New York: Shipping’s fragile recovery risks being rocked by a wave of new orders, while traditional shipowners are facing a severe funding gap, warns a leading New York-based ship wheeler dealer.
Basil Karatzas is the ceo of eponymous New York ship finance advisory Karatzas Marine Advisors, a regular voice in social media and across a broad range of shipping titles.
It’s not only tonnage demand concerns, but also tonnage supply issues that can limit upside potential for shipowners, Karatzas notes.
“With the forward orderbook getting thin for many yards,” he says, “a shipbuilding industry with effectively unlimited capacity to expand – at least for commoditised vessels like small dry bulk, with commodity prices falling like a rock – and thus lower steel plate and material cost, and newbuilding contract prices, combined with the appreciating value of the US dollar, many more ships are begging to be built; in a low interest rate environment and with many investors desperate for projects to invest, it will not take much to have another major wave of newbuildings.”
Karatzas feels the tanker market at present has gotten ahead of itself – the current rally unlikely to last more than a few months more.
Containerships, meanwhile, do not seem to have much to expect in terms of what Karatzas terms as “pure alpha” from a weak macro environment. “However,” he quickly adds, “absence of alpha does not necessarily mean lack activity in the market, whether consolidation, fleet expansion with bigger ships, etc, as the players in this market are preparing for the next battle.”
For dry bulk Karatzas reckons it is hard to see how the sector could get any worse. “By elimination, the market has to improve, but again, improvement is not always associated with strength,” he says.
Avoid newbuilds and buy secondhand, especially in dry bulk is Karatzas’s advice.
“Given our concerns on both tonnage supply and demand, ordering more vessels likely will not make for a profitable strategy,” he says. “Not only because shipping can ill afford more vessels to be ordered, but also newbuildings still cost too much and do not offer the best value proposition. However, we do think that there are business opportunities to start, grow and expand fleets with vessels in the secondary market.”
Such investment opportunities are all very well for those with ready access to capital, but this is something that is not so easy for the industry’s traditional owners these days.
“Banks implicitly discriminate against the smaller, traditional shipowners,” Karatzas says, “and they tip their hand towards the bigger owners with economies of scale and consolidated financials, critical mass and modern fleets, and encourage the prospect to be meaningful players in the industry for the decade to come, hopefully with prospects to grow and get bigger, and hopefully to access the capital markets and become public companies, if they are not already so.”
The traditional example of the shipowner borrowing from a bank with which they have done business in the past and have established a strong record or debt financing based relationship banking is getting to be a thing of the past, Karatzas reckons.
It’s not that banks have moved to the other extreme of the spectrum only and suddenly became too conservative, but that the new world of banking has changed; shipowners will be forced to change with it, there is little way around it, Karatzas thinks.
Nations such as Greece with some 1,000 owners will likely see a contraction in numbers.
Options for smaller owners are to put their own equity on the table, scale up, get financially sophisticated and look for new sources of capital through corporate finance, institutional investors, private equity and the capital markets. “This is not a turn of events that many smaller shipowners can afford, are willing or prepared to deal with,” Karatzas concludes.