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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‘Shipshape 10’ News for Week Ending May 28th, 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’:

While lots of shipping hope has been laid at the feet of a Chinese recovery, China’s sovereign debt has been downgraded mostly on concerns of slowing growth:
1. China’s sovereign debt downgraded by Moody’s (Financial Times)

2. China Moves to Stabilize Currency, Despite Promise to Loosen Control (The New York Times)

A seemingly major investor for shipping, but not clear whether there are string attached; in any event, the funding gap in shipping could suck up Dubai’s billion fund in seconds:
2. Dubai looking into forming $1 billion shipping investment fund (Reuters)

Shipping is a commodity b2b business. Od, isn’t it?
Quoting Basil M Karatzas, at Splash 24/7
3. Has Shipping Become Commoditised? (Splash 24/4)

In a weak overall market, mergers in the commodities trading world, and other news:
4a. Sowing Glencore’s Waves of Grain (Bloomberg)

4b. Huntsman and Clariant unveil $20bn tie-up (Financial Times)

4c. Noble Group, a big Asian commodities trader, is teetering

4d. War on Sugar Turns Years of Growth Into Market Tipping Point (Bloomberg)

OPEC had once promised to do ‘whatever it takes’ to drive oil prices higher. This week’s developments from Vienna show that OPEC may not be in charge of the oil markets as it used to be:                                                                                         5a. OPEC Should Watch Glencore’s Bunge Jump (Bloomberg)

5b. OPEC’s Weakest Link Is Not Who You Think It Is (Bloomberg)

5c. Opec: more of the same (Petroleum Economist)

5d. BP and Glencore warned over bullish fossil fuel forecasts (Financial Times)

5e. Oil market awaits ‘whatever it takes’ details as Opec gathers (Financial Times)

And the reason for OPEC’s dwindling chances controlling the oil markets:
6. New era beckons as Euronav VLCC is first to load US oil (Lloyd’s List)

Soft tanker asset prices have been conducive for M&A activity, with Scorpio Tankers acquiring the Navig8 Products Tankers fleet, creating the biggest player in the sector:                                                                                                                     7a. Scorpio Tankers fleet worth $3 bn after Navig8 Product Tankers takeover (Seatrade Maritime)

7b. Scorpio Announces Merger With Navig8 Product Tankers (The Maritime Executive)

While the world of ‘commodity shipping’ is struggling to recover, the cruiseship market has been strong, and China’s prospects in the sector cannot be ignored: 8a. China Tops Two Million Cruise Passengers (The Maritime Executive)

8b. Princess Tells “Chinese Story” Along Silk Road Route (The Maritime Executive)

8c. Greece To Bolster Cruise Capabilities (The Maritime Executive)

The current issue of the Economist is running a series of articles the oceans:
9a. How to improve the health of the ocean (The Economist)

9b. Getting serious about overfishing (The Economist)

9c. Megaprojects threaten Hong Kong’s iconic dolphins (The Economist)

“I will greatly bless you, and I will greatly multiply your seed as the stars of the heavens and as the sand which is on the seashore.” Genesis 22:15-18, and “like the sand of the sea, which cannot be counted” Genesis 32:12. Apparently, sand is not as plentiful these days:

10a. The World is Running Out of Sand (The New Yorker)

10b. An improbable global shortage: sand (The Economist)

Majestic sunset: Piraeus. 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 April 2nd, 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’:                                                                                     

On innovation and new technologies in shipping:                                                         1. Shipping-Technology Startup Freightos Raises $25 Million (The Wall Street Journal)

On the continuous enfeebled state of the offshore drilling markets:                           2. Ocean Rig Files for Bankruptcy (The Maritime Executive)

On crude oil and OPEC:                                                                                                    3. China Tanked Oil Once, It Can Do It Again (The Wall Street Journal)

On the prospects of shale oil in the USA:                                                                       4a. Fracking 2.0: Shale Drillers Pioneer New Ways to Profit in Era of Cheap Oil (The Wall Street Journal)                                                                                                                    4b. U.S. Petroleum Exports Climb to Record as Crude Output Grows (Bloomberg)

On steaming (thermal) coal, natural gas, renewables and emissions:                        5a. Lacklustre power demand in Asia throws a cloud over coal (The Economist)                 5b. India becomes more active in the fight against global warming (The Economist)             5c. The Other Permian Shale Boom (Bloomberg)

On coking (metallurgical) coal:                                                                                        6. China’s the Real Cyclone for Coal (Bloomberg)

On trade, insightful article:                                                                                              7. Whatever Happened to Free Trade? (The Wall Street Journal)

Mexican buyers of U.S. corn look elsewhere; good news for dry bulk shipping:      8. Mexico eyes duty-free corn deals to counter Trump (The Financial Times)

South China Sea and other geo-political considerations:                                            9a. The South China Sea presents a reality check for America (The Financial Times)           9b. Is China challenging the United States for global leadership? (The Economist)               9c. A bigger catch: China’s fishing fleet hunts new ocean targets (The Financial Times)       9d. China building navy’s biggest amphibious assault vessel, sources say (South China Morning Post)

On boutique cruising:                                                                                                     10. Cruise Vacations for the Anti-Cruise Crowd (The Wall Street Journal)

Cruiseship MV ‘Norwegian Gem’ departing New York Harbor; photographed as vessel was passing the Statue of Liberty. 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 26th, 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’:

Talking about destruction of value for the sellers…
1. Borr Drilling to buy Transocean’s jack-up rig fleet for $1.35bn (Seatrade Maritime)

and, the riskiness of the offshore drilling markets…
2. Shell’s Titanic Bet: Can Deep-Water Drilling Be Done on the Cheap? (The Wall Street Journal)

when, oil majors start thinking beyond oil…
3. Big Oil Replaces Rigs With Wind Turbines (Bloomberg)

But, some shipowners too think cleaner energy
4a. World’s First LNG-Fuelled Aframax Tankers Ordered (The Maritime Executive)

4b. Crowley Launches LNG-Powered Con/Ro for Jones Act Trade (The Maritime Executive)

But, in the mainstream shipping world, another week, another bailout or blowout …
5a. Korean Shipbuilder Seeks Another Bailout (The Wall Street Journal)

5b. Daewoo Shipbuilding: deep water (Financial Times)

or a dugout…
6. Maersk Line, Hapag-Lloyd Among Carriers Subpoenaed in U.S. Price-Fixing Probe (The Wall Street Journal)

But, some publicly listed companies going long the market, but paying in paper mostly, no hard cash…
7a. BW Sells All Its VLCCs to DHT Holdings (Splash 24/7)

7b. Golden Ocean Inks Agreements to Buy Quintana Shipping’s Entire Fleet (Seatrade Maritime)

A highly recommended private equity fund implodes; only noteworthy to shipping since they were the first to enter shipping in JV-style post financial crisis looking for distressed value; Euromar platform with publicly listed Euroseas (Ticker: ESEAS)
8. Eton Park to Shut Down as $3 Trillion Hedge Fund Industry Faces Turmoil (The New York Times)

Looking for maritime college education, look no further than the State University of New York Maritime College at Fort Schuyler, just outside New York City.
9. The Young Mariners of Throgs Neck (The New York Times)

And, finally, a story when passion and avocation turn into a (profitable) vocation. We could not argue against seafood and especially New England lobster!
10. A Restaurant’s Sales Pitch: Know Your Lobster (The New York Times)

Sovcomflot’s Products Tanker MT ‘Anichkov Bridge’ entering the Upper New York Harbor with the Manhattan skyline in the background. 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.