It happened again today. I was chatting with a client of mine, and discussing the state of the ship sale and purchase market. I had called him because there is a lot of action around the size and age of one of his ships, one of the ships we were keeping an eye on as a potential sales candidate for the future. Without revealing the identity of my client, I can tell you it’s a bulk carrier, the oldest in his fleet, and it is now over fifteen years old. Furthermore it is due to be fitted with a ballast water treatment system at the next drydock, which is due in the next twelve months. As this could apply to a number of our clients, or indeed any number of anybody else’s clients, I don’t think I am being too indiscrete.
At the beginning of the year I told him the value was, let’s say, US$ 8 mill, and I told him that now was not the right time to sell because values were improving.
“Ok Simon,” he said, “when the value gets to US$ 10 mill, call me, and we can talk.”
“Good I said,” I said, “but when I tell you that the values are US$ 10 mill, then you will tell me that you want more, and now isn’t the right time.”
He laughed and said, “Yes, you are probably right, but I will have to tell you why it’s not the right time to sell, and you will have to tell me why it is.”
Time passed, and when the time arrived, as it did, I called, and we had another conversation. He told me:
“Yes, you were right that values would rise, and you were also right that I would not want to sell, and the reason is that I am making more money trading the ships than I have for a long time, and I’m not sure when the time will be right to sell with the market still rising, so let’s wait.”
“Ok,” I said, mainly because I didn’t have any convincing argument other than the fact that prices were still rising, and it’s easier to sell in a rising market than a falling one. The bull market was only three months old at that point.
So, today, when I brought him news that values had risen another US$ 1 mill in the interim, we started to discuss things more strategically.
Firstly, how long is this market going to last? The signs are, bearing out my previous forecasts, that this will go on for some time. Leaving aside the more irresponsible arguments of commodity supercycles and other buzzwords, the fundamentals seem to be balanced in the favour of owners, and will be for some time. And as all markets overshoot, and overcorrect, getting the timing right is very difficult especially as none of us can see into the future.
Secondly ship sale and purchase, despite the breathless reports in newspapers and market reports is not simple zero-sum asset play, where owners who have bought cheap can sell at higher prices and automatically report a profit. If I bought a ship at US$ 10 mill and sold it at US$ 15 mill, it would indeed seem on face value to the short-sighted and uninformed that I had made a 50% profit, but that would not necessarily be true because that simple calculation would not take into account any finance, or the income the vessel had earned in the meantime, or the investment made in the vessel, or otherwise. It could present a 100% profit on equity invested, or far less than 50% if there were significant works, upgrades and repairs undertaken in a poor freight market.
There is a particular insidious myth involving ship sale and purchase, that the most successful owners, particularly Greek owners, play the market well, and the only real money to be made is in asset play. Both statements contain some truth, but this is by no means is the full picture. It is enough to say at this point, without starting to write a book on the subject, that the reasons behind decisions to sell or buy ships are varied and complex, and no shipowner or potential shipowner has the same cash, resources, finance, temperament, risk appetite or business philosophy. Thank God, otherwise the sale and purchase market would be a very boring place indeed.
Selling a ship just because the values are higher than they were is not necessarily a great idea, especially when the profits cannot be easily reinvested in shipping at the same time.
This is where my client and I ended up.
“The values are much better today Simon, but what do we do with the money? Wait for the next cycle? I could make another US$ 6 mill over the next two years just by keeping her.”
I suggested looking at newbuildings.
“But what newbuildings? Why should I invest in a newbuilding when I don’t know what the regulations will be in three years’ time, let alone ten years’ time. Can we order a ship today that will comply with the regulations, or have a good chance of complying with them? Do I need an LNG ready main engine, or an ammonia ready main engine? How much more expensive will the ships be if I get a dual fuel engine? Will charterers pay me more for having a more environmentally friendly ship? Will banks finance the difference? No, newbuildings, however cheap they seem to be in comparison with secondhand are not that attractive. Let’s wait and see.”
And so uttering the three deadliest words a sale and purchase broker can hear, we agreed to have dinner once things had settled down a bit after lifting of the lockdown, and finished the call.
It is true that a conversation like this took place today, but it could have taken place any time in the last few months in conversations with any number of shipowners. And the last point – where do I buy a ship that is relatively future proof? – is a question that cannot be answered today. So this is why I was inspired, together with my good friend Matt Gilbert at the Institute of Chartered Shipbrokers in London, to get a panel together to discuss this very issue for the Baltic Exchange/Institute of Chartered Shipbrokers Webinar next Wednesday, a panel consisting of the Owner, the Banker, the Regulator, the Builder, and the Customer. And what a line-up:
– Ioanna Procopiou, CEO, Sea Traders Inc
– Mauro Sacchi, Director, Business Development, Wärtsilä
– Alex Haubert, Manger Ocean Freight, Amaggi
– Camille Bourgeon, Technical Officer – Marine Environment, International Maritime Organization
– Christopher Rex, Head of Innovation and Research, Danmarks Skibskredit (Danish Ship Finance) A/S
With me, the Broker, as the Moderator. Join us:
But I think it is also the most important issue facing shipping – and by extension ship sale and purchase, today. I doubt it will provide any concrete solutions, but it may gives us an idea of a possible roadmap towards a way that the shipping industry will be able to restock in the future to maintain the flow of world trade whilst also complying with, and playing its part, in reducing greenhouse emissions. Paradoxically, without a solution there will be fewer ships being built and the charterers will end up paying more anyway as supply tightens evermore. And as freight rates rise, so do values, which makes the problem worse. But as my client said, these are nice problems to have, for shipowners at least.
And this in part could be the beginnings of a market-based solution: as income increases, and values rise, the costs of futureproofing the fleet could be underwritten by the increased wealth of shipowners looking to invest in the next, greener, cycle. But as values increase, so does risk, and making the wrong decision could prove costly, if not fatal to a business. This is why discussions like the one we will have on Wednesday are important, and I hope we can find some consensus on how to face to future together.