Heart Surgery - Ode to shipping industry.

I was over the weekend in ICU at Asklipeio. Two days.  Indication was bad: Clogged arteries 99/70/50% and immediate bypass surgery. I am trying urgently to go to surgery for bypass.  The doctors initially urged me to contact Olympic Maritime, where I used to work for a place at the Onassio ASAP.  They have shown little or no interest in my case at least so far. It works like a private hospital. I am on the waiting list at the Ippokrateio for surgery.  Like every public hospital , they want to see my case and then I go to the waiting list. 

I am losing ground with the arteries and lack of proper oxygen in the blood.  How I was normal and healthy just a few weeks ago was a miracle given the advanced condition.  I had a triplex and blood tests in October with very positive results. 

Last night I had significantly worse angina attack in terms of pain, this time to shoulders and back and in terms of duration.

This ordeal with my health reflects much of my disappointment and frustration with the shipping industry over the years.  I have never had many really productive relationships.  The shipping industry has been a bad experience for me. 

This is the cost of getting involved in the shipping industry that started with Thanasis Martinos and later with the Onassis Group.  It was my choice and responsibility.  I always wanted to be active, creative, responsible and productive. But it never really brought me the happiness, well-being and satisfaction that I wanted.  Lots of disappointment and unhappiness.

Maybe things will change, but I have no reason to be optimistic, provided that I survive my health ordeal.  

 

  

 

Stopford - Covid and Climate Change: Two big challenges to the Shipping Industry

Yesterday listening to Martin Stopford's interesting presentation in a Capital Link event and lengthy Q&A session, it seemed to me that the two major drivers of events shaping the shipping industry today are Covid and Climate change.  They have a number of similarities. They have far ranging effects on world trade and ship technology that will affect the future.

Covid crisis and climate change start with natural phenomena that have morphed into highly contentious political issues due human response to them and the ensuing politics involved, particularly in the EU and US. 

Viruses and microorganisms are as old as life on the planet.  New viruses appear all the time.  Coronaviruses are well known and this is a new strain of this existing family.  We have had virus outbreaks from China repeatedly in the past years like SARS and H7N9.  Nobody panicked  and eventually these new strains took their course through natural means with human immunity and some efforts for vaccine,  Vaccines are simply an artificial means reinforcement of human immunity systems that would otherwise develop antibodies in reaction to exposure to the virus.  Ultimately there is no other way to deal with viruses.  The human race would have long ago become extinct from viruses if there were not biological immunity systems.

What is startling in the case of Covid is the political response to it that was first initiated in China by mass lockdowns/ social distancing of the healthy population and economic shutdown of production. Historically quarantines in reaction to infectious diseases were done by isolating sick people from the general population and holding travelers from infected areas for a certain period before entry into national territory.  

The Chinese government shutdown had an immediate effort on the shipping industry with a reduction of port cargo movement of 20% on the average, affecting the container industry negatively, forced to blank sailings and facing box build ups in Europe from the imbalances produced by the factory shutdowns in China.

Then there was an even more damaging and recessionary impact on the shipping industry with Western Governments collectively adopting the Chinese lockdowns and imposing them on their populations, quarantining large segments of their healthy population in fear of exposure to the virus, something never done before in human history.  

This has caused a great deal of instability for global shipping. There are projections of significant reduction in world trade this year,  Ship operations have become challenged due difficulties to carry out surveys and repairs. Normal crew changes have become a major problem to carry out .  Economic impact varies by sector.  

• Container shipping was looking to recover with Chinese reopening of factories and increase in port cargo volumes in March, when it got slammed by the recessionary impact of the lockdowns in Western economies that created even deeper losses of revenues and blank sailing. Major container lines have been plagued by poor earnings margins for years.  Some were just beginning to turn profits in 2019.  Now all these major liner companies are likely this year to go back into operating losses.  Stopford feels they will eventually muddle through this, depending on the speed that Western government reopen after lockdown and the severity of the global recession.  Stopford feels that large containerships were always a problematical response to the structural problems of the industry.  Globalization is over after Covid and trade is likely to evolve more regionally.  The use of these units will be restricted and the transport needs will be more for regional distribution.

