URSABLOG: Do The Rules Still Apply?

Around ten years ago, in the midst of the worst dry bulk carrier market for a generation, when some ships were being arrested and auctioned by pitiless and ignorant banks, and many others were going up the beach to be recycled well before their expiry date, I came up with the rather pompous sounding Simon Ward Three Golden Rules of Shipping Investment:

1)       Always Buy Cheap (cyclically, below the historical average, rather than the cheapest ship in the market at the time)

2)       Always Buy What The Charterers Want (not what you convince yourself you want because it’s cheap)

3)       Always Have Ships AND Money (you will not be able to take advantage of a rising market unless you have ships and up-to-speed management, and you will need money to suffer the inevitable downturn, when it comes as it surely will).

I also threw in the observation that shipowners only go out of business for two different reasons: debt and lifestyle, i.e. when they can’t pay back money they owe or they can’t be bothered any more with the day-to-day grind of ship management, and have – so they think – better things to do with their time. Or both.

Now, I am having to revisit these ‘golden rules’ because the facts have changed, and therefore – after Keynes – I should really examine whether I should change my mind. What follows particularly applies to the dry bulk carrier market, but although there may be some familiar echoes for tankers and container ships, I don’t have enough day-to-day knowledge of those markets to stick my neck out too far.

In between the noise and hustle of Posidonia parties and receptions I discreetly canvassed the opinions of the people I met who were baffled by the decisions of owners to buy ships when prices “did not make sense”, “bore no relation to the freight market” or were simply “crazy”.

Whilst these phrases are a commonplace in market conversations, I do not think that they are a correct way of thinking about ship sale and purchase. Those decisions to buy may appear irrational to people viewing things from outside the decision-making process, or do not stand much scrutiny to those who operate within different parameters, but they are not crazy. Nobody purchases a ship from a psychiatric hospital – as far as I know at least – and whilst some suspect that particular owners may have borderline personality disorders, just because it does not fit into your way of thinking does not mean it’s crazy; it’s just a different way of reading the market.

The bulk carrier fleet is getting older, and the availability of decent ships from decent shipyards, whether in the secondhand or newbuilding market, is low. And when supply is low, and demand remains the same, prices go up ceteris paribus.

But all other things are not equal, and prices are rising, steadily, incrementally if not exponentially. It is incremental because a number of things are happening at the same time:

–           It is a good freight market, and people are collecting money, and at the moment that money has nowhere else to go – in shipowning terms at least – than reinvestment. Some dry bulk carrier owners are looking into tankers, container ships and gas carriers. The owners of tankers, container ships and gas carriers are looking into other sectors too.

–           Time is passing, and ships – like all of us – aren’t getting any younger. There is a desire from owners to rejuvenate their fleets, and the only way to do that is to get younger ships.

–           Newer ships mean those that have newer main engines, newer kit, more favourable designs. Younger models, to coin a phrase, always seem more attractive.

–           The investment horizon of most shipowners I know is not months or even years, but decades, especially if it is a family-owned business.

–           People are not as risk averse as they were, as the memory of previous crises recedes from the memories of those that suffered at the time, and the good times of today soften up the caution of yesterday.

–           Other money from outside shipping is coming in, and looking for a piece of the action.

But it is not exponential because:

–           The freight market is not flying, and prices are not struggling to keep up with freight rates increasing by eye-watering amounts on a daily basis.

–           The banks, whilst offering low spreads and credit lines for predelivery payments on newbuildings, remain disciplined: loan to value ratios are not increasing and financiers remain cautious about how much and to whom they lend.

–           The geopolitical and macroeconomic environment is so volatile – and unpredictable – that despite the fact that many see geopolitical disruption as only a good thing for shipping, the freight markets do not wholly agree. And what has been wound up can be unwound just as easily.

