tag:blogger.com,1999:blog-67966513381603955392024-03-06T01:03:57.476+02:00Amalia Tankers Inc.Articles on the shipping industry and marine finance.Diran Majarianhttp://www.blogger.com/profile/07818842231575871539noreply@blogger.comBlogger245125tag:blogger.com,1999:blog-6796651338160395539.post-20084779655689026192020-07-31T11:59:00.004+03:002020-07-31T14:11:39.929+03:00Heart Surgery - Ode to shipping industry.<p class="MsoNormal" style="text-align: justify;"><br /></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: inherit;">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. </span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: inherit;">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. </span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-family: inherit;"><o:p></o:p></span></p><span style="font-family: inherit;">Last night I had
significantly worse angina attack in terms of pain, this time to shoulders and
back and in terms of duration.</span><div><span style="font-family: inherit;"><br /></span></div><div><span style="font-family: inherit;">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. </span></div><p class="MsoNormal"><o:p></o:p></p>
<div><span style="font-family: inherit;">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.</span></div><div><span style="font-family: inherit;"><br /></span></div><div><span style="font-family: inherit;">Maybe things will change, but I have no reason to be optimistic, provided that I survive my health ordeal. </span></div><p class="MsoNormal"><o:p> </o:p></p><p class="MsoNormal"> <o:p></o:p></p>
<p class="MsoNormal"><o:p> </o:p></p>Diran Majarianhttp://www.blogger.com/profile/07818842231575871539noreply@blogger.com1tag:blogger.com,1999:blog-6796651338160395539.post-43072314782064348622020-04-29T13:44:00.001+03:002020-05-04T18:58:15.191+03:00Stopford - Covid and Climate Change: Two big challenges to the Shipping Industry<br />
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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.</div>
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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. </div>
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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.</div>
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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. </div>
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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.</div>
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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. </div>
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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. </div>
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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.</div>
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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.</div>
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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.</div>
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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.</div>
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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.</div>
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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.</div>
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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.</div>
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Despite the three scenarios, Stopford closed with a hopeful note that by fall, most of this Covid crisis will be over. We shall see!</div>
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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.</div>
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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.</div>
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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. </div>
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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.</div>
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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. </div>
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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.</div>
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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. </div>
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They are not keen to return to the <i>status quo.</i> 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.</div>
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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.</div>
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<br />Diran Majarianhttp://www.blogger.com/profile/07818842231575871539noreply@blogger.com1tag:blogger.com,1999:blog-6796651338160395539.post-88904843319527996612020-04-09T19:41:00.000+03:002020-04-14T13:41:48.740+03:00How long will this bull tanker market last?<div style="text-align: justify;">
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<span style="font-family: inherit;">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.</span></div>
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<span style="font-family: inherit;">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?</span></div>
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<span style="font-family: inherit;">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.</span></div>
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<span style="font-family: inherit;">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. </span></div>
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<span style="color: #003000;"><span style="background-color: white;"><span style="font-family: inherit;"><span style="font-family: inherit;">M<span style="display: inline; float: none; font-style: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;"><span style="font-family: inherit;"><span style="display: inline; float: none; font-style: normal; font-variant: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-decoration: none; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;">aritime consultancy Marsoft predicted in a recent webinar that a</span> 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. </span></span></span><span style="display: inline; float: none; font-style: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;"><span style="font-family: inherit;"><span style="display: inline; float: none; font-style: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;">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.</span></span></span></span></span></span></div>