•  Conversely the tanker sector has been enjoying a bull market with record rates.  This in related to failure of OPEC to extend production cuts and a new price war, when at the same time Western mass lockdowns have provoked a significant drop in oil demand.  The system is flush with oil from overproduction.  This has resulted in a surge of demand for tankers both for transport and storage, even backing into product carriers from refinery overproduction.  Ironically this situation will eventually result in obligatory and severe cuts in oil production and a dead tanker market with fewer hydrocarbon cargoes ahead.  Stopford pointed to the inherent weakness of the tanker sector in his presentation.  For now the tanker companies are the darlings of investors and flush with cash and profits.

•  Dry bulk is more mixed and nuanced here.  This sector has not been very profitable for at least 10 years, except for short rate spurts in certain segments.  The large bulk carriers depends on the steel industry,  coal and iron ore cargoes.  This segment had an awful first quarter with BDI indexes going into negative territory. Stopford does not see a very bright future here for these units with a maturing Chinese economy and the likelihood of stimulus spending to be more focused on technology rather than further infrastructure projects.  The smaller units will fare somewhat better. Panamax units carry more diverse cargoes like grain that are driven by other factors than the steel industry. The smaller sizes carry a much wider range of cargoes, including minor bulk trades.  More of this is related to foodstuff and general population needs. These segments will muddle through the crisis but present rates are low.

Stopford sees a secular trend towards regional trading zones with production closer to consuming areas.  He outlined three recovery scenarios.  All this is related to Western governments and how they manage the reopening of their economies.

This is entirely a political issue and it will have big effects on the depth of any recession. The drop in world trade will be milder than drop in GPD, but the effect on the shipping industry will be far reaching.

I see this as complicated political issue, not directly related to the virus. Western governments have taken unprecedented actions imposing drastic restrictions on their populations and curtailing basic civil liberties like freedom of assembly and religious worship.  All this together with significant social and economic cost on their populations that has led to the specter of global recession.

Scientific studies are beginning to indicate that there is nothing novel about this virus.  Infection rates on general population are much higher than originally anticipated despite the lockdown measures.  Death rates are much lower than wildly inaccurate early studies from places like Imperial College.  There is no easy way for the political class to reopen quickly.  They are fearful of the future political cost of their actions.  How this unfolds in the US and EU depends on the boldness of the political leadership and their effectiveness to return to normalcy and limit damages by getting their populations back to work and reflating their economies with the stimulus programs.

Despite the three scenarios, Stopford closed with a hopeful note that by fall, most of this Covid crisis will be over.  We shall see!

Climate change and environment regulation has taken the back seat due Covid crisis but this is a similar case of politics overwhelming natural phenomena and creating considerable challenges.  The earth has underdone significant changes in climate for millions of years. Anthropogenic causes by burning hydrocarbon fuels are a very recent phenomenon.  Carbon is essential for life on the planet.  There is a natural recycling of carbon from plant life back to oxygen.  Science is even more divided over these matters than Covid and human immunity systems.  The climate depends on so many other unquantifiable factors such as solar radiation and tilt of the earth.

But the present political consensus like the massive Covid lockdowns is that carbon is bad and greenhouse gasses GHG must be reduced and eliminated.  IMO has adopted GHG targets for 2030/ 2050 for which there is presently no technological means to comply.  The EU dominated by Northern European Green parties wants even more drastic measure such as a carbon tax trading scheme imposed on the shipping industry.  Like the Covid lockdowns, these measures will have negative economic impact on their populations, particularly the poorer classes.  There have been mass protests like the Gillets Jaunes in France in reaction to government taxes on fuel, just as in the US there are increasing protests against the government lockdowns. But generally the political class stands firm on these matters and it is not easy for them to back down in terms of their positions for the political cost.

For the shipping industry, Stopford points out that diesel and fossil fuels are far more efficient technologically than alternative fuels.  There is much higher energy content in the fuel.  It can easily and safely be stored on vessels and it does not take much space.  For these reasons, Stopford feels that diesel propulsion is the only alternative for the next generation of ships with a lifespan of another 20 years. 

The innovations in shipping for less fuel consumption and GHG levels will come from 'smart' ships with messages via CPU modules replacing wires, as Stopford puts it.  I would add this would also dictate more use of digitalization and software maximization programs in the offices linked to the vessels that they manage.  Metis - a Greek software system -based on the internet of things is a good example and a number of leading Greek Shipping companies have adopted it.