There are a few other signs that show that whilst people complain about the irrationality of ship prices, they do indeed make sense at present. What I can only describe as the “existentialist” desire for ships that will improve an owner’s fleet profile has not translated so far into a desire for any ship. Buyers are cautious about the types of ship, the designs, the quality of build they examine, and are not in a hurry to grab “anything that floats”. They are picky, and want ships that can compete well in the freight market at all stages of the cycle, and not just the one we find ourselves in at the moment. In my experience at least, they will turn down otherwise attractive looking ships in terms of age and size if they won’t be in the front of the queue for an open cargo, or have some liquidity in a poor sale and purchase market.

Likewise the premium paid for resales is measured against the cost of capital for a fresh newbuilding order from a good shipyard: the later the delivery, the longer the money paid in predelivery instalments is tied up, earning no interest elsewhere, or able to be used speculatively when the market conditions prove more favourable.

But there were worrying signs – for me at least – during some of the conversations I had around and about Posidonia, and from some of the contributions made during panel discussions I attended: alarm bells started ringing, not loudly, but they were there to be heard by those who were listening.

Firstly, as I have already alluded to, is the view that geopolitical disruption is only a good thing for the freight market, if not for some unfortunate ships and their crew who will continue to be threatened and targeted for reasons not of their making. This is, I feel, a short-sighted and perilous attitude to take, when we are sailing – literally – in uncharted waters at present. My shipping memory does not extend before 1990 – when I first entered the industry, and I am older than most – and yet the period since then has been incredibly benign in historical terms at least. It is surely possible that tonne-mile demand will go into a downward trajectory at some point in the future; I would say not only possible, but inevitable.

Secondly, people have already become accustomed to this “new normal” world, where shipowners find it very difficult to lose money, and accept this as how things will be. I listened to a discussion where all the panellists agreed that the days of the old ‘boom-bust’ cycles had passed. I could not believe my ears: it is a truism perhaps, but one that is nonetheless true, that shipping is a structurally cyclical industry and what goes up must come down, and often with more than a gentle bump. Benign, manageable cycles where everyone lives happily ever after? In the world of perfect competition we live in? That is self-delusional dreaming at its most dangerous. I did not, thankfully, hear any mention of a “new paradigm” but I fear it is not too far off.

Thirdly, as I mentioned earlier, there is a lot of money around (and also much in evidence during Posidonia). This is not a bad thing per se, but it does dull the alertness of those who are supposed to be keeping an eye out for trouble – all of us in shipping – and increases the ease with which people spend their money. I tend to spend more money when I’m having a good time, and I have noticed that other people do too. Go to Paros (or any other Cycladic island) this summer and then tell me if I’m wrong.

Which is not to say that this is not a good time to buy a ship, or that my Golden Rules do not apply today. It is evident that there are willing buyers and willing sellers out there, otherwise there would be no sales of ships at all. Different buyers have different needs, and opinions, and there is – after all – a price for everything. The dry bulk carrier market is not crazy, even though many regret the prices that are being paid by others for ships that used to be a lot cheaper, and many of those same potential buyers probably regret they didn’t buy sooner, even though they thought the prices were too high back then. And yet, once they do finally get around to buying, they will probably be most at risk of buying just at the wrong time.

Of my three rules, only the first – buy cheap, historically – does not apply right now, at least as far as history is concerned. The other two are still as valid as they have ever been. And very few owners, for now at least, find debt an overwhelming burden, although the lifestyle question remains as pertinent as ever.

The problem is the future: the time when ships become cheaper is when the freight market collapses, and ships cannot make enough to cover running expenses, let alone capital expenses, and prices fall because no-one wants to buy in gloomy conditions, i.e. demand drops.

But the other problem with the future is that it is, necessarily, existentially, unforeseeable – even though the tech sorcerers will try and convince you otherwise – and that is what makes the shipping markets so rewarding, and so brutally value destroying, over time. The trick is survival, and to remember this even as sirens reappear, singing us to shipwreck.

Simon Ward