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<span style="color: #003000;"><span style="background-color: white;"><span style="display: inline; float: none; font-style: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;"><span style="font-family: inherit;"><span style="display: inline; float: none; font-style: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;"><span style="font-family: inherit;"></span><br /></span></span></span></span></span></div>
<span style="color: #003000;"><span style="background-color: white;"><span style="display: inline; float: none; font-style: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;"><span style="font-family: inherit;"><span style="display: inline; float: none; font-style: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;">
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<span style="font-family: inherit;"><span style="color: #003000;"><span style="background-color: white;"><span style="display: inline; float: none; font-style: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;"><span style="font-family: inherit;"><span style="display: inline; float: none; font-style: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;">This view was recently seconded by Cleaves Securities, who turned b</span></span></span></span></span><span style="color: #003000;"><span style="background-color: white;"><span style="display: inline; float: none; font-style: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;"><span style="font-family: inherit;"><span style="display: inline; float: none; font-style: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;"><span style="font-family: inherit;">earish and are projecting that </span></span></span></span></span></span><span style="color: #003000;"><span style="background-color: white;"><span style="display: inline; float: none; font-style: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;"><span style="font-family: inherit;"><span style="display: inline; float: none; font-style: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;"><span style="font-family: inherit;">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.</span></span></span></span></span></span></span><br />
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<span style="font-family: inherit;">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.</span></div>
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<span style="font-family: inherit;">At least the tanker markets profitable and build</span>ing 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.</div>
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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. <span style="background-color: white; color: black; display: inline; float: none; font-family: "times new roman"; font-size: 16px; font-style: normal; font-variant: normal; font-weight: 400; letter-spacing: normal; text-align: justify; text-decoration: none; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;">It all depends when the quarantines are lifted and how soon we return to normalcy.</span></div>
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Diran Majarianhttp://www.blogger.com/profile/07818842231575871539noreply@blogger.com0tag:blogger.com,1999:blog-6796651338160395539.post-71836280798292994262020-04-08T20:09:00.002+03:002020-04-08T20:11:21.965+03:00Performance Shipping wipes slate clean<div style="text-align: justify;">
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<span style="background-color: white; color: #212529; display: inline; float: none; font-family: inherit; font-style: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;">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.</span></div>
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<span style="font-family: inherit;">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. </span></div>
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<span style="font-family: inherit;">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.</span></div>
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<span style="font-family: inherit;">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.</span></div>
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<span style="font-family: inherit;">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.</span></div>
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<span style="font-family: inherit;">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. </span></div>
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<span style="font-family: inherit;">Performance Shipping is clever renaming of the company. It puts the emphasis for investors where it should be: good earnings results in profitable sectors.</span></div>
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Diran Majarianhttp://www.blogger.com/profile/07818842231575871539noreply@blogger.com0tag:blogger.com,1999:blog-6796651338160395539.post-23136337012890819632020-04-02T11:12:00.000+03:002020-04-08T20:15:01.183+03:00Alternative fuels and scrubbers<br />
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<span style="font-size: 11.0pt;"><span style="font-family: inherit;"><span style="font-family: inherit;"><span style="background-color: white; color: black; display: inline; float: none; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-decoration: none; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;">The only present realistic, <span style="background-color: white; color: black; display: inline; float: none; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-decoration: none; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;">technically feasible</span><span style="background-color: white; color: black; display: inline; float: none; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-decoration: none; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;"> </span>alternative fuels for IMO 2030/ 2050 carbon emission targets are LNG/ LPG.</span><span style="color: black; font-size: 14.66px; font-style: normal; font-variant: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-decoration: none; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;">
</span><span style="background-color: white; color: black; display: inline; float: none; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-decoration: none; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;">All alternative fuels have drawbacks over conventional diesel fuel in terms of energy density, storage requirements and safety.</span><span style="color: black; font-size: 14.66px; font-style: normal; font-variant: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-decoration: none; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;"> </span></span></span></span></div>
