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The asset appreciation play has yet to leave port

The so-called ‘asset play’ investment strategy, buying low and selling high, is a well-known way of generating outstanding profits in shipping. In an industry as volatile as shipping, where freight rates can expand or shrink by a multiple in a matter of months, asset prices can fluctuate substantially over time. In the last decade, when the market was moving in one direction, asset playing was almost a guaranteed way of making obscene money in shipping.

Not to be held back by the market crash in 2008, the gospel of buying ‘cheap ships’ was the rock upon which many business plans in shipping were based upon. There were so many ships to be bought cheaply from distressed shipowners, from distressed shipping banks, from bankrupt KG funds in Germany, from shipbuilders that got stuck with contracts in default and ships at their slipways.

The ultimate opportunity for establishing a position for a possible asset play took place in 2016 when the BDI reached its lowest point. In 2016, there were days that good quality dry bulk ships for sale could not get an offer or an interesting party to send an inspection for a pre-purchase inspection. Ten-year old dry bulk vessels in 2016 were selling at a multiple of their scrap value; and tankers and containerships, although better appreciated, were selling at comparably valuations.

There were not many shipowners in 2016 that were not pounding the table for the buying opportunity of the decade if not of a lifetime; a couple of shipowners called for ‘blood in the streets’ buying opportunities at a few conferences. 2016 indeed was a year that many a shipowner would wish they could put behind.

Thankfully, 2017 is a better year, for the most part for dry bulk vessels and containerships, although tankers have been experiencing a deteriorating market at present. The dry bulk and containership markets have improved compared to 2016, and when compared absolute bottom of 2016 to a relative high in 2017, the BDI was up by a four-fold. So enthusiastically and strongly the dry bulk market moved up, that many shipowners with plans to buy ships were crying that the market took off and they were left behind: too late to buy anymore as the asset play boat had left the dock.

There have been a couple of examples whereby dry bulk vessels that were bought in 2016 and sold in 2017 demonstrably doubled in price and fetched their shipowners the windfall of a few million dollars of a profit within a year. Not bad. Not bad, at all. In the last decade, lots of money was made by just flipping ships. As painful as it is to remind, modern capesize vessels were selling in 2008 well in excess of $150m and a shipowner missed on the opportunity selling a resale VLCC at that time at an unheard of $200m price because he didn’t want to pay a full commission of 1% to a shipbroker. Modern capesize vessels had been sold last year as low as $32m and VLCCs can still be had at $80m. As sweet as the market is when shooting up, it can be brutally ugly on the way down; especially when the asset play is levered to the hilt with ship mortgages and OPM.

From a purely investment perspective, asset play is mostly a speculative vehicle since it’s an opinion that an asset will appreciate and will be resold in a timely manner for a profit. When an asset play takes with shares, it can be easily levered with a margin account in order to amplify the profits. When asset play takes place with currencies or commodities, the leverage (since these are futures contracts, mostly) is astronomical by a multiplier of 100 or even more. In shipping in the last decade, it was a similar investment as ‘investors’ (whether shipowners or speculators) could obtain 90% leverage on loose covenants to speculate, effectively. The sorry state of the shipping industry presently can partially be explained by the ability to immensely speculate in shipping in the last decade with borrowed money.

As said earlier, shipping is a very volatile (variance between peaks and troughs) and we have no doubt that serious money can be made by just timing the sale and purchase of ships. As long as an investor or shipowner or speculator is right more times than they are wrong, and make more money when right than lose money when wrong, no objections to such a strategy. Risk management will have to be outstanding, and possibly helped with some good luck for one who is a bit superstitious, but an asset play has been known to make money. But, also losing fleets and fortunes when done improperly or not done at all.

We have seen several shipowners in different degrees of exasperation in the last few months about whether it’s too late to initiate an asset play position in the dry bulk market or how right they were last year when ship prices were at rock bottom. And, for the twisted part, how narrow-minded institutional investors have been by refusing to invest now in shipping, especially the dry bulk market.

There are many ‘loaded’ statements in the last paragraph, but we think that when it comes to asset appreciation and asset play, the boat has really never left the port. Two charts based on data for five-year old vessels from the Baltic Exchange (Karatzas Marine has been proudly been member of, and having access to such data) are provided herebelow.

The first graph shows asset prices since 2010, just after the shipping market started finding its footing from the 2008 collapse. There has been volatility in asset prices since then, and money could have been made if the timing was perfectly correct and prompt. However, there has been no clear trend of asset appreciation, despite the great debating that 2010 was still one of the worst years in shipping ever.

Paying closer attention to the graph with asset price since January 2016, the asset value curves are practically as flat as any highway in the great state of Texas (we lived there for 15 years!), despite the minimal improvement in prices in 2017. It’s correct that older dry bulk vessels (roughly 10 years old) experienced most of the volatility and appreciation in asset values in the last twelve months – and not five-year old vessels, but again, two points are clear: a) when it comes to asset appreciation and playing the market to benefit from increased asset values, the boat – it seems – has never left the port, actually – the lines are flat, more or less; and, b) when it comes to asset playing in shipping, it’s easier said than done in times when there is no clear market trend, and a strategy best left to professionals in the market, especially to those able to be playing with their own money or substantially own equity or their seed funding, which would have to be substantial, in our opinion.

There are many more fine nuisances when it comes to asset playing, and given our expertise and line of business as shipbrokers to banks and institutional investors and independent shipowners, and as vessel appraisers and investors in shipping – on our own right, we have seen first hand what has worked in the past and keeps working over time and business cycles, and what ‘asset play’ projects act as a people’s exhibit that ‘a sucker is born every minute’ when it comes to ‘buy cheap ships now’.

But again, the volatility in shipping and its ‘saltiness’ are what tmake this industry so easy to be passionate about. And, yes, the saltiness of the seawater is an added bonus of what it makes this industry loveable, too!

There are many good reasons and ways to be invested in shipping at present; the ‘asset play’ boat has not left yet the port in our humble opinion, though.

Basil Karatzas

Basil M Karatzas is CEO of Karatzas Marine Advisors, a maritime consultancy and shipping finance firm based in Manhattan, New York.
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