“The past is a foreign country; they do things differently there.”
P. Hartley The Go-Between
It certainly appears that way to me. If I look back to the summer of 2008, it does seem like I was in a foreign country. And indeed I was: I was in the UK (I now live in Greece) when it was still a member of the European Union, and under a Labour Government, just before all hell was about to break loose with the collapse of Lehmann Brothers. Things have changed fundamentally and immeasurably since then.
But the past is a foreign country in our memories too. I cannot really say with any certainty how I was feeling about the market at the time except it was hard work, and deals were being done at numbers that in retrospect seemed amazing but at the time seemed normal. But that was the time, and those were the deals. It is indeed a foreign country and we did things differently there.
So when people ask me today – as they do – what do I think of the current dry bulk market, I try not to refer back to the past. Others, I know, like to frame their thoughts of the present in the past, but I suspect that this is because they want to tell a story, which is after all the most effective way of selling something. It is a clear and easy way to make people feel good, as they remember the good feelings of the past. Our memories are very efficient in blocking out the bad times of the past. When I think of my childhood growing up in Coventry in the English Midlands, the summers were hot and dry – we were never locked up inside to shelter from the rain – and the winters were cold and snowy, and we built snowmen and slid around on the pavements. But I am remembering the long hot summer of 1976, and the cold winter of discontent of 1978-1979. Everything else has faded. My memory is not accurate enough by itself to give me a true picture of how it was, but it doesn’t stop me relating to it.
Heraclitus memorably said:
“No man ever steps in the same river twice, for it’s not the same river and he’s not the same man.”
This is a wise observation especially if you consider the sale or purchase of ship like crossing a river. The flow of cargoes is not the same as it was in 2008, and my memory of them has been corrupted or enlightened – whichever way you look at it – by the experience and knowledge gained in the intervening period. We stand on, or in, a different river now, and the currents flow in different ways.
But history does affect us, because it is there that we gain our wisdom.
“Life can only be understood backwards; but it must be lived forwards.”
And living is what we must do, because life requires action, and engaging in the world, unless you are a philosopher. Philosophers I imagine make poor shipbrokers, and shipbrokers are even poorer philosophers, so I will stop the ostentatious quoting and name dropping and move on to what I think about the market today, if nothing else to clarify my own thoughts.
2021 started slowly, but for many reasons not yet understood, by March the market started flying, but not as we may have expected. This time, the market was driven from the bottom up, the handies moving first and stronger. There is speculation for the reasons behind this. One theory is that because the container ships were full of consumer cargoes to fight the boredom of lockdowns (or empty containers desperately needed to keep the movement of webcams and home gym equipment moving), break bulk and project cargoes were being pushed on to handies, and this meant more tonne miles on unusual routes. I think it’s a nice story and whilst there is some evidence of this trend I don’t think it’s the whole story, not by any means.
For all the talk of China stimulus via infrastructure development post COVID iron ore and coal shipments are not experiencing the same insatiable demand as they did ten years ago, the past, otherwise capesize rates would be off the charts. Chinese industrial growth is not the primary driver, which is a significant difference from the boom years of the 2000s.
So what is happening? I don’t know, but here are a few points worth noting:
– The capesize market is not dragging the rest of the freight market behind it
– China is not the only or even the main driver
– Fleet utilisation is very high for all sizes
– Atlantic and Pacific basins are competing with each other, especially in the smaller sizes with fronthaul becoming backhaul and vice versa, depending on the week, or even the day of the week
– Congestion is evident in both loading and discharge ports
Putting all this together – and I have missed out a lot of other just as relevant stories – this speaks to me of a shipping boom driven by a lack of tonnage. There are not enough ships to go around, so if you want ships, either for cargo, for period cover, or just to play the market, then you have to pay.
Moving on to sale and purchase indeed these are strange times. There are very few ships openly available for sale. Owners are reluctant to release ships for sale, because they are making more money on the freight market than they can realise by selling a ship, despite the strong increase in values in the last few months. Average freight rates for all sizes – according to todays’ Baltic Dry Indices are between US$ 31,246 – US$ 32,469 per day. This means income (assuming no offhire on an index linked timecharter) is US$ 1 million per month per ship, albeit before operating and capital expenses. This is astonishing.
But we should remember that many ships are not on index linked charters, and in fact many are still locked into lower paying employment fixed before the current boom. We are not yet six months into this market, and many owners have yet to experience the increased cash flow many observers assume.
In the S&P market therefore, ships really for sale remain very few, and there are a few isolated buyers. This has not stopped values increasing exponentially, but this is a function of the tightness of the market rather than rampant demand. All it needs is two buyers (or more) bidding for a ship to increase prices. Owners are more content to make money from the freight market rather than the S&P market, and as yet do not see the wisdom of selling off their cash cows for a handful of beans.
And here is another difference between now and life before 2016 at least. There is still little finance available except for the dwindling number of banks offering traditional mortgage secured finance, and the more liner/long term charter oriented lease-back finance available from Chinese, Japanese and other trading houses and banks. With the exception of two or three companies – Castor, Costamare, Taylor – there are few owners on buying sprees on the back of capital market or other sources of funds.
This is why prices are still some way off recent historical highs (by that I mean post 2008), despite freight rates being the best since then. Shipping is now seen as a difficult asset class for general investment in considering its carbon footprint, rightly or wrongly. ESG investors look for other sectors instead, and shipping remains beautifully unfashionable yet again.
These same environmental concerns are keeping the lid on newbuilding investment as the regulations and technology to deal with them are gloriously opaque, despite the best intentions of people who want to see change. There is nothing on the drawing board to cost quite yet except what already exists, so many buyers are looking to invest in ten year old vessels rather than modern ships to avoid having expensive stranded assets in 8-10 years time.
So what does the river look like? It is certainly not the same. It is one with steady and growing tonne-mile demand, high fleet utilisation and a lack of fresh supply via newbuilding orders, one flowing with money into owners’ pockets who have ships open in the freight market now. Further, the owners of these ships – unless they are ships they are happy to see the back of – seem reluctant to part with them whilst the river flows with gold. There is nothing on the horizon that I can see that will disrupt this flow, but that does not mean that nothing can.
At present there isn’t a widespread deal flow in terms of ships actually changing hands. Yes, there are a lot of deals being done, but they are restricted to a restricted group of buyers. I console myself with the thought that I am blessed with conservative and sensible clients who do not jump to buy the worst ship in the market just to have a ship, or on terms that don’t give them access to cash flow in the near future. Likewise they are not persuaded to sell just because prices have gone up. These are not clients that will make me rich in the short term just because the market is higher, but hopefully they will still be around in the future to address the new challenges of reinvestment – and divestment – with a bit more money in their pockets to invest.
The past is indeed a foreign country, with different customs, different food, different forms of entertainment. But this particular go-between hopes to still be around when the time is right to cross the river again in the hope that there will be money flowing in it, and I that I too might get myself a little wet in the process.