Singapore: As 2014 draws to a close shipowners are in no better state than a year ago. Indeed, many shipping lines’ balance sheets are even more stretched than at the end of 2013. What has been remarkable about this protracted downturn has been how few bankruptcies there have been – private equity, the bête noir of shipping, has arguably staved off many, while at the same time elongating the slump.
Shipping has never fully shaken off the impact of the global financial crisis, argued Soo Cheon Lee, co-founder of Hong Kong independent fixed income specialist, SC Lowy. The problem, he said, is that now with private equity and hedge funds coming in so strong, capacity has built up once again threatening the future stability of rates in many ship classes, from capesize bulkers to containerships.
“The nuance here is that private equity is by definition a type of investor that requires an exit, often over a shorter time horizon than it takes for shipping cycles to turn,” Lee observed. How will these investors approach exits if the companies they have stakes in or control are in a sector are in loss-making businesses? That’s one question that will vex the market in the upcoming three to five years.
Private equity investment in shipping touched new heights this year, plateauing with estimations of as much as up to $40bn of PE funds being directed to the industry, much of which is going into opportunistic ordering of new tonnage.
“The magnitude of this ordering will sharply add tonnage supply and could well stifle or delay any sustained recovery,” reckoned Manish Singh who returned to V.Group as group director for strategy and M&A this September. “The short- to mid-term exit horizons of a typical PE investment would mean that some PE backed shipowning outfits are likely to match exits to favourable market conditions and may see unfulfilled returns for some investors who are only in for the short run and uncertain market conditions for the wider long term stakeholders.”
In Maritime CEO’s opinion no other sector of shipping has been so swayed by PE in recent years as the heavylift one, with product tanker trades latterly challenging this assumption. How PE makes an exit from heavylift remains a mystery for many.
“Plain talking,” Svend Andersen, ceo of BBC Chartering, told us frankly, “shipping remains a low return, high risk business and it may only prove successful for long term engagements – this is valid today more than ever.”
Consolidation in the heavylift sector is ongoing, according to Andersen.
Unlike many of his peers, Jim Furnivall, managing partner at Alterna Capital, one of the big PE investors in shipping, claimed his firm is very much in shipping for the long term.
“For the time being I think that hedge funds and probably private equity are likely to focus elsewhere than on shipping. The returns on the capital that has been deployed will have the major impact on whether this is a sector of permanent interest,” he said.
As to when Alterna will cash out, Furnivall has a few principles he wants to follow.
“When we make a shipping investment our base case investment model always assumes that liquidity comes from selling the assets and distributing the sale proceeds,” he explained.
“We believe that if we get those things right and are patient investors, industry volatility will create attractive exit opportunities,” Furnivall said.
Bob Burke from Ridgebury Tankers, a firm that has risen very fast in a short period of time thanks to PE cash, told Maritime CEO: “Private equity is only there when they see returns that beat the mean in any industry. PE is there for an asset play, once that is gone, they will move on to something else. Any pullback will be done opportunistically.”
Such opportunistic pullbacks might be tricky given the stale state of the markets, meaning PE could be here for a while, as indeed could overcapacity.
The current supply/demand imbalance seen across many shipping sectors could well be the new normal, reckoned Sadan Kaptanoglu, a board member at the eponymous family conglomerate, Kaptanoglu
“As our fellow shipowners and investors continue to order there will be no continuous improvements in the market and, if this is the new normal, then except the asset players, there will be not enough windows for healthy returns,” she warned.
One of the most talked about men in shipping this year has been Emanuele Lauro, whose Scorpio Group has risen sensationally fast in no small part thanks to institutional investors. For Lauro, who took over the family business from his grandfather a decade back, he maintained: “The nature of the shipping business has changed. Today, it is more of an institutionalised business.”
Scorpio appears to be ahead of the pack in realising this changed cycle dynamic with its listed subsidiaries operating like asset holdings or trading companies.
