It would be nice if such platitudes were true in the ship sale and purchase market, but life is just not like that. In the last couple of weeks, the dry bulk market has boomed, and ship sale and purchase activity is booming too: the broking community is almost feverish with excitement. The new supercycle is here. Off we go again!
Those of us old enough are wondering whether indeed it is like the start of the supercycle for shipping that began at the end of the summer in 2003. There are some similarities: Asia was coming out of a SARS pandemic, and stimulating their economy with infrastructure projects; charterers were starting to take long term cover at higher and higher rates; owners were accepting offers from buyers at prices they didn’t believe would ever exist again. At that point the dry bulk market had just suffered seven years of low freight rates, with various other crises thrown in. The order book was low, investment in shipping was deeply unfashionable, and brokers were dreaming of new careers, and some even left the industry. Then out of nowhere Asian buyers started snapping up ships, and as the dry charter market soared away, and prices with it.
Things slowed down a bit after Chinese New Year in 2005, when things went ‘back to normal’ until early-mid 2006, when the markets raced again, and the world went crazy. Until Lehman Brothers collapsed in September 2008, we were living in a crazy world. Even after a pause following the height of the financial crisis – a heart-stopping one it has to be said – things got going again in April 2009 and did not really start to cool down until 2012. There was a dead cat bounce in 2013-2014 which precipitated the fall of 2015-2016, and we we have been trying to drag ourselves out of it ever since. Now, out of the ashes of COVID-19 rises a phoenix at breakneck speed, sweeping all negative feelings before it. Here we ago again! Surely?
Well, here come a few quotes about history, and you can take your pick:
– “History repeats itself, first as tragedy, second as farce,” Karl Marx
– “Those who cannot remember the past are condemned to repeat it,” George Santayana
– “… the vintage of history is forever repeating – same old vines, same old wines!” E.A. Bucchianeri
– “History repeats itself, but in such a cunning disguise that we never detect the resemblance until the damage is done,” Sydney J Harris
And so on. Google is a great resource, but I have no idea of whether the quotes or the attribution are correct. And I am not sure if they are relevant anyway.
History does not repeat itself, at all, but it is the only experience we have. I hate to say this, but not all of us took advantage of the rising market, or recognised it as a supercycle, even at the time it was happening. I remember that, at least as far as the ship sale and purchase market was concerned, the deals came in waves. The smart money had been quietly picking off the available sales candidates in the bad times, and even if they made a loss in the first year or two, or saw values fall, it was still more or less the right time to buy. As the markets boomed, the aggressive phase came into play. Sales candidate were sought, and money was paid, whatever it took at the time to get the ship. Owners were given offers that they couldn’t refuse, and didn’t, but regretted as the markets rose higher and higher. Then as the market continued rising, more cautious buyers moved in, desperate not to miss out, and drove prices higher. And then there was a pause, and then off we went again. Press repeat, and enjoy the ride. Until it stops.
There are many mistakes that both buyers and sellers make in these circumstances, but as long as the market keeps moving at higher-than-normal levels, everyone can make a profit, or at least hide their mistakes in plain sight. The 2008 financial crisis did not force many people into bankruptcy immediately in dry bulk, although some decided the excitement was enough, and went home, still in profit but unable to stomach the bumpy ride. Banks, particularly German banks tried to kick the can down the road, without addressing the revaluation issue head on, and ended up kicking everything into the gutter. But this was for later. In the immediate aftermath, the market came back quickly enough as the Chinese turned on the stimulus taps, and more ships were ordered at a discount to those ordered in 2007-2008, so they must have been good value. They were, according to the freight market at the time, but that did not last, and many of these newbuildings delivered into a markedly poorer market in 2012 and onwards, exacerbated by the amount of newbuildings being delivered. The dead cat bounce of 2013-2014 had the effect of stimulating even more newbuilding orders – “this time we really have hit the bottom!” – before going a long way further down.
If we remember the boom years, which ‘aggressive wave’ do we think this one is like? September 2003? May 2006? May 2009? May 2013? I would like to think it’s like September 2003 but I would do that wouldn’t I? I want another ten years of a supercycle market. But it’s time for a cold shower.
