Thoughts from Posidonia 2018

It’s an even-numbered year and it’s June, which – for those in shipping – can only mean one thing: it’s Posidonia time! And, Posidonia it was, the 50th occasion of the international shipping community convening to Athens for the industry’s flagship event.

The cold facts: it has been reported that more than 100 countries have been represented, more than 1,800 exhibitors showcased their trades and more than 22,000 visitors attended the event with an estimate of half of those visitors originating outside Greece. No one could doubt, based on such enormous numbers, the significance of the event to the maritime industry, and, by association, the importance of Greece and the Greek shipping community to the maritime industry. Posidonia has been a truly “must attend” shipping event for its size, the wealth of market info available, and, this being Greece, for its fun, party scene and the great weather!

Having attended Posidonia for numerous times now, one can get a “feel” of the market and observe a lot by just watching, in the immortal words of Yogi Berra. Here have been a few of our observations:

In June 2008, when the shipping markets were white hot and the BDI was topping 12000 points, the Posidonia attendance was standing at just 16,000 visitors; now, ten years later and the BDI at a tenth of its former glory (presently appr 1300 points), the Posidonia attendance was higher by almost 36%. It does seem that Posidonia 2018 was marginally better attended than Posidonia 2016 which was better attended than 2014, which was … Posidonia once again proves that it’s an exhibition with eternal appeal, in good and bad times, where participants congregate to seek market intelligence.

Given the state of the freight market in the last decade, there has been no exuberance this time around with the by-now famous “Posidonia party scene”, since long are the times when company parties were esteemed by the number of Russian models in attendance. However, we have noticed that there have been many more corporate events and receptions than in previous times, quite often discreet and with less noise; mostly dinner receptions where guests could discuss market developments under the full moon in the Greek summer breeze with a drink in their hands. Seeing greater social activity but of less noise and of higher caliber has been an encouraging observation, in our opinion, as it’s a sign that the market gets back to fundamentals and away from the pretense of the past times.

Although freight markets are weak, and frankly the crude tanker freight rates downright painful, we noticed an air of solid perseverance and mild enthusiasm. Posidonia traditionally has been one of the most optimistic conferences in shipping, in our opinion; however, this time we did not notice vainglorious enthusiasm of “bring it on” but rather guarded optimism that since we have survived these terrible markets so far, there is little else that can shock us. Things are getting better, or at least they will get better. Probably this weird mix of sarcasm, resilience and enthusiasm is another sign that the market is reverting back to the fundamentals and logic and away from unfounded enthusiasm and speculation.

And, what a better sign of speculation than newbuilding orders? While in the good times Posidonia was a time of announcing of massive newbuilding orders – just to keep up with the Joneses – this time around, there barely have been any newbuilding announcement; for sure, there have been a couple of them, mostly from well established shipowners and with an LNG focus, but the majority of the market has been keeping clear of new orders. Probably another encouraging observation that the market is slowly shifting back to fundamentals.

Newbuilding orders cannot take place without plentiful and cheap financing, and speaking of the devil, there barely were any financiers in the whole greater Athens region! In the past, shipping banks hosting Posidonia parties used to be a parallel event of its own; this time around, just a handful of banks held discreet dinner parties for their clients and closed advisors with little outward attention. And, even more importantly, a complete dearth of equity fund, hedge funds, mezz funds, credit funds, alternative capital funds and other representatives of “master of the universe” species… Most of the financiers we saw were traditional long-term shipping market players who have been through the ups and downs of the industry a couple of times. Gone were the opportunistic or speculative investors who were de rigueur in previous Posidonia, another sign of the market’s efforts to revert to the mean. On the funny side of things, shipping financiers seem to be getting special attention as shipping finance is very hard to come by these days, and shipping financiers are as precious as the apple in one’s eye these days.

Shipping finance has been a hot topic of the exhibition, as one would expect. Despite selective activity, most shipping banks keep exiting the industry and dumping shipping loans, while the cost of capital keeps going up for most, not to mention the increasing interest rates that pose an additional risk to the industry at a time of soft freight rates. Chinese leasing has been a strengthening trend as well as preference by shipping banks for corporate loans (instead of asset-based ship mortgages), while institutional investors kept bearing the deriding scorn of “dumb money” in shipping and the sinners of a tonnage oversupplied market.