Paolo Cagnoni, ceo and chairman of Mediterranea di Navigazione, strongly believes in two parallel shipping industries coming up. “On one hand there will be the traditional markets more easily to be attacked by private equity funds, while on the other hand the niche segments, with companies like Mediterranea providing tailor made services to charterers through high quality ships and crews.”
However, not everyone is convinced that this new direction for shipping will last forever. Michael Tusiani, chairman of US brokers Poten & Partners, told readers that the advent of public money and other sources of capital such as private equity and hedge funds has changed the landscape because of the effective separation of the ownership of physical assets from their day-to-day operations.
“It seems that access to public financing has outweighed the desire for secrecy which the traditional shipowner valued so highly,” he noted.
The primary focus of these public shipping companies, he reckoned, is to demonstrate quarterly growth.
“As there is a greater pressure to produce quicker returns, operational integrity could be potentially compromised,” he warned.
Most shipowners have put making short-term profit above all else, Tusiani said. “The long term doesn’t seem to matter particularly when capital markets are robust,” he added.
However, Tusiani does not believe that this new shipping structure — where ownership is separated from commercial and technical management – will last for a long time.
“As soon as there is a major problem, charterers will not stand for them,” he predicted.
Tankers have picked up as the northern winter drew in, with rates for VLCCs pushing towards six-digit territory, something that has frustrated the normally genial Fred Cheng. For a long time, Cheng, the famous owner who soared high and crashed spectacularly with Golden Ocean in the 1990s, has been championing prospects for VLCCs. It was a mistimed major investment in VLCCs in the late 1990s that brought about his downfall.
Cheng is absolutely convinced that market dynamics point to a very strong uptick in VLCC earnings come the fourth quarter of 2015. “The markets are coming together, there is a great opportunity in VLCCs,” he claimed, while cautioning that the orderbook pushing into late 2016 and 2017 will dampen prospects quite quickly. The frustration for Cheng is not being able to find the funds quick enough to get in on the act. “I am talking to people, but I don’t think I have the time to get everything in place quick enough,” he said.
Ridgebury Tankers’s Bob Burke has been similarly bullish on suezmaxes.
“The conventional wisdom in the US and much of Europe is that the two million barrels of crude from West Africa to the US Gulf is dying, largely because of shale gas,” he said.
Burke compared suezmaxes to Boeing 737 planes – “bigger enough for long haul but can do regional too”. It is their flexibility that is allowing them to take work from VLCCs and aframaxes, he said.
Still, the real reason for his focus on suezmaxes was on the tiny orderbook for the segment plus noticeable increases in ton/miles.
“The biggest thing we look at is the orderbook,” he said, adding: “I’ve never seen an orderbook so low as suezmaxes today.”
While crude tankers have enjoyed a decent run of late, product carriers early year spurt petered out. Part of the problem for product tankers is that they became a solid bet for many, and now too many have been ordered.
“Everybody builds on relatively well-founded expectations,” said Kim Ullman, ceo of Concordia Maritime, “but when everybody does it the expectations go away.”
While tanker rates have rallied, Maritime CEO’s resident finance columnist Dagfinn Lunde remains worried about prospects for dry bulk although he is not as bearish as some. “Talk of no decent markets for dry bulk through to the end of the decade is far too pessimistic,” he said.
“Dry bulk will have spikes especially for bigger ships, but there is enormous oversupply across the board,” he said.
When we met up with Atul Agarwal, managing director of India’s Mercator Lines, he was especially pessimistic.
“There does not seem to be a silver lining on the horizon for shipping in this entire decade,” he said. “I don’t see bulk shipping improving for some years. There is excess capacity, and too many orders continue to flow into Chinese shipyards.”
Quite so, said Clarkson’s Dr Martin Stopford who also warned the dry bulk downturn could last all the way through to the end of the decade. Nevertheless, the downturn could provide owners with a chance to become more innovative and efficient, he said in an article on Maritime CEO that drew many hits. In a rallying call to owners, Stopford urged: “It’s time for a reappraisal about what our strategy is in shipping and time to think whether that $180bn of investments last year in new ships needs to be matched by perhaps a much smaller but significant investment in increasing the industry’s technical capability to use this great new revolution we have, information technology.”