Stopford then outlines a growing use of LNG and dual fuel vessels. New technologies like this are more easily implemented in short sea shipping in early stages. Already this is the case for use of LNG in the cruise industry and tanker feeder vessels in Europe, for example.  This will lead to a new generation of vessels that will start to replace the  'smart' diesel/ fuel oil vessels. 

Then rather far out, Stopford sees electric vessels with fuel cells powered by hydrogen, etc. None of this is close to reality today.  The fuel cells cannot produce sufficient power and the new fuels presently can  only be produced from processed that create GHG that must be sequestrated.  Many of alternative fuels are noxious and difficult to store on vessels.

It is very intriguing to note that the same political class that supports decarbonization and vigorous climate change regulation also support with passion the mass lockdowns in reaction to the Covid virus  Many are extolling the positive results from the mass lockdowns on the environment with the drop in air and land transportation and falling demand for hydrocarbon fuel. They are the ones most critical to attempts to reopen economies and get people back to work. They are advocating universal income guarantees and green new deals for stimulus as long term solutions. 

They are not keen to return to the status quo.  They are not particularly troubled by adoption of  restrictions of movement and civil liberties on the general population. They tend to be indifferent to empirical scientific method and how it may evolve over the particular ideology that they promote to support their policies and actions.  They are not especially concerned about the social cost and economic hardship on the general population from their decisions. They place more important on their longer term ideological political goals that they feel are good for society and their political careers.

We will see in the next few months how this political debate evolves and how soon we reopen. The political climate is looking toxic and divisive. Inevitably we are entering a new post globalization era for the shipping industry with far reaching consequences.  Stopford parallels the challenges as analogous to the transition from sail to steam in the 19th and early 20th century.  The political and economical ramifications are huge.

How long will this bull tanker market last?

Despite looming global recession, the tanker sector has been enjoying a rate boom from the oil price war and failure of OPAC+ to agree on rate cuts.  This market boom comes at a time of falling oil demand. The tanker market is being driven by ramped up production. The present large contango in pricing favor physical oil storage, further reducing tanker supply and keeping tanker charter rates very firm.

Many of the major listed tanker companies feel that the tanker industry has entered a new era and will finally be enjoying several years of good earnings.  Frontline's MacLeod characteristically sees floating storage as a 'generational' opportunity.  What is the incentive for build up oil inventories even with wide contango when oil demand is falling in a looming global recession? Is this bull run sustainable and what are the risks for tanker share investors?

There are substantial risks that this could be another false start for the tanker industry, sooner than later.  Even if there are no agreed on cuts in the near future, present production seems so out of proportion to falling oil demand that available storage space is filling up rapidly.  There is the risk that at some point, the storage space will be so tight and expensive that production will have to be physically reduced.  At that point, the tanker market could become frozen for a period with very little demand for oil transport and refineries drawing off oil stocks.

More likely agreed production cuts will come sooner than later and contango spreads will narrow. Negotiations failed this week 15 because Russia and Saudi Arabia are insisting that non OPEC producers like the US and Brazil join in the production cuts. In the US environment, voluntary production cuts are almost impossible legally.  Sooner or later, production cuts seem inevitable.  Physical oil storage has never been sustainable over the long run.  

Maritime consultancy Marsoft predicted in a recent webinar that a significant oil supply cut of Opec, Russia and nine other producers – also known as the Opec+ group – will end the bull runs in tanker markets from July onwards.  Marsoft partner Kavin Hazel estimates that a reduction between 5m barrels per day (bpd) and 10m bpd would pressure tanker rates later this year.  This would lead to a much smaller stock buildup and less floating storage. A rise in oil price from production cuts would narrow the contango spreads. Tanker rates would fall back more significantly in the second half of the year with less oil put into the market.

This view was recently seconded by Cleaves Securities,  who turned bearish and are projecting that Oil Tanker spot rates plummet in concert with asset and share prices. Their tentative VLCC spot rate forecast for 2H20E is now only US $ 15k/d, which is extremely low given 4Q represents high-season, in a tanker note yesterday.

The clean sector also faces challenges with dropping oil demand in  recessionary environment. The jet fuel market, for example, has collapsed with the fall in air travel.  Refineries are trying to change their product output mix to compensate for the collapsing margin spreads in these products. Excess jet fuel can be stored, but unlike crude oil, there is a limited shelf life and the product become off specification and can no longer be used as intended.