But the critical topic of Posidonia 2018 has been the upcoming regulations for fuels and emissions; and, here, we left the exhibition as uncertain as we were when landing in Athens at the beginning of Posidonia. Multiple panels and presentations and opinionated discussions on emissions, but we drew the conclusion that no-one really has a crystal ball on the subject; the possible outcomes ranged from this being a non-event (postponement into the future) to being a catastrophic event (too costly and not enough volumes clean fuels) that would reset the industry to this being the greatest thing in shipping in the last decade (accelerated scrapping and disappearance of less-capitalized shipowners.) A wide range of opinions indeed that render decision-making in such a challenging environment not dear for the meek in the heart; but again, that’s how money is made.

The Greek shipping community still stands strong, and, in general, in the news in the last few years, especially when it comes to opportunistic vessel acquisitions in the secondary market. Despite market challenges, Greek shipowners keep buying ships (occasionally even at high financing costs), and this purchasing activity contrasts them to other shipping nations that have been less active, or even net sellers of vessels. Thus, a few self-congratulatory remarks were to be expected here and there.

Posidonia is for sure the shipping event to attend; so much info to be learned as the as the vastness of the big ocean itself!

Posidonia 2018. 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 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.

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Can money still be made in shipping by flipping ships?

Unlike other capital assets whose value depreciates over the economic life of the asset, ships are known to appreciate in value if markets are strong. When freight markets are exuberant, the value (price) of ships can appreciate as investors expect stronger cash slow streams and higher earnings. It’s not unheard of ships having doubled or trebled in value in a matter of years, generating exceptional windfalls for their owners.

It is said that much more money in shipping has been made by timing the purchase and sale of ships by an owner and benefiting from the asset appreciation rather than by generating operating profits. And, conceptually, this is true: over the long term of a business cycle, as markets are efficient, the operating profit cannot be much higher than the risk undertaken from investing in a ship. On the other hand, as shipping is subject to a myriad variables – a few of them beyond the realm of logical projection such as geo-political events or natural disasters – volatility in the shipping spot freight markets is notoriously gigantic (both VLCCs and capesize vessels in the last decade experienced spot rates ranging from $1,000 pd to $200,000 pd), ships prices can vary accordingly. There have been cases of ships that have doubled or trebled in value in a matter of a few short months, even – and, inversely there have been cases where ships have collapsed in value in a matter of weeks (actually, there has been a well-published Harvard Business School case study – to which we have contributed, whereby two sistership capesize vessels were sold a few months apart in 2008 at a price differential of more than $90 million. By timing the market decently, many a shipowner have made a fortune in the last decades by just buying and selling vessels at the right time.

The 2008 market correction saw a precipitous drop in asset prices. Many buyers hoped for vessel acquisitions at distressed prices – mostly from fire sales from shipping banks, but really only a small portion of vessels mortgaged with bad loans ever got to be sold cheaply. There was no doubt in the minds of many people that 2010 asset price levels were strong buying opportunities.

Once the markets normalized, 2012-2015 saw a tremendous interest in newbuilding vessels, which, by boom-year standards, were at competitive prices; and, of course, shipbuilders did their best to encourage more newbuilding activity by actually sharing the subsidy windfalls from their governments with international buyers of newbuilding ships.

Let’s say that a market recovery did not play out as expected and 2016, for the dry bulk market, saw one of the worst times on record; freight rates and asset prices just collapsed. As a matter of proportion, ten-year-old drybulk vessels were selling in early 2016 at twice their scrap value, while historically ships of that age would be expected to sell at approximately 5x their scrap value. Once again, 2016 was a screaming buying opportunity in the mind of many people, of buying “cheap ships”.

Fast forward two years later, drybulk asset prices are higher than the lows of 2010 and 2016; but, really, not exuberantly higher; and, definitely, no higher than the highs of 2013-2014. Yes, there have been cases of ships getting flipped at double their purchase price between the low and the high, but such evidence is limited to one-off deals, older tonnage, or transactions where the seller had to sell at any price.

The tanker market, the other main commodity shipping market that it’s prone to asset flipping, has experienced similar trends, only in a different sync cycle than dry bulk. Tankers actually are at a cycle low at present with the trade of crude oil being dislocated by OPEC’s production cuts and the boost of shale oil in the US. Tanker asset prices are low – so much so that an institutional investor recently sold a vintage VLCC for scrap – which was bought three years ago; sale was at a loss by our calculations, and much pre-maturely than the expectations of the tanker’s economic life. Making money on this cheap but vintage supertanker did not work out.