$180bn is a vast amount to have spent when the markets were so fragile and this looming orderbook set to deliver makes many owners worried.
“We shipowners are normally reckless and destroy our own market,” commented Paragon Shipping’s Michael Bodouroglou.
The ever sage but normally optimistic CC Liu from Hong Kong’s Parakou admitted he expects a “tough market” to continue for a few more years.
Arun Kumar Gupta, chairman of Shipping Corporation of India, predicted another major storm coming in 2016 and 2017 with far too many vessels ordered recently.
Contrary to many of his peers, Alexander Panagopulos, chairman and ceo of the Greece-based Arista Shipping, has an optimistic sentiment for the shipping market looking at the short to mid-term future.
“We are living in interesting times,” he said. “The US economy is again becoming the world´s locomotive and commodity prices including most importantly oil, are dropping, both of which are positive,” he noted. However, China, the force driving shipping markets for the past decade, while still growing strong is slowing down.
“Shipping markets correct relatively fast and reaction times are becoming shorter. Orders are slowing down and scrapping is accelerating. All the above lead us to assume that the market will find its balance soon again,” Panagopulos said.
In the bulk trades in 2014 Spyros Capralos has clearly been one of the newsmakers of the year. The chairman of Star Bulk Carriers now presides over the largest US-listed dry bulk shipowner with a fleet of 103 ships – including newbuildings – following mergers and acquisitions with Oceanbulk and Excel Maritime, aided by its largest shareholder Oaktree Capital. With consolidation the name of the game at the moment for private equity’s binge in shipping, Star Bulk is leading the way. Its market cap is now around $1bn.
“Mergers are difficult, but possible,” said Capralos, admitting that: “Right now bulk is still at a low part of the cycle.”
The word ‘consolidation’ has become one of the most used in shipping as the last days of 2014 play out with a host of high profile mergers – from brokers to owners. Rolf Habben Jansen, the new Dutch ceo of German containerline Hapag-Lloyd, is busy consolidating Chile’s CSAV and admitted to Maritime CEO he is not averse to bolstering the Hapag-Lloyd brand, but not for any price. “We would like to play an active role in any further consolidation,” he said, “but only if the right opportunity comes by. We can be successful without it.”
While many of his peers remain wary of box rate prospects for 2015, Habben Jansen is hopeful.
“It is important to look not just at the number of ships, but to look at ports, congestion, inland issues, the costs of low sulphur, and so on,” he said, adding: If I were a betting man, I’d expect rates next year to be somewhat higher.” Volatility will remain however.
Mandarin Shipping, the shipping line founded by Tim Huxley in Hong Kong, made headlines when revealing to Maritime CEO his orders of six 1,700 teu ships. “This sector has had limited investment over the past few years, particularly since the German KG market hit problems. Liner companies are particularly sensitive to fuel efficiency and hence we see an opportunity to build an Asian based company providing a first class service with modern, fuel efficient ships to the major liner companies,” he said.
One of the big liner stories of the year was China’s refusal to greenlight P3, a proposed mega alliance between the top three containerlines, Maersk, MSC and CMA CGM, just as it downed Brazilian miner’s plans to deploy giant 400,000 dwt bulkers to China. The common link between these two events, despite the official announcement coming from government ministries, has been the maritime lobbyist-in-chief, the China Shipowners’ Association (CSA). The CSA works very hard behind the scenes to get its members’ viewpoint across well to the government.
Zhang Shouguo, the secretary-general of the CSA, told this site: “Alliances are necessary for the shipping industry to improve efficiency and services, however competition is needed.”
Alliances are indeed vital, concurred United Arab Shipping Corporation (UASC) president and ceo Jorn Hinge, who has now formed a tie up with CMA CGM and China Shipping. “Alliances make good sense in liner shipping. They allow lines to adjust capacity more easily to fluctuating market demand,” he said.