Firstly, the dry bulk boom of 2003-2012 was commodity driven for sure, but the commodities were iron ore and coal. What we are seeing today is being driven by grain primarily. Forget the eye-catching charter rates for ice-class kamsarmaxes in the Baltic, that is not where the action really is. The action is in the US Gulf, and East Coast South America, and it is – like I commented last week – grain driven. The reasons behind the boom, according to people I talk to, vary from the increase in pork production, to charterers falling foul of their own games in the FFA market, to a delaying of physically shifting the stuff onto ships causing congestion. What it does not point towards is a suddenly greater demand for industrial commodities. That card has already been played.
And grain, famously, is a seasonal trade.
As I write, some of the steam is coming out of the dry market as certain positions unwind, and buyers baulk at the valuations sellers now place on their ships. Owners of capes and kamsarmaxes/panamaxes wanted better than last done, and now are faced with nothing, as period charter demand evaporates, or if it is still there, it is not with the same intensity of desire. But the steam is very much in evidence for handies and supramaxes, and whilst some suggest that this demand will reduce as the rates for the larger sizes drag them down, I am not so sure.
So the question for anyone in the ship sale and purchase market now is:
“Is this a bubble, or the start of new cycle, super or otherwise?”
The answer is, I would suggest, all a matter of degree. Yes there is a great deal of aggressive buying at the moment, but who is buying and why? And whose money is it? The fools could well be those who do not take advantage of the prices on the table at the moment, and will have to pay more in the future. And further it could be that just as they pay more, will the market turn back to its usual, fickle ways. Is it 2003, or 2006? Is it 2009 or 2014? The answer to that is of course no, it is none of them, it is 2021, and we live in a completely different world.
I have two conclusions to make. One is that whilst I do believe that conditions for a better market exist, the current burst in freight rates may prove to be short lived as grain houses sort out their issues, and take a step back. They have a lot of tonne-mile demand in their hands, and they have the resources to control it. This does not mean a precipitate fall in the freight market, but a less steamy one. Will prices fall back? Probably not, unless a lot of ships come for sale to take advantage of the last done prices, causing an oversupply of ships for sale. There are very few sales candidates at the moment that can be bought, especially charterer friendly ships. A surplus would be helpful to buyers and brokers alike.
The second conclusion is that investment – or divestment – is a hard decision to make, and whilst some will be proved fools, and others angels, that result can only be known in the long run. Timing is everything: sometimes acting quickly is being decisive and seizing the moment, other times it is acting hastily and impulsively. The same decision can lead to amazing profit or bankruptcy, and only the market decides. The reasoning behind the decision may be perfectly logical, but the market does not understand logic, it just reacts to the inputs and outputs and behaves accordingly. Seeing, in our world of perfect competition, that no-one can control or corner the market, not even the grain houses, then timing is everything. And in shipping, as in life, the consequences stay with us for ever. Time past being present in our future.
We cannot see into the future, and history can only guide us to why things in the past happened, and even then the debate is furious. So what to do? Call me and discuss it, and depending on your circumstances and the ships I can propose, or the buyers I can find, we can try and work it out together, or not. In the meantime this is from Burnt Norton, number 1 of Four Quartets, by T S Eliot, perhaps the greatest poet of the twentieth century:
Time present and time past
Are both perhaps present in time future,
And time future contained in time past.
If all time is eternally present
All time is unredeemable.
What might have been is an abstraction
Remaining a perpetual possibility
Only in a world of speculation.
What might have been and what has been
Point to one end, which is always present.
And if that makes your head hurt, then it should. It is hard to make a decision when you think about things too much, and it is hard to consider the nature of time – past, present and future, and their relationship to each other – too. But that does not mean you should be impulsive in making investment decisions to make it less hard, but to at least recognise that things are not as simple as they appear, and recognise the risks ahead. And – although many of my brother and sister brokers will curse me for this – there is nothing wrong in doing nothing if you are not sure.
Eliot quotes Heraclitus at the start of his Four Quartets:
“Although logos is common to all, most people live as if they had a wisdom of their own.”
Filter out the noise, avoid the stories about the ghosts of cycles past, and concentrate on what you can see, and what you can do. Beyond that, indeed, you’re on your own.