What has happened to the asset play game in commodity shipping? Is the game over? Freight rates still are fair and drybulk vessels generate positive cash flows; what would take to pull prices up from the depths of the 2016 crisis?

We wish we had a crystal ball on this, but we think that making money by flipping ships these days is not the “game” it was. The market is getting more complicated, more efficient and transparent, and more demanding; higher demands by all: bankers, charterers, operators, regulators, etc And, ships have been evolving, and they have to catch up with new regulations; it was ballast water treatment management last year, it’s emissions this year, likely it will be IoT and bunkering fuel in the next few years. And, likely many more factors to worry about.

And, cheap and plentiful financing leverage to lubricate the market to make purchasing of ships easier is only getting costlier and more complicated. And, lack of cheap leverage, among other things, has kept a lid on asset prices.

Not saying that asset play is dead; ships seem reasonably priced in today’s markets. But, asset players have to have access to capital and buy opportunistically fleets (not just a ship) when the timing is right (i.e. Angelicoussis and Ofer Groups in the past), and also have the flexibility for financial structuring (while Star Bulk sold have their capesize fleet (at a major loss) in 2016, now they are consolidating the market by paying in paper (shares) to acquire the Songa drybulk fleet and the Augustea Atlantica / York Capital tanker fleet). By buying and operating fleets, they give themselves the benefit of finding employment with established charterers, accessing the banks and capital, having an operating platform – if the asset play does not work out, they will have the capacity to sustain the cycle and go for operating profits.

Borrowing from a credit fund at 10% interest to play the asset game for one or two ships is like playing with the fire. Even worse if the asset player has to put 100% of the purchase money themselves.

Several shipowners tried to raise capital since the 2016 crisis based on the investment thesis that buying cheap ships pays off. We are aware of no institutional investor who actually paid much attention to the theme or even funded the project, since 2016, tempting the theme as it may have been. At least, some lessons have been learned on this matter from the past.

Still shipping is an exciting industry and there is money to be made. But for now, the asset play game is not the way to make money in shipping. At least not by playing the same game with the old rules…

Flipping is hard to do! 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 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.

 

The Institution of Shipping

For someone to get an academic degree in accounting, for instance, it does not automatically qualify them to represent clients on accounting matters. This approach to qualification is not a judgment against the institution granting the degree, but the premise that the professional society of accountants – wherever they may be – make the effort to ensure that their members have to meet certain standards – professional, academic, legal, ethical, etc – and practice the profession under a certain set of rules. There are people who have studied accounting but failed to pass the professional exam, and as a consequence, they ended up slaving in the back office doing book-keeping at a substantially lower pay scale. For the professionals in law or medicine, “passing the bar” is even more critical and demanding. Professional societies go to a great length to ensure that their members are knowledgeable and current and of a certain standing; and they do weed out the “bad apples”. In exchange for maintaining (certain) standards, the profession enjoys a high degree of reputation and its members earn a respectable living.

Having ourselves being in the shipping profession for almost two decades, and only becoming a member – after passing a series of exams – of the Institute of Chartered Shipbrokers (ICS) in the UK in the last three years, and now in the final stages of becoming an accredited appraiser (valuator) with the American Society of Appraisers (ASA) (after again passing series of exams of law, ethics and subject matter) in the USA, it got us thinking that the shipping industry really lacks professional organizations whose credentials are a sine qua non in the industry.

To be a practitioner shipbroker, there are really no professional certifications to hold or minimum body of knowledge to possess in order to practice the profession. True, most young shipbrokers usually have studied a subject matter related to the maritime industry, but there are no minimum standards of the breadth and depth of such knowledge or some uniformity. And, given that ship-brokerage involves aspects of law and finance, the actual field of knowledge can be quite substantial. Most ship-brokerage offices would hire people apparently good at selling and getting compensated on commission and let Darwin’s law of survival do the rest of the work. And, true, certain ship-brokerage houses have their own in-house training, but again, this rests with the employer, who still can opt how to train young professionals.

Why there should not be a mandatory license in order to practice the profession of a shipbroker? Why there should not be professional assurances of standards of practice and also of ethics – including consequences for breaking the rules?

