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.

 

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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.

‘Shipshape 10’ News for Week Ending July 16th, 2017

‘Shipshape 10 List’, a list of news and articles published in the current week that a senior executive in shipping, shipping finance, commodities, energy, supply chain and infrastructure should had noticed; news and articles that are shaping the agenda and the course of the maritime industry.

Sometimes seemingly tangential, periodically humorous, occasionally sarcastic, sporadically artistic, inferentially erotic, but always insightful and topical.

We apologize for the absence of an update for almost a month to those who have found this blog worthwhile to subscribe to and follow it regularly.

And, this week’s ‘Shipshape 10’:

On the Cosco and OOCL transaction:
1a. China underlines shipping ambitions with $6.3bn takeover of HK group (from the Financial Times) – article quoting Basil M Karatzas

1b. China’s Cosco to Buy Shipping Rival Orient Overseas for $6.3 Billion (from The Wall Street Journal) – article quoting Basil M Karatzas

1c. Cosco Takes OOCL, Eyes CMA CGM (from Splash 24/7)

1d. As Trade Revives, Big China Shippers Merge (from Barron’s)

1e. Karma and Comfort for Orient Overseas (from Bloomberg)

1f. Not Keeping It in the Family (from Week in China)

Dryships once again on front page news:
2. A Shipping Company’s Bizarre Stock Maneuvers Create High Seas Intrigue (from the Wall Street Journal)

Brazilian shipbuilding:
3. In Lula’s Shadow, Brazil’s Shipbuilders Struggle to Right Themselves (from The New York Times)

A UK shipyard is looking far away from traditional lines of business:
4. Mersey shipyard Cammell Laird set to build UK polar research ship (from the Financial Times)

New trading patterns due to expanded Panama Canal become more apparent with time:
5. Panama Canal Does Some Good While Upending Historic Trade Routes (from Bloomberg)

US crude oil exports:
6. US crude exports forecast to exceed most Opec members by 2020 (from the Financial Times)

Wheat trade and possible impact on the dry bulk market:
7. Traders Gobble Up Wheat Amid Great Plains Drought (from The Wall Street Journal)

Opinion article in Splash 24/7 by yours truly on whether there is still time for the famous ‘asset play game’ in shipping
8. The Asset Appreciation Play Has Yet to Leave Port (Basil M Karatzas, from Splash 24/7)

Opinion article by yours truly in Splash 24/7 on shipping finance:
9. Credit is Due to Shipping (Basil M Karatzas, from Splash 24/7)

Summer is the perfect time to to take to the water, this time for pleasure:
10. 5 Summer Water Sports You Can Master the Easy Way (from The Wall Street Journal)

Panamax Containership MV ‘OOCL Montreal’ sailing upstream in Norderelbe, Hamburg. 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.