<span style="font-size: 11.0pt;"><span style="background-color: white; color: black; display: inline; float: none; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-decoration: none; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;"><span style="font-family: inherit;"></span><div style="text-align: justify;">
<span style="font-family: inherit;"></span><br /></div>
</span></span><div style="text-align: justify;">
<span style="font-size: 11.0pt;"><span style="background-color: white; color: black; display: inline; float: none; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-decoration: none; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;">
</span></span>
</div>
<div style="text-align: justify;">
<span style="font-size: 11.0pt;"><span style="font-family: inherit;"><span style="font-family: inherit;"><span style="background-color: white; color: black; display: inline; float: none; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-decoration: none; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;">The most likely future scenario is dual fuel engines <span style="background-color: white; color: black; display: inline; float: none; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-decoration: none; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;">with capability for LNG</span>
for the next generation of ships.</span><span style="color: black; font-size: 14.66px; font-style: normal; font-variant: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-decoration: none; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;"> All the major marine engine makers - particularly Wartsila and MAN - are ready for this. </span><span style="background-color: white; color: black; display: inline; float: none; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-decoration: none; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;">Longer term it is likely there will be a range of fuels depending
on size and trade of the vessel.</span><span style="color: black; font-size: 14.66px; font-style: normal; font-variant: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-decoration: none; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;"> </span></span></span></span></div>
<span style="font-family: inherit;"></span><div style="text-align: justify;">
<span style="font-family: inherit;"></span><br /></div>
<div style="text-align: justify;">
<span style="font-family: inherit;"><span style="font-family: inherit;"><span style="font-size: 11.0pt;">The scrubber story has
fizzled out with very small fuel spreads and drop in fuel prices.<span style="mso-spacerun: yes;"> </span>Technically scrubbers are an absurd option:</span><span style="font-size: 11.0pt;"> </span><span style="font-size: 11.0pt;"> </span></span></span></div>
<ul>
<li><div style="text-align: justify;">
<span style="font-family: inherit; font-size: 11.0pt;">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.</span></div>
</li>
<div style="text-align: justify;">
<span style="font-family: inherit;"></span></div>
<li><div style="text-align: justify;">
<span style="font-family: inherit; font-size: 11.0pt;">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.</span></div>
</li>
</ul>
<div style="text-align: justify;">
</div>
<div style="text-align: justify;">
<span style="font-family: inherit; font-size: 11.0pt;">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.</span></div>
<span style="font-size: 11.0pt;"><span style="font-family: inherit;"></span><div style="text-align: justify;">
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</span><div style="text-align: justify;">
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</span>
</div>
<div style="text-align: justify;">
<span style="font-family: "calibri" , "sans-serif";"><span style="font-family: inherit;"><span style="font-family: inherit;">T<span style="font-size: 11pt;">he 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.</span></span></span></span></div>
<span style="font-family: "calibri" , "sans-serif";"></span><span style="font-family: inherit;"></span><span style="font-family: inherit;"></span><span style="font-family: inherit;"></span><br />
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<span style="font-family: "calibri" , "sans-serif"; font-size: 11.0pt;"><span style="mso-spacerun: yes;"></span></span><br />
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<b></b><i></i><u></u><sub></sub><sup></sup><strike></strike>Diran Majarianhttp://www.blogger.com/profile/07818842231575871539noreply@blogger.com0tag:blogger.com,1999:blog-6796651338160395539.post-82615702932803326622020-03-26T18:34:00.001+02:002020-03-26T18:44:06.397+02:00Coronavirus has changed dramatically all forecasts for shipping markets.<br />
<div style="text-align: justify;">
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,</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
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.</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
We can make the following observations:</div>
<ul>
<li><div style="text-align: justify;">
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.</div>
</li>
<li><div style="text-align: justify;">
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.</div>
</li>
<li><div style="text-align: justify;">
The impact on this situation on shipping varies with the sector:</div>
</li>
</ul>
<div style="text-align: justify;">
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.</div>
<div>
</div>
<ul>
</ul>
<div style="text-align: justify;">
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. </div>
<div>
</div>
<ul>
</ul>
<div style="text-align: justify;">
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. </div>
<div>
</div>
<ul>
</ul>
<div style="text-align: justify;">
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.<br />
<br />
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.</div>
<br />
<br />Diran Majarianhttp://www.blogger.com/profile/07818842231575871539noreply@blogger.com0tag:blogger.com,1999:blog-6796651338160395539.post-10548614959053583352020-01-23T18:54:00.000+02:002020-03-27T16:04:18.668+02:00Scrubbers revisited.<div style="text-align: justify;">
<br />
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.</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
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.</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
<span style="font-family: inherit;">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.</span></div>
<div style="text-align: justify;">
<span style="font-family: inherit;"></span><br /></div>
<div style="text-align: justify;">
<span style="font-family: inherit;">Further scrubber refitting is proving to be an excellent asset play. C<span style="background-color: white; color: #212529; display: inline; float: none; font-style: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;">lose to 20 modern or resale VLCCs are being touted for sale at high prices in a market that is offering shipowners strong returns.</span></span></div>