Likewise, almost all shipbroker houses advertise their vessel valuation service as part of their set of services offered. Most of vessel valuations are so-called “desktop valuations” where no physical inspection of the asset is required, and typically ships are valued based on the “last done” – a process shipbrokers should be good at. However, when valuing an asset to the tune of millions of dollars, one would expect more effort and detail to reach a complete valuation, and, actually assurances of the integrity of the valuation process. Ship valuations and appraisals are used for loan documentation and on-going loan-to-value (LTV) tests for the loan, are used for insurance and claims purposes, for arbitration and court proceedings, and many other factions, where small detail is crucial. Yet, the ship appraisal process is approached in a cavalier way in terms of competence, or even worse. It has been known that vessel valuations services can be used to curry favor with principals and shipowners for shipbroking business, and there have been known instances of “broker shopping” for vessel valuations that will render the highest vessel value (dear reader, please keep in mind when asset prices are low and sometimes “underwater” in terms of LTV, vessel values are critical for triggering default clauses with severe consequences). Once again however, there is no professional body ensuring accuracy and integrity of ship valuations. The “loss leader” model seem to work for many parties when it comes to vessel valuations, with the exception of US banks and lessors and equipment finance companies that steadily are demanding that vessel appraisers to be certified, qualified and obeying by a professional code of ethics by the American Society of Appraisers.

The Baltic Exchange’s –another venerable maritime organization to which Karatzas Marine Advisors is a member of – keystone premise is “Our word our bond”, an expression that is rather encompassing of the mentality of the shipping industry. In an industry of perfect competition, it’s an open field for providing services in the maritime industry: the qualified and less-qualified, the competent and not, the good and the bad… There is room for many a “cowboy” and “buccaneer” in the shipping industry, and sometimes lots of caveat emptor, along with people in shipping whose word is their bond.

For strangers new to the shipping industry, sometimes it’s a learning curve before finding one’s bearings in terms of people to depend on. The push for new technologies in shipping is offering a quick bypass to professional credentials as now an agnostic algorithm can be programmed to provide the services; an algorithm build (hopefully) by experts in the field, an algorithm that obeys a set of rules (but not a code of ethics).

Besides technology, there is an underlying trend to bring shipping into an age of an “institution” where services and products are better defined and where the buccaneer and un-predictability element of the business go away. Charterers want to see bigger shipowners with efficiencies and critical mass and predictability of service, shipping financiers want to see bigger shipowners with better practices and efficiencies, etc, Taking inefficiencies and un-predictability out of the system, professional accreditation for services would go a long way.

A new day, a new epoch for shipping? 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 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.

A Sale & Purchase Market in Shipping that Was … or, It Wasn’t It, in 2017

2017 was a fairly good year for the drybulk market. As compared to 2016, truth being told, 2017 was an exceptional year. All segments of the drybulk market have moved from severely depressed levels (with a meaningful part of the world fleet idle then) to profitable levels; at some point in early 2016, it seems that all types of drybulk vessels, irrespective of size and segment, were earning $4,000 per diem, if they managed to find employment at all. By comparison, in November 2017, capesize vessels most noticeably were etching earnings close to $30,000 pd.

And, looking forward, the prospects for 2018 seem at least fair for the drybulk market, while tankers and containerships hold hope. Shipping is far from showing a full recovery from the crisis, but at present the market seems optimistic, especially when one considers the abysmal days of the market bottom in March 2016.

Drybulk freight indices in 2017, provided by the Baltic Exchange

2017 has been a fairly decent market for the sale and purchase (S&P) of shipping assets. Vessels were bought and sold, but mainly they were bought, at a livelier pace than in 2015 or 2016; overall, S&P activity has been higher by 34% in 2017 for the drybulk market than the previous two years, a welcome development for S&P brokers. And, most of the vessels were bought in expectations of a recovering market instead of getting sold as in the past in a bloodbath of a market at auctions and other forced sale scenarios.