At least the tanker markets profitable and building up cash.  Other shipping sectors are not so fortunate with container lines and cruise business burning cash and struggling right now. Dry bulk is showing some improvement but just above water at present.

These are complex matters, but the most worrisome presently is falling global oil demand and depth of the coming recession. The timing and shape of a coming global recovery is critical here. It all depends when the quarantines are lifted and how soon we return to normalcy.

Performance Shipping wipes slate clean

The company, previously known as Diana Containerships, bought the remaining shares back from Kalani Investments.  This marks the end of a major transition for this listed subsidiary of Diana Shipping, Inc.

I was never a fan of the original concept to enter the containership segment and purchase speculatively containership assets.  This a popular fad at the time with dry bulk companies.  Paragon did the same thing and it was also a failure, along with Paragon that was completely run into the ground.  The CFO, who understood the issues, quit and moved on.  Investors lost their money. 

Diana had better management,  It has weathered many storms, but it has never been a block buster for investors.  Dry bulk has been a tormented sector for many years now.  None of the listed companies in this sector have been very profitable.  Many have disappeared.  Some like Genco has undergone bankruptcy and restructuring.  Eagle was bought out by distressed asset investors.  In comparison, Diana has been a survivor.

Moving from dry bulk to being a containership provider company to liner companies was always a weak proposition with challenges even more daunting than dry bulk.  So why waste money and management time?  Better to focus on what you know and try to maximize it.  As I remarked at the time, Simos Palios could never replicate Gerry Wang at Seaspan at the time.  He lacked to mojo for this.

One has to give credit to Simos Palios and his management that they did not leave their subsidiary to fester as in the case of Paragon.  They took steps to deal with the problems and transform the company to something better.  They were also aided by luck as always needed in these entrepreneurial decisions.  Moving to crude tankers, they had some success.  Tanker markets are booming now with the low oil prices with extremely good freight rates.

The Kalani involvement was out of financial necessity at the time, but now the company is past this and in a position to redeem the preferred shares involved. 

Performance Shipping is clever renaming of the company.  It puts the emphasis for investors where it should be: good earnings results in profitable sectors.

Alternative fuels and scrubbers

The only present realistic, technically feasible alternative fuels for IMO 2030/ 2050 carbon emission targets are LNG/ LPG.  All alternative fuels have drawbacks over conventional diesel fuel in terms of energy density, storage requirements and safety.  

The most likely future scenario is dual fuel engines with capability for LNG for the next generation of ships.  All the major marine engine makers - particularly Wartsila and MAN - are ready for this.  Longer term it is likely there will be a range of fuels depending on size and trade of the vessel.  

The scrubber story has fizzled out with very small fuel spreads and drop in fuel prices.  Technically scrubbers are an absurd option:  

• You are burning dirty fuel with heavy residues over a cleaner fuel LSFO that is better for the engine with less wear and lower maintenance costs.
• You have to maintain and operate a complicated exhaust cleaning system that leads to higher carbon emissions from the main engine as well as additional maintenance costs, risks of breakdown and a burden on the crew.

The only motivation was cheaper fuel costs, which presently is nearly zero differential.  Turning off the scrubbers is a no-brainer and scrubbers are a stranded investment for the time being. Obviously, publicly listed companies like Star Bulk and Scorpio tankers, who have been selling the scrubber story to their investors argue that the fuel differentials will widen and their decisions are justified.  Time will tell.

The companies that held back on scrubbers like Euronav or installed them selectively upon charterers request and share in expenses like Safe Bulkers and Danaos have been justified and shown as more prudent management for their shareholders.

Coronavirus has changed dramatically all forecasts for shipping markets.

Covid 19 is now in a second stage, destabilizing the major consuming economics - US and EU - and unleashing a major global economic crisis of the magnitude of the 2008 meltdown.  It started in China and spread to other Asian countries in the first stage.  China, Singapore and Korea seem to have managed successfully the initial health crisis and contained the contagion, so that people have returned to work, but the problem is that export demand is now under threat due the second stage where the virus has now led to lockdowns that have incapacitated large sectors of the US and EU economies,

In the meantime, a price war has broken out between Saudia Arabia and Russian and oil prices have fallen dramatically.  These low prices threaten the US shale oil industry and many lead to more woe in the offshore sector that was showing first signs of some recovery after a prolonged slump for several years now.

