The partnership of small, family-ran
shipowners and cash-laden, private equity players mirrors the classic tale of
Prince Charming and Cinderella.
The Wall Street financial firms embraced
lowly shipping companies, thinking they could catch the rebound in an industry
with some of the largest boom-and-bust cycles.
But the marriage between these two vastly
different worlds has already gone sour.
Too Many Ships Sink the
Industry
Five years into the union, the bulk shipping
industry, which includes vessels that carry iron ore, coal, and other dry
commodities, is in the depths of a depression.
Rates for the most common of these type of
vessels – a capesize – are currently around $4,300 per day. That is below the
capesize’s daily operating cost of $6,500. When you add in financing and other
costs, each vessel costs its owner about $13,000 per day!
Right now, operators of these ships are
earning well less than half their costs on a typical journey. This is a huge
contrast to 2008 – the shipping heyday 2008 – when vessels garnered $200,000
per day.
The Baltic Dry Index, which tracks the
daily earnings of vessels hauling dry commodities, is down 95% from its 2008
peak and hit a three-decade low in February.
So, why are dry bulk shipping rates today
so low?
Well, part of the problem is a slowing
economy in many parts of the world.
However, the core issue is a massive
oversupply of these types of vessels. You see, the Wall Street Prince Charmings
are continuing to open their wallets and giving shipowners about $5 billion
annually.
The shipowners, in turn, have been doing
the only thing they know how to do, apparently… build ships. Since 2009, the
size of the dry bulk shipping fleet has increased 5% or so every year on
average. Yet the amount of commodities shipped rose by only 3% to 4% annually.
It’s a simple recipe for continuing to losing money.
At least one prominent shipowner – Nikolas
Tsakos, the CEO of Tsakos Energy Navigation (TNP) – has tried to talk some
sense into the financers. Tsakos warned the deep-pocketed private equity firms
to quit financing so many new ships, or they would risk “destroying” the
market.
Instead, Tsakos wants private equity to buy
existing ships from struggling shipowners. But to date, private equity has
little such inclination.
A Ray of Hope?
There are only two positives for the
industry to cling to at the moment.
The first is that ship demolition rates are
way up this year. Some smaller shipowners have thrown in the towel and decided
to just scrap certain ships.
Clarkson Research Services reports that 4.6
million deadweight metric tons of Capesize ships have been sold for scrap so
far in 2015. That’s up 368% from 2014’s level. The overall ship-breaking rate
is up 37% this year.
But the real hope for the industry lies in
consolidation.
This idea was brought to the fore by
private equity pioneer in the bulk shipping industry, billionaire Wilbur Ross.
He acknowledged the “irrational exuberance”
for the industry by private equity saying, “Shipping’s structural problems can
only be solved by massive consolidation.”
In other words, fewer, larger firms
controlling the fleet. You see, shipowners could idle some of their fleet to
help bring prices back up. But the industry is very fragmented, and while all
of the shipowners agree that idling vessels would be good, no one wants to idle
their own vessels.
Ross is no martyr, though. He has spent
about $2 billion backing the building of new ships through various investment
vehicles.
Dim Investment Possibilities
Consolidation may be the answer to the bulk
shipping industry’s woes, but whether the many, family-owned businesses will be
willing to sell out to the likes of Ross is definitely up in the air. Many of
these families, often Greek, have been in the shipping business for
generations.
All I know for sure it that until some
consolidation happens and new ship building slows drastically, this is an
industry to be avoided.
After all, the current 25% overcapacity
will not disappear on its own, and about 1,000 new vessels will be delivered
this year alone.
Already this year, eight shipping companies
have filed for bankruptcy. It’s likely others will follow, including some of
the publicly traded companies.
And the chase continues,
Source:
wall
street daily. 8 April 2015
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