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.

Advertisements

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.

‘Shipshape 10’ News for Week Ending May 21st, 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.

And, we take a minute to thank our readers who took time to contact us and let us us know that they missed reading our reports in the past couple of weeks. Delighted hearing that ’Shipshape 10’ indeed has become a quick way of following up the shipping and related industries.

And, this week’s ‘Shipshape 10’:                                                                                               
On the ‘One Belt, One Road’ initiative, and the recently hosted high-profile ‘Belt and Road Forum for International Cooperation’ in Beijing:
1a. Lessons for China in failed US Silk Road initiative (South China Morning Post)

1b. China’s Silk Road Initiative Sows European Discomfort (The Wall Street Journal)

1c. Next Silk Road summit set for 2019 as Beijing ramps up global drive (South China Morning Post)

1d. China takes ‘project of the century’ to Pakistan (Financial Times)

Trade agreements can be hard to re-negotiate when economic factors can interfere with politics:
2a. Trump launches NAFTA renegotiation (Politico)

2b. Prospect of NAFTA rewrite gives US farmers a case of jitters (Associated Press)

Not the biggest port in the world, but events in Buenaventura can underline how delicate the supply chain sometimes can be:
3a. Colombia’s biggest Pacific port placed under curfew (Financial Times)

3b. U.S. Ports Need $66 Billion for Infrastructure (The Maritime Executive)

OPEC for sure is winning the shale war…
4. Full tanks and tankers: a stubborn oil glut despite OPEC cuts (Reuters)

What do to with junk…
5. Old Containers Find Out-of-the-Box Second Lives (The Wall Street Journal)

Hopes that there is a recovery and economies will be growing solidly:
6a. Household Debt Makes a Comeback in the U.S. (The New York Times)

6b. The silent sell-off in US Treasuries (Financial Times)

The offshore and ‘brown water’ industries in the US still under pressure:
7a. Tidewater Files for Chapter 11 Bankruptcy (gCaptain)

7b. GulfMark Offshore Files for Chapter 11 Bankruptcy Protection (The Wall Street Journal)

An old generation Greek shipowner dies
8a. Aristides Alafouzos, owner of Kathimerini, dies (Kathimerini)

8b. Aristides Alafouzos, the founder of Kyklades Maritime, dies aged 93 (Splash 24/7)

There is a price for everything
9. From Deep in Atlantic, Titanic Relics Sail Toward Auction Block (Bloomberg)

Tall tales of drunken sailors no more
10. Terrifying 20m-tall ‘rogue waves’ are actually real (BBC)

A pretty picture of another products tanker in ballast condition. 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 March 19th, 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.

And, this week’s ‘Shipshape 10’:

1a. A Blind Spot Masks the Danger Signs in Finance (Financial Times)

1b. Shadow Lending Threatens China’s Economy, Officials Warn (The New York Times)

2. The Man Who Made Us See That Trade Isn’t Always Free (Bloomberg)

3. The World Economy is Picking up (The Economist)

4. Imagine a Silicon Valley of the Sea (Bloomberg)

5a. Missing from Trump’s Grand Navy Plan: Skilled Workers to Build the Fleet (Reuters)

5b. Critics warn Trump that gutting foreign aid will endanger U.S. (Politico) (probably a very bad development for the American Flag fleet and shipowners in the USA – please note, American flagged vessels are not ‘Jones Act’ vessels with same cabotage privileges; see Cargo Preference Act).

6. Port of Amsterdam to Phase Out Coal Terminal (The Maritime Executive)

7a. Blockchain: A Transitional and Transformational Technology for Shipping (Splash 24/7)

7b. Ocean Shipping Transaction Firm INTTRA Buys Container Tracking Company Avantida (The Wall Street Journal, Logistics Report)

8. The Great Barrier Reef had a Pretty Terrible Year (Popular Science)

9. Subsea Salmon Farming Project Hits Snag (The Maritime Executive)

10. Whose Sea is It Anyway? Photo Essay: Coast of Vietnam (1843 Magazine)

Where all it happens, Manhattan and the ‘Big Apple’! 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.