Dry Bulk Ships: To Buy or Not To Buy

The dry bulk market had a great run from the fall of the last year until March this year when the BDI reached 1,338 points on March 29th.  While freight rates still have been hovering at just above break-even levels, the improvement of the market has been impressive in relative terms; freight rates have quadrupled in the last year, admittedly from abysmally low levels.

While still the freight improvement has not been strong enough to justify popping champagne bottles, it has worked miracles in terms of improving the mood and bringing soaring enthusiasm back in a market that was relentlessly bleeding cash for the last few years. The enthusiasm has been so strong that recent sale & purchase activity (s&p) has been the strongest in the last two years, while there are a couple of cases of shipowners doubling their money on ‘asset play’ transactions within the last year.

The market has given up some of its recent earnings as the BDI is now back to approximately 900 points, but the improved mood is still abundantly present. And, given that we are heading into the summer, a seasonally weak season for shipping, there have been some concerns on the direction of the market. And, now that the market seems to be taking a breather and there is some time for introspection, there is some head-scratching on the real reasons for the market bouncing back so strongly in the last year as fundamentals did not seem to justify such a strong (fourfold) freight improvement.  All in all, while the market is still decent and the mood is buoyant, one has to be more cautious at present.

Shipping asset prices have improved since last year when ships, especially when non-modern dry bulk ships were selling at a multiple of their scrap value, irrespective of quality and pedigree. Probably the “easy money” has been behind for those looking for an easy “asset play”, but shipping asset prices are still low by historical standards.  And, there has been serious interest for acquisitions of dry bulk shipping assets whether in the secondary or the newbuilding market.

But again, it’s hard for a buyer or investor to enter aggressively the market. Prices have doubled for a great deal of assets while the freight market barely covers their daily operating expenses. And, there are risks looking forward to justify an aggressive approach. Trade volumes are still anemic to imply a strong market recovery. And, shipbuilders are getting more desperate by the day at building up their orderbook. Lack of competitive shipping finance keeps a dumper on the market, but any export credit incentive or other catalyst would have a tremendous (even catastrophic) impact on the market.

While asset prices look tempting by historical standards, whether for tankers or dry bulk vessels, it’s hard making the argument that the market is in a full recovery swing and buying ships, whether for operating profits or for asset flipping in the future, can b a great strategy. The risks still lurking in the market cannot be ignored. And, in our opinion, the “irrational exuberance” we have seen earlier in the year make us believe that there is still lots of froth in the market.


The article was first published in Seatrade Maritime on June 6th, 2017 under the title “Dry Bulk Ships: To Buy or not to Buy“.


Great looking dry bulk vessel MV ‘Genco Pyrenees’ not making making (sailing in ballast). Recently photographed sailing upstream in Elbe in 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.

Advertisements

‘Shipshape 10’ News for Week Ending November 20, 2016

‘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, sometimes humorous, occasionally sarcastic, but always insightful and topical.

And, this week’s ‘Shipshape 10’:

While most of the past week has been consumed by stipulations on what a Trump administration would mean for the shipping industry,

1. Varsler shippinghavari (from Dagens Næringsliv),

and whether a y-u-g-e infrastructure stimulus package may be what the dry bulk market needed, shipping shares for a couple of days behaved as in the good old days of 2008, almost a lifetime ago:

2. Unmoored From Reality: DryShips Halted After 1,500% Post-Election Rally (from the Wall Street Journal)

and

3. What to Do With a Stock Up 1,000% in One Week? (from Barron’s)

Nothing fundamental actually besides distorted markets and covering ‘short squeeze’, but impressive and nostalgic headlines nevertheless, we have to admit; for real life headlines, another shipping enterprise sponsored by an iconic name of the shipping universe has been making headlines that more accurately reflect reality:

4. Rickmers Maritime says unable to show it will remain in business (from the Straits Times)

Dry bulk freight rates have improved a lot in the last month, and the BDI is up almost four-fold since its bottom in February 2016; really an impressive performance, but is this a sign that the market is turning around and that the present rally is not just another seasonal improvement? Time will tell, but it’s worth mentioning that the Chinese currency is presently at eight-year low, and given than storage costs for commodities such as iron ore and coal is low, probably it makes sense to hold onto commodities than unto fiat money, especially with all the political uncertainty worldwide:

5. Yuan Slides to Lowest Level in Nearly Eight Years (from The Wall Street Journal)

While new trading outposts are established even at remote corners of our planet:

6. As Trump talks wall, China builds bridges to Latin America (from the Associated Press),

and

7. Pakistani PM welcomes first large Chinese shipment to Gwadar port (from Reuters)

If marine engines is a sign for the shipping industry’s direction, Rolls-Royce’s announcement for the week gives additional color on market recovery:

8. Rolls-Royce May Close More Marine Sites as Cost Cuts Deepen (from Bloomberg)

A major piece of news that will be affecting the tanker market (crude and gas) and the Jones Act market for decades to come, there has been another tremendous discovery of another field in Texas, further solidifying the state’s nickname as the ‘Texarabia’ of the US:

9. Vast shale oil field in Texas could yield 20 billion barrels (from the Associated Press)

In the interim, another government is bowing to pressure and committing $1.9 billion dollars to help domestic shipping companies, this time in Taiwan; as a quick reminder for those with short memory, just two weeks ago, the S Korean government had allocated $9.6 billion to assist the local shipping industry (shipbuilders and shipping companies). After almost two decades in the shipping industry, we got to appreciate the industry from a special point of view: most of the vessels in the world fly ‘open registry flags’ and pay tax on tonnage (but not on income); for the few shipping companies that pay tax, it seems they get the extra option of getting bailed out when times are bad.

10. Taiwan Approves $1.9 Billion Aid Package to Troubled Shipping Companies (from the Wall Street Journal Logistics Report)

And, our bonus feature, a few editorial thoughts “What Will Save The Shipping Industry? Nine Industry Thought Leaders Weigh In” (from #Shipping2030)

 

img_2313

Shipping is an ancient art… 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.