One of container shipping’s top vessel providers is in doubt that alliances are necessary.
“The industry has structural problems that it must deal with,” Seaspan’s Gerry Wang said, adding: “The industry is going towards a more systematic approach to business. Container shipping is not like dry bulk or tankers, it is more like the airlines.” Wang noted how airlines cope with capacity much better and how they work better through alliances.
Shipping will have to contend with a host of new emission control areas from next year, something that has brought much head scratching from many owners.
“The 0.1% sulphur emissions control area rules that will apply in the North Sea, Baltic and English Channel from next January are set to split the shortsea shipping industry into two classes: operators that can still compete, and those that will struggle”. That’s the opinion of Emanuele Grimaldi, ceo together with his brother Gianluca, of the Naples-based Grimaldi Group.
The growing environmental legislation stacking up against shipping has meant alternative fuel research has become a very hot topic in 2014, with LNG leading the way as the most likely alternative ship fuel.
“With sulphur restrictions now really taking hold through ECA compliance we believe that the dash for gas just may be about to accelerate further,” said Mark Bell, general manager of the Society for Gas as a Marine Fuel.
Finally, Maritime CEO takes the advice of owners who have ridden the good and bad times thrown at them.
Take for instance, these wise words from Bharat Sheth, Great Eastern’s soft-spoken vice-chairman and managing director.
“Eventually, this game is about how sensibly you allocate your capital,” he told Maritime CEO when interviewed in Mumbai. “Nobody can really anticipate the direction in which the market will move, so we concentrate on entering any sector where we will get trading returns, and also where we think the newbuilding cost of a similar asset can only go up in the future.”
That’s true, admitted Varun Shipping’s vice chairman and managing director Yudhishthir Khatau, someone who spectacularly got the markets wrong, leading the company very close to bankruptcy.
“The fundamental issue in shipping is matching your assets with your liabilities,” said a chastened Khatau.
Among owners stepping down this year after a long time in the limelight were Precious Shipping’s Khalid Hashim and BW Group’s Dr Helmut Sohmen. The latter had some interesting reflections on how shipping has changed in his 44-year career in the industry.
The main changes during the past four decades, Sohmen said, have been the shift from a very private – “at times considered even secretive” – business to one that has become very public. This, Sohmen puts down to being a natural consequence of the development of financial markets and the heavier engagement in shipping by short-term players.
A second development, he noted, has been the increasing government involvement in all aspects of the operations of shipowners, prompted by greater scrutiny of business in general, the emergence of new safety, environmental, and liability issues, as well as the closer attention paid to questions of taxation, anti-trust, manpower protection, or the adequacy of insurance cover.
“More sectors of shipping have become commoditised,” he said.
Arguably one of the biggest changes in his tenure at the top has not been with shipowners, but the people who supply the ships.
“What has changed significantly is world shipbuilding capacity and the resultant threat of permanent overtonnage,” Sohmen warned.
Looking ahead, Sohmen can see plenty of potential changes such as resource production techniques and locations, cost of fuel, environmental considerations, direction of trade flows, larger canals. However, all of these issues have not yet settled down and might throw up surprises, he suggested.
“Owners should not make too many assumptions or believe in linear projections based on historic precedent,” is the Austrian national’s sage advice.
As he pointed out, few people would have guessed only a few years ago the success of fracking, the political decisions to terminate nuclear power generation in major industrialised countries, or the incredible Chinese economic success story.
This sentiment was echoed by Parakou’s Liu, who said: “No one can predict the future market precisely. A policy, a natural disaster or a new innovation may change the whole world.”
Starting next Monday, Maritime CEO launches its annual Future of Shipping Poll. Regular interviews with the top names in shipping will return on January 5.
For many leading insights into the markets and what the top names in the industry are thinking do check out the latest issue of Maritime CEO magazine, available for free here. [19/12/14]