Monday, January 20, 2014

Scorpio Bulk: new ground in shipping investments

Scorpio Bulk is attracting massive media attention. It is start-up dry bulk company with no operational history, riding on the name of Scorpio Tankers and their management team. 

Following the tanker fleet strategy, the concept has been to build up a large fleet by aggressively acquiring yard slots. They currently have a fleet entirely on paper that consists of 23 Capesize bulkers, 23 Kamsarmax bulkers and 28 Ultramax bulkers from various yards all for delivery between 2015 and 2016. They have to build an organization for the commercial and technical management of this very large fleet. This amounts to a massive futures position in dry bulk assets that depends on market conditions in 12 - 24 months for employment. It is fairly concentrated shipping risk. 

 It is not surprising that there have been mixed comments about Scorpio Bulk. This venture has a very different history from Scorpio Tankers. Emmanuelle Lauro built the tanker operation methodically concentrating initially on a tanker pool with partners and building up a substantial commercial team. He also had a tanker fleet in the water that he was managing and operating. He then hired Robert Bugbee and organized an IPO to acquire tanker assets. 

This venture conversely is contracting new buildings without any vessels in the water. Indeed prior to Scorpio Bulk that was supposed to be an impossible schema for a public shipping company because investors wanted operating cash flow with vessels in the water before funding any shipping projects with forward deliveries and were not prepared to endure negative cash flow for prolonged periods before the vessels hit the water. Scorpio broke revolutionary ground that had never been done before in public markets. 

What Scorpio wants ultimately to do with this company and its assets is yet to be seen. Bugbee may be trying to replicate OMI and look at an opportune moment to cash in and sell out the company or its assets for profit. Prima facie, however, they are looking to build an operating dry bulk company alongside their tanker operation. 

The key factor here is how the dry bulk markets will be faring when the vessels hit the water. The prevailing school of thought today is that dry bulk markets are likely to be good for the next two years with Chinese closure of domestic mines and increasing imports of coal and iron ore from cheaper and more efficient overseas sources. After two years, this substitution process will have been completed and the surge in demand will level off to inventory restocking needs. This is especially important for Scorpio Bulk since their fleet is larger bulk carriers, where these are primary trade. There are no handysize vessels in their fleet. 

The major investment premise is that the vessels have been contracted at historically low prices and markets have nowhere to go but upwards in the coming years. The vessels are new and fuel efficient. The major risk hypothetically is that Chinese growth rates disappoint and the rebalancing, including Chinese long positions in commodities need to be liquidated at losses. Historically, falling commodities prices has been a negative factor for freight rates. China finds itself in a middle income trap and there is no other source of fresh demand so that shipping markets face a prolonged downturn of low rates. 

Another risk that the present type of eco vessel is rapidly superseded by change of fuel and becomes obsolescent prematurely. This concerns the general strategy of Scorpio, heavily predicated on the eco-ship story and heavily invested in current eco-designs. 

Most shipping experts are confident that these are unlikely scenarios, but shipping is always unpredictable because trade relations are constantly in flux. Scorpio has undoubtedly considerable new building risk with a very concentrated position. No rewards without taking on risks.

No comments:

Post a Comment