Sunday, July 31, 2016

Greek Maritime Cluster: Role of the small family shipping business – challenges and opportunities.

What will be the future landscape of the Greek maritime cluster in the coming years ahead? 
The Greek maritime cluster has been facing a period of rising unemployment and shrinkage in the small medium sector,  It has been hit by the bankruptcy of the local banking system, tight money, rising taxation on ships and most significantly the very poor dry cargo markets the last few years, where there is a very heavy exposure. 
Generally these smaller private companies have a lot of bias against their larger listed company compatriots and their use of capital markets and private equity money, which they see as an unsustainable passing fad and a primary reason for the over investment in shipping assets and poor markets. 
These companies generally have older and smaller vessels, primarily handy size bulk carriers, with the larger better capitalized companies operating also Supramax and Panamax bulk carriers. This sector has been the incubator of the maritime cluster, allowing newcomers to enter.  Given the larger number of this type of company, it is a key market for the local Greek service companies such as chartering and ship brokerage firms, crewing, insurance and suppliers.  

As George Economou astutely observed during Posidonia this year, Greeks have been predominate in shipping because they were willing to accept the lower long term returns on shipping assets that others found unattractive. There are a variety of historical reasons for this:  
  • Greece is a small, relatively resource poor country. This drove many Greeks to the sea and created a maritime tradition. 
  • Greece was prior entry to the Eurozone, a soft currency country with constant moderate inflation, where investment in assets was a hedge to currency depreciation and an opportunity for capital gains.
  • Because of the abundance of local seafarers and the family nature of the business, the Greek ship was cheaper and more efficient than most competitors on operating expenses, but this advantage started to erode and has largely been eliminated with the Greek entry into the Eurozone, where Greece lost many other local industries such as ship repairs, textiles, etc.
Still today despite the hikes in ship taxation and EU pressure to eliminate Law 89 offshore law, the cost of maintaining a shipping office in Greece is relatively low compared to lower tax jurisdictions in the Far East like Singapore and Hong Kong. There is an abundant supply of personnel with the increasing unemployment in the sector.

The Greek business model is owner operator. It is based on owning shipping assets and chartering them out for hire with the crew. About 70% of the Greek maritime cluster is invested in dry cargo vessels because of the lower capital requirements and the ease of entering the sector, which is highly fragmented.

The period of growth and success of Greek shipping from the early 1970’s was due to several key factors:    

  • The ability of Greeks to acquire older vessels and keep them running for longer than expected trading life.  
  • The inflation of shipping asset and scrap values along with market fluctuations created significant capital gain opportunities that allowed the company to borrow against higher values to expand and renew their fleets and reduced the nominal value of the bank debt.
  • Abundant bank debt to finance ship acquisitions and roll over the fleet at low cost. Greek shipping was initially fueled by petrodollars and merchant banks, then the German landesbanks and the expansion of the local Greek banks until the 2008 financial crisis and the Greek national bankruptcy within the Eurozone.

The past few years, the climate has changed for Greek shipping. Money has become tight and more expensive, ship values and scrap prices have declined. Earning margins have tightened. The dry cargo chartering market has become more age conscious with a tiered market structure similar to the tanker sector. Ships over 15 years have become less preferred with lower rates with the overabundance of newer tonnage in the market for hire.

Investments in older tonnage at close to scrap levels are no longer a guarantee of safe returns. The earnings margins are very poor, sometimes negative. Often over time, the vessel values erode such that it is not possible over the limited remaining trading life of the vessel to recuperate the asset impairment loss.

This is a highly emotional and very controversial subject in Greek shipping circles. Most of the local Greek shipping industry would vehemently contest this view, but I can safely say that I have seen frequently this phenomenon reflected in balance sheets for older vessels over the last few years.

The present hope today is for a surge in investment in dry cargo shipping assets, even with negative carrying costs as a means of substantial future profits to reflate the sector. This is very understandable with the current depleted balance sheets of the industry and the suffering service industries, particularly the local chartering and sale and purchase firms. A lot of private Greek money has been invested this year in dry bulk shipping assets. More units keep employment for the shipping offices, and create needed income for the local Greek brokerage firms.

For a family business, the top priority is to reinvest in the future of the business that is their prime source of livelihood. Under these conditions, it is quite a different investment decision than an institutional investor or shipping industry outsider. The key differentiating factor is the returns criteria. An outsider is looking for the best possible return for his risk profile in a variety of alternatives. A family business dependent on the shipping industry is willing to live with much lower returns and higher risks initially, even to the point of no returns or negative carry for the prospects of future capital gains. The reason for this is obvious: The critical factor is the future of the family business. A family shipping business without outside investors does not really need profits, investing their own money in their business as long as it stays solvent and supports a good life style.

Another important point to be considered is that the local Greek banks have a lot of older, unattractive dry bulk assets on their books and they will make every effort to keep these assets operating with local family companies rather than scrapping them and taking losses now on weak balance sheets. They will also be willing on a limited basis to finance older vessels for local companies that have the necessary liquidity to carry them.

So there will always be a place in the market, particularly for older bulk carrier operators. More than likely than not, there will be less scrapping and more efforts to prolong trading life than the larger players invested in new tonnage would like to see. The fragmented nature of the bulk carrier industry will allow space for this, even with the lower operating costs and fuel consumption of the newer vessels because the family operator will accept lower margin business and remain viable.

Unless present economic conditions change, however, I do think that there will be inevitable further consolidation in the Greek shipping SME’s as well as the larger operators and less space for new comers in the industry. The profits on capital gains will be subdued and below expectations for some time to come because ship replacement value will remain low and there will not be sufficient banking liquidity to support the sale and purchase turn overs to generate a significant rise in asset prices. The older tonnage will eventually be scrapped at low prices.

Those companies with resources to invest in younger vessels, build up larger fleets and develop good trading platforms will be the best positioned for the future.

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