URSABLOG: Decisions In Indecisive Times

The timing of investment and divestment of ships is one of the few times that ship owners have control over their own destiny. At most other times they are in the hands of a freight market they have no influence over, although employment decisions – whether to trade spot or on short or longer term period charters – obviously affect the bottom line too. It depends on risk appetite and management, but risk appetite is not constant; in my experience the discipline to control risk is weakened by good times and excess profits. I spend more money when the sun is shining; I want to enjoy myself and feel good. Locking in income by fixing on period, or even selling, is an admission that the sun will not always be shining. It puts a dampener on the mood.

We are in a market phase at the moment when many owners are looking to refresh their fleets. They have a view, which I share, that the supply side is tight enough to react positively to increases – even minor ones – in tonne-mile demand, especially when combined with geopolitical, and geographical, disruption. However, when the prices of ships increase independently, perhaps in the expectation of better days in the freight market, or simply a short supply of particular ships for sale in the face of increased demand, for example for modern ships with more efficient main engines, is it still a good idea to buy ships?

The answer of course is: it depends. At the time of investment no-one knows the outcome. When the investment horizon is unclear, sometimes the tendency is – in the three deadliest words spoken to a hungry S&P broker – to “wait and see”, and enjoy or suffer what the freight market has to offer.

The assumption that a good freight – or S&P – market leads to increased transactions across the board for all players is misleading. Not every owner has to – or even wants to – buy or sell simply because the market is good. For example, those owners who simply held on to their dry bulk carriers during the period between 2003-2012 did remarkably well, and in some cases better than those that were more active in the S&P market at the time. Obviously those that sold near the peaks did astoundingly well, but such was the nature of the market at the time, particularly between 2006 and 2008, that buying ships even then was not a recipe for immediate disaster, because there was good business to be done in the freight market, even after the financial crisis of 2008. The disaster for dry bulk shipping came much later – in effect between 2015 and 2017 – when the freight market crashed catastrophically due to an over-supply of ships.

People with shorter memories than mine – and by that I mean younger people – are suggesting that today’s ship prices, especially for modern ships and newbuildings are as high as the wonder years of 2007-2008 and therefore we are in the middle of a boom. I, for one, do not agree with them, mostly because I was there at the time. This is not because I have become a grumpy old man – although that may be true – but because even though asset prices have risen, and they have, the freight market is not showing any obvious signs of booming any time soon, either in the physical or the paper market. Back in those days – despite the falls of 2005 and 2008-2009 – the freight markets were driving prices up and in some periods prices were finding it hard to keep up.

We are not now in a phase when five year old kamsarmaxes can be bought, eagerly, at US$ 90 mill. We were then. We are not now in a phase where twelve year old small handymaxes were sold at US$ 60 mill. We were then, and I know, because I sold one.

So sure, yes, prices have been rising, but there is a ceiling to these prices whilst the current freight market lacks upward momentum (but is by no means poor). I would also argue that the recent surge in both newbuilding prices and the appetite to sign newbuilding contracts has eased as delivery slots have filled and the even higher prices that yards are asking are not being taken blindly.

One of the things that increases prices, and the general mood of the market, is the advent of other money into shipping from outside the industry. Despite the best efforts of some, there does not seem – to me at least – to be a rush of new money from capital markets, hedge or private equity funds. Most of the money seems to come from established sources, long familiar with the markets, and using the more traditional types of financing. In fact other types of finance – Japanese sale and lease back type sales for example – seem to be being pushed for reasons other than providing finance for people desperate to get into shipping. Needless to say the terms and conditions of these types of deal are not as attractive as traditional bank finance being offered at the moment.

In trying to think through this conundrum, and also assist my clients in their decision making by throwing a few new ideas around, I have been dipping  into financial literature outside the world of shipping, and in particular in investing in shares. There is a lot of material out there, and much of it is breathless and almost irrelevant to shipping investment because it deals in a market which is fully liquid and assumes the availability of willing buyers and willing sellers at all times, which is certainly not true of even the dry bulk carrier ship sale and purchase market. One aphorism caught my eye:

Amateurs blow up by taking large losses; professionals blow up by taking small gains. 

The idea is that a lot of professional investors get bored with their best ideas.  Everything happens as expected, the stock keeps going up, finally it reaches and exceeds the price target … you wouldn’t buy the thing at this price, so should you sell it?

Let’s extrapolate that to – for want of a better phrase – traditional ship owners. Their policies of buying when they did and holding onto the ship has worked well to a greater or lesser degree. But if they did sell, and crystallise their profits in cash, what would they do with the money? Buy a more modern ship? Yes that would be a good idea, but they are reluctant to buy at these elevated prices because of the very fact that they are elevated has induced them to sell in the first place. Newbuildings have been a more obvious outlet, but that route, as described above, has reached a point where risk outweighs reward, however further in the future that could be. Should they invest in another sector, like tankers or containers? Well tankers are very expensive, and containers are all over the place, and both carry a great deal more trading risk at present than dry. So what to do? Wait and see.

When a particular stock reaches it’s peak and trends start to reverse, it’s because the marginal buyers have been exhausted. In the world of equity investment the top tick will happen when someone way down the food chain, who the early birds will never talk to, finally scratches their head and goes “maybe I should have some of that, it’s going up”. Shipping investors do not have such a diverse and complex ecosystem. Investing in ships Is not cheap, and you need a great deal of money to get in at any point of the cycle. But the lack of outside investors at the moment flush with cash rules out those investors less familiar with the ways of shipping that were so evident between 2013-2014, and arguably caused, and were in turn burnt by the crash of 2015-2017. These ‘amateurs’ (in shipping at least, in all other appearances they were very sophisticated) did take large losses and are unlikely to try playing the same game again. So further increases in prices without a push from the freight market seem unlikely for now.

The best way to succeed is to make sure that you really benefit when you’re right. The best way to avoid failure is to avoid making mistakes in normal times, and by taking money off the table when it is right to do so.

By making mistakes, I mean buying expensive ships just for the sake of buying ships, or because everyone else is. I say this even though I think it is absolutely essential for owners to err on the side of having ships rather than money at present if, as I expect, we experience a supply crunch in the next year or so. I mean buying ships at the moment needn’t be reckless, but does mean looking for value, even though it’s not the exact ship that you had in mind.

But another mistake could also be avoiding discussions of selling at today’s prices when a sizeable profit can be made, and banked. It may not be an offer you cannot refuse that triggers the sale, but the offer that you shouldn’t refuse.

I know many of my clients will agree with the basic thrust of my argument, but it requires a particular stubborn and disciplined long term attitude to carry this out, especially when the world disagrees with you. Maintaining that view when the world agrees with you – even if they agree with you for different reasons – can be even more difficult, especially for natural contrarians.

This stubborn, disciplined attitude I spoke of above is usually a lonely one to take.  It means filtering out the noise, even of those S&P brokers singing siren songs of untold riches and the realisation of all your wildest dreams. But the stubborn, disciplined attitude should not be confused with indecision. I think that the dry S&P market is stable enough at present to at least test some scenarios, bearing in mind that investment in shipping should be made – in my opinion at least – with the destination in mind beyond the current cycle, wherever we are in it, and wherever it ends and why. Just because we cannot see where we end up doesn’t mean that we can’t sail towards it, but always having a hand on the tiller to correct our course along the way.

Simon Ward