand, Ardmore Shipping Corporation (ticker: ASC) was successful offering 7 million shares in a follow-on equity offering and raising $90.2 million, still in the product / MR tanker sector, pricing that was in line with the company’s share price – which is at discount on a peer group valuation.

Please note herebelow three articles on the recent developments with Diamond S Shipping from different sources: Shipping Watch, a Copenhagen-based credible shipping trade publication, Bloomberg and the Financial Times. We have had the honor to be quoted in these articles.

2014, March 12: Lukewarm investors canceled IPO of Diamond S, republished from Shipping Watch.

2014, March 12: Wilbur Ross Suspends Diamond S Shipping IPO on Low Price, republished from Bloomberg.

2014, March 13: Ross upbeat after IPO cancelled, republished from the Financial Times.

Diamond S MR Tanker MT "AEGEAN WAVE"

Diamond S MR Tanker MT “AEGEAN WAVE” (Image source: courtesy of Shipspotting)

© 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 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.