We can make the following observations:

•  The best case recovery scenario is a U-shaped global recovery in the 2nd half of 2020 but lots of output destruction in the 1st half.  Hopefully better years in 2021 and 2022.
•  Scrubbers that seemed a major success story in January this year are now rendered problematic with the low oil prices and very small prevailing spread between LSFO and HSFO.
• The impact on this situation on shipping varies with the sector:

Containerships were badly affected by the factory shutdowns in China, now with the factories coming on stream they face the second wave that is reducing import demand in the US and EU.  Liner companies will face a new bout of financial stress with the weaker liner companies again in jeopard with serious cashflow problems. Likewise, third party vessel provider companies that have legacy debt problems.

Drybulk started the year with very low rates. The Capesize sector was very badly hit and still suffers.  There has been some recovery for the other sizes, but mixed.  

Tankers are experiencing a boom market with the low oil prices, but the first surge in rates has now abated, albeit rates are still very profitable levels. Both crude and products trades are currently profitable. The contango price curve favors liquid storage. With a looming recession, a lot of crude oil and oil products will go into storage.  Reduced oil demand from a prolonged economic slump would jeopardize the current profitability of the sector.   

The severity of this major global recession depends heavily on the ability of governments to contain the virus and get people back to work to restore normalcy.  The most successful cases seem to be Singapore and Korea in this regard.  Whether the US or EU can replicate this success remains to be seen.

The US government is particularly concerned about the need to restart their economy and get people back to work but they are just in initial stages in dealing with the health problems.  The EU is struggling over reflation mechanisms that are lacking in the Eurozone. The health crisis in Italy and Spain is still out of control.

Scrubbers revisited.

Back in October 2018, I published on this blog a somewhat negative article on scrubbers as a means of compliance for IMO2020 regulations.  Today we are close to finishing the first month of IMO2020 in full implementation.  I think it opportune to revisit this subject in view of the experience to date with these regulations now in force.

I always saw scrubber refitting as speculative by nature depending on fuel differentials.  I never liked the concept of making a ship a factory to remove sulphur from heavy residual fuel oil.  I considered direct use of compliance low sulphur fuel oil from the refineries as a more efficient solution.  Also I believe in a level playing ground for the shipping industry and scrubbers create a tiered market for the vessel segments where they are widely used.

In fact, the initial fuel differentials have been much wider than initially forecast.  The actual fuel price spreads are well above projected levels to support the scrubber investment.  This has made the prime movers like Scorpio, Star Bulk and others the winners and substantial beneficiaries on the initial scrubber wager. Indicatively, Okeanis VLCC's are earning a staggering US$ 121 m per day as scrubber savings kick in.  The Greek shipowner says it has already made back 44% of the retrofit bill for its big tankers.

Further scrubber refitting is proving to be an excellent asset play.  Close to 20 modern or resale VLCCs are being touted for sale at high prices in a market that is offering shipowners strong returns.

Looking ahead, we do know yet whether fuel spreads may narrow.  The high differentials may be simply a product of the supply disruption in initial market conditions. Over time, the prices may normalize to lower levels.  Fuel spreads may drop significantly.

One issue to be resolved is the matter of the continued supply and availability of traditional heavy residual fuel oil.  Refineries have ramped up production of low sulphur fuel oil and are earmarking HSFO for other uses than marine fuel.  A smaller supply of HSFO and tighter availability may result in higher prices and also storage issues for the smaller quantities in the market for marine fuel.  Already it is reported that there are availability issues for supply of HSFO in the Far East and ships forced to Singapore to bunker heavy residual fuel oil.

In any case, the scrubber school is presently at the top of the shipping world as the winners in this debate. Some are thinking about monetizing their position by selling the scrubber-fitted units at a premium, but this depends on willing buyers and nobody knows how long present fuel spreads will remain of whether fuel spreads may narrow.

Furthermore, dry bulk rates are very weak and tanker rates are falling, so regardless of whether the vessels are fitted with scrubbers or not, the earnings margins are not improving.

Postscript: Fuel spreads have now collapsed with the dramatic fall in oil prices.  Plans for scrubber installations are now facing massive cancellations, particularly in the dry cargo and containership sectors. We will see in coming quarters whether the wagers made by companies like Star Bulk and Scorpio Tankers pan out in earnings results for their shareholders.