May 23, 2013

Interesting times

Reports from the sale and purchase market for newbuilds often resemble, these days, the confusing and contradictory reports we are used to seeing emanating out of places like the stock market. This probably has a lot to do with the fact that confusion has increased as some people sense a bottom may have been reached last year in new asset prices, and that this is a good time to buy ships. But this is a simplistic approach, and, given the big ticket items that ships inevitably are- recession or not- this can be a dangerous approach too, especially at a time when speculation is driving asset prices.

Shipping does not like to advertise that, as billionaire Wilbur Ross says, “You make your big money based on your entry point in the market and the exit point”. Like the stockmarket, you buy low and you sell high with a trader’s outlook, not an investors; you don’t worry too much about the intrinsic worth of the asset, its revenue or profit generating potential.  

Anyway, this is what all I have heard and read over the last month. The Greeks are buying- more correctly, ordering newbuilds- in large numbers because of fears of a domestic levy on bank deposits similar to the one proposed in Cyprus. Other European countries may soon follow suit, somebody says. No, no, says another report, the Greeks are buying because they have an instinct for these things; prices have bottomed out, freight rates will triple this year and the Greeks have a nose for the opportunity that is there for the taking. They don’t control 16 per cent of the global fleet for nothing.

Then, one report says that the Chinese are ordering big containerships of the Maersk Triple E Class type- 18000 TEU behemoths. Actually the Chinese seem to be buying- or building- everything; the country is responsible for 40% of all deliveries made in the last three years, and the 11,000 vessels China has built so far constitute a fifth of the global fleet. Besides, the country still holds 40% of the global orderbook. A significant proportion of this tonnage is Chinese owned, by the way; the country is only behind Japan and Greece as a shipowning nation. 

Some analysts on the other side of the fence say that Chinese shipping growth is not based on market principles but on strategy, and imply that it would be unwise for individual shipowners to take their cue from there. 

Many people seem to be ignoring, for the time being, the restructuring (read survival attempt) that Nobu Su’s TMT is undergoing today. It was not long ago that Su could do no wrong. Like John Fredriksen of Frontline, another company that went through ‘restructuring’ a while ago, he was the golden boy. (That Wilbus Ross quote above goes on to refer to Fredriksen as being ‘brilliant at both’ buying and selling). With Taiwanese Su, it seems that his last wager went belly up. In stock market lingo, his last trade tanked.

It seems clear that speculation is driving the purchase of ships today. People with access to funds, sensing that prices cannot go much lower, are snapping ships up like they would a blue chip stock that has crashed 30 percent for no good reason. Like in the stockmarket, many of the purchasers are not long term investors. They will buy low now, putting pressure on struggling shipyards to get rock bottom prices. Including in Japan, where shipyards are being encouraged by government policies and sweet deals to push for orders to gain marketshare. 

And these speculators will sell when asset prices rise a year or two or ten down the line. Just like the stockmarket; the only difference is the longer time horizon speculators in shipping have to live with. Just like in the eighties, when older ships were snapped up by punters only to be laid up, then reactivated when prices started rising. And sold. The only difference today is that the gamble is being made with newbuilds.

Long term traditional shipowners will be at a huge disadvantage in this atmosphere- any attempt by them to manage today’s overtonnaged reality (some shipowners in Europe are even contemplating collective lay-ups) will come to nought in this environment of stockmarket-like speculation that is close to gambling. Because, although the newbuilds being ordered today will come online a year or two down the line, the psychological impact of this additional tonnage at a time like this may well be crippling for freight rates, which are at unsustainable levels even today.

This is not a good time to be a traditional shipowner. You could easily lose your shirt being prudent and wise and following sound economic principles. You may not lose your shirt because your rationale is faulty; you can lose it because you are in the wrong place at the wrong time and because, to put it bluntly, you insist, still, on playing a game whose rules were changed long ago.


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