<div style="text-align: justify;">
<span style="font-family: inherit;"><span style="background-color: white; color: #212529; display: inline; float: none; font-style: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;"><br /></span></span></div>
<div style="text-align: justify;">
<span style="font-family: inherit;"><span style="background-color: white; color: #212529; display: inline; float: none; font-style: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;">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.</span></span></div>
<div style="text-align: justify;">
<span style="font-family: inherit;"><span style="background-color: white; color: #212529; display: inline; float: none; font-style: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;"><br /></span></span></div>
<div style="text-align: justify;">
<span style="font-family: inherit;"><span style="background-color: white; color: #212529; display: inline; float: none; font-style: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;">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.</span></span></div>
<div style="text-align: justify;">
<span style="font-family: inherit;"><span style="background-color: white; color: #212529; display: inline; float: none; font-style: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;"><br /></span></span></div>
<div style="text-align: justify;">
<span style="font-family: inherit;"><span style="background-color: white; color: #212529; display: inline; float: none; font-style: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;">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.</span></span><br />
<span style="font-family: inherit;"><span style="background-color: white; color: #212529; display: inline; float: none; font-style: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;"><br /></span></span>
<span style="font-family: inherit;"><span style="background-color: white; color: #212529; display: inline; float: none; font-style: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;">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.</span></span><br />
<span style="font-family: inherit;"><span style="background-color: white; color: #212529; display: inline; float: none; font-style: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;"><br /></span></span>
<span style="font-family: inherit;"><span style="background-color: white; color: #212529; display: inline; float: none; font-style: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;">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.</span></span></div>
<div style="text-align: justify;">
<span style="background-color: white; color: #212529; display: inline; float: none; font-style: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;"><span style="font-family: inherit;"></span><br /></span></div>
<div style="text-align: justify;">
<span style="background-color: white; color: #212529; display: inline; float: none; font-family: "sueca" , "times new roman" , "times" , serif; font-style: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;"><span style="font-family: inherit;"></span><br /></span></div>
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<b></b><i></i><u></u><sub></sub><sup></sup><strike></strike><b></b><b></b><br />
<br />Diran Majarianhttp://www.blogger.com/profile/07818842231575871539noreply@blogger.com0tag:blogger.com,1999:blog-6796651338160395539.post-77836608098895230062020-01-23T18:25:00.001+02:002020-01-23T19:13:49.539+02:00CMA-CGT merger with Ceva and its challenges<div style="text-align: justify;">
<br />
The Ceva merger is a milestone for CMA-CGT. It represents an effort to move away from a transport provider business model to a logistics operation, in hopes of creating more value content to services sold and better earnings margins for shareholders</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
The liner industry has been through years of stress. This is related to many years ofovercapacity and intense competition sending box rates to very low levels, despite China entering the WTO and a global trade boom with a massive rise in volume of container traffic on head haul routes to Europe and the US for finished goods.</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
The liner industry has basically exhausted any possible way of improving profit margins within its present business model as transport provider to freight forwarders.</div>
<ul>
<li><div style="text-align: justify;">
Initially there was an attempt to move to large tonnage to defend earnings margins by lower unit costs. The industry moved to Panamax size to post-Panamax for the huge 10.000 teu plus vessels that are employed on head haul routes today. Whilst this process created a cascading of the small older tonnage to other routes. Every liner company was obliged to follow suit to remain competitive in the alliance system. Financially weaker operators resorted to chartering larger units from vessel provide companies, who could carry them on their balance sheet against the period charters. None of this provided any sustained relief with improved box rates and better earnings margins. The larger units and cascading generated more overcapacity in the process.</div>
</li>
<li><div style="text-align: justify;">
The Global Financial crisis in 2008 created substantial trade disruption that put all the major liner companies in massive losses. |Defensively the major liner companies resorted to slow steaming for lower fuel costs and soak up as much tonnage overcapacity as possible. This mitigated the operating losses and provided some reprieve. Eventually slower speeds became a norm in the liner industry.</div>
</li>
<li><div style="text-align: justify;">
It did not prove to be any game changer, however. Eventually two major Korean lines - Hyundai and Hanjin - had serious financial problems leading to debt restructuring and the bankruptcy of Hanjin. The Hanjin bankruptcy helped rebalance the industry. There was a revision of the alliance system to three major alliances. For a brief period there was some improvement in box rates with this industry consolidation.</div>
</li>
<li><div style="text-align: justify;">
IMO2020 and higher fuel costs is a tremendous challenge to the liner industry. The liner industry has been the most proactive shipping segment to deal with these challenges. All the options are painful. Using compliant low sulphur fuel requires securing in advance necessary fuel supply to support continuation of liner service without disruption. Fitting scrubbers on larger container vessels is an expensive CAPEX investment and means the immobilization of the significant number of vessels for refitting. Use of LNG requires new building orders for another generation of container vessels.</div>
</li>
</ul>
<div style="text-