With increasing volume for S&P in an improving freight market, one would be forgiven to assume that shipping assets prices were on a roll in 2017. It’s true that vessels’ values for dry bulk have improved, driven by an improving freight market and good prospects for the immediate and near future; however, asset pricing was nowhere close to match the freight market’s buoyancy. Freight rates increased by a multifold factor, while asset prices dragged along. As per the attached graph, prices of asset classes tracked by the Baltic Exchange under their Baltic Exchange S&P Assessment Index (BSPA) for five-year old vessels, both tankers and bulkers, have been steady. [Karatzas Marine Advisors is an active member of The Baltic Exchange]. For tankers, prices have shown in 2017 as much liveliness as if trading in a sea of tranquility – exhibiting almost prefect flat lines. For bulkers, there has been a relatively mild improvement in the spring of 2017, but flat lines that resemble tanker prices followed. Still, year-over-year, there is a 25% increase for capesize vessels and milder improvements for other types of dry bulk vessels. Again, these are data for five-year old vessels, and older vessels performed better and newer vessels performed a bit worse than five-year old vessels; and again, these are asset price increases in 2017 alone, not from the bottom of the market in 2016 – where price improvements have been more significant. But again, and without wishing to burst anyone’s bubble, the Standard & Poor’s (S&P 500) index in the USA achieved almost a 20% performance in 2017, and this with all the benefits of a liquid investment.

Shipping asset prices in 2017 and the Baltic Sale & Purchase Assessment Index (BSPA), provided by The Baltic Exchange

Asset prices in 2017 have been un-inspiring for all types of vessels, including drybulk, tankers and containerships. We have written in a different post about the sale & purchase market and asset playing as a business idea that seems that it lost its luster. Hopefully there are much better days in shipping and we are in the early stages of a lengthy and strong recovery; and, likely those who bought ships in 2017 and 2016 will get to enjoy much stronger markets and asset prices.

Our skepticism on the subdued state of the sale & purchase market and its impact on the asset play theme is that they may be early signs that the shipping industry is facing structural changes while we all celebrate the strength of the freight market recovery. It would appear that with the lack of plentiful and cheap debt financing, flipping shipping assets is not as appealing any more. More of one’s money has to be committed to the “bet”, which is makes it costlier to buy ships and play and game. And, more importantly, lack of availability of cheap money for other buyers makes it harder for other people (and potential buyers) of one’s assets to get optimistic and bid up asset prices and pay you a strong price to buy your assets. Or, it may be that shipping is finding its calling that it is actually for transporting goods and being part of the logistics chain and not a speculative instrument for buying and selling ships and stretching one’s fleet like an accordion and being highly opportunistic with the market and business relations.

Even more concerning that the lack of shipping finance prospect affecting asset prices is that the freight market recovery may not considered to be real and sustainable by the “smart money”. Even shipowners with access to cash, few reference names have made substantial purchases in 2017, a few individual acquisitions notwithstanding. Shipowners who in previous down-cycles were loading up on cheap tonnage, it seems this time around have gone on a buyer’s strike. It’s interesting seeing who’s doing the buying and who is doing the preaching, and who’s buying with their own money and who is buying with other people’s money. As another of Yogi Berra’s pith quotations has it, “you can observe a lot by just watching”. And who has been doing the buying in the S&P market in 2017 is not strongly convincing.

There have been reports elsewhere that Greeks and Americans have been the highest buyers of ships in 2017, and the geography of these two countries may indicate trends in the market, at least in the short term and at least for 2017. Access to shipping expertise and access to capital have always been two competitive advantages to have in shipping. Hopefully the trend will continue as our firm has intimate access to both of these markets.

We only hope that 2018 will be a better and more active year for S&P that 2017 has been, and we wish that much more money stands to be made in the new year. Having been very active in 2017 ourselves, we only hope that any S&P activity and asset appreciation is based on fundamentals and not on speculation, and any signs of concern mentioned above remain just that!

Happy New Year!

The hope of the new day and the dangerous of the treacherous seas… Bass Harbor Light, in Mount Desert Island, Maine, USA. Image credit: Karatzas Images

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

IMPORTANT DISCLAIMER:  Access to this blog signifies the reader’s irrevocable acceptance of this disclaimer. No part of this blog can be reproduced by any means and under any circumstances, whatsoever, in whole or in part, without proper attribution or the consent of the copyright and trademark holders of this website.Whilst every effort has been made to ensure that information 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.

Dry Bulk Vessel Prices Lagging the Freight Market

The turnaround of the dry bulk freight market in the last eighteen months has been impressive and a welcome reminder that the shipping industry is an extremely volatile business. The overall Baltic Dry Index (BDI) has quintupled from March 2016 till now, while more spectacularly, the Baltic Capesize Index (BCI_2014) has decupled in the same period.

Still, in absolute terms, daily freight rates are just moving above operating break-even levels, and for vessels with recent or high mortgages, present earnings do not suffice to fully cover the financing cost component of the ownership. Such was the depth (and desperation) of the market that multifold increases in freight rates and barely managing to keep our heads above water!

The improvement of the freight market can be attributed to several factors such as delays in newbuilding deliveries in the short term (and precipitous drop in additional newbuilding ordering in the longer term), an accelerated scrapping pace for older and less-than-older bulkers (bringing the tonnage supply and demand balance to a relatively favorable equilibrium), a Chinese economy that keeps impressing with its strong demand for raw materials, miners that keep expanding supply (legacy projects, mostly), new trading routes and patterns expanding ton-mile, and yes, anti-globalization political rhetoric that seems to favor shipping by inserting inefficiencies in the world trade.

None of factors above single-handedly has driven the market higher, but all have contributed to a better shipping. As a word of caution, almost all of the above factors are reversible or cancellable on short order, and any thought of popping campaign bottles is premature. And still, there are several additional risk factors that still lurking in the background.

In past times, such a strong improvement in freight rates would had set dry bulk prices on fire. Vessels are valued on earnings, and quite often, on expected earnings (which explains, inter alia, how the shipping market finds itself flooded with newbuildings so often); a freight market that has been galloping ahead in the last few months would had triggered major asset appreciation and incited even loftier hopes for higher prices.

Given that capesize tonnage is the most volatile among the dry bulk sectors, we chose in the following chart to show the Baltic Capesize Index (BCI_2014) and the price of a 5yr-old capesize vessel since January 2015 (data by Karatzas Marine Advisors & Co. (KMA), and the Baltic Exchange to which KMA maintains membership). Back in January 2015, capesize prices were overvalued comparatively to the freight market and the index, as expectations and hopes were strong for shipowners to accept lower bids. A further dip where BCI dropped from 500 points to 250 points by early 2016, and capesize asset prices were dropping fast, from almost $38 mil to $25 mil. Since March 2016, the BCI_2014 index has decupled to above 3,000 points at present, but capesize asset prices have only moved up to currently $34 mil for a 5yr old capesize vessel. Quite a disconnect, a 35% increase in asset prices when the freight market is up by a multiple of ten (1,100%).

Capesize freight rates (LHS) vs capesize vessel prices (RHS) since January 2015: under-appreciating. Source: Karatzas Marine Advisors & Co.

Taking a broader look for other asset classes (panamax dry bulk, ultramax/supramax, and handysize tonnage) in the following graph, a similar trend of improving prices can be seen among all asset classes, in the range of 30-50%. There have been cases when dry bulk vessels were bought at the dark depths of the market in spring 2016 and a year later were flipped by as much as 130% actual profit, but those were few selected transactions, for older tonnage (and different economics and risk), and probably a few of those transactions were opportunistic with an element of luck. The corollaries to the story is that money can still be made in shipping for asset play (“buy low, sell high”) if timing is right, and that when shipowners were pounding the table to raise money to buy cheap ships were correct (but again, many of those owners were pounding the table to buy cheap ships at the peak of the market in 2013/2014). However, the real lesson is that there is a disconnect at present between freight rates today (and also freight rate expectations) and the level of asset prices in the dry bulk market.

Dry bulk vessel asset prices: hot, but not hot enough. Credit: Karatzas Marine Advisors & Co.

Lack of finance is, in our opinion, the real culprit for asset prices not being on fire at present (and this is not necessarily a terrible thing, in our opinion.) Shipping banks have been very tight with new business, capital markets and institutional investors are not perceiving shipping to be an industry of great prospects at the moment, and export credit from newbuilding nations is low on the list. Besides seed equity and selectively follow-ons in the capital markets and anecdotal evidence of ship mortgages from banks, financial leverage in shipping can be obtained from alternative capital funds, at levels that can easily exceed 10%; not necessarily too expensive, but barely sustainable unless one expects a great freight market looking forward.

Opportunistically dry bulk is still a great market to enter although the “easy money” has already been made in the early stage of the market bouncing from the bottom. We do not espouse a blind expansion strategy in the sector but there is an arbitrage opportunity for money to be made, especially where investments can be structured to minimize the (many) risks that are still lurking in the background. There are still cargoes to be moved worldwide, and contracts of affreightment (COAs) are still available, and strategic partnerships can be set, instead of someone jumping speculatively in the market, even today, when there is the disconnect of freight and asset prices.

A bulker in the Big Apple… probably looking for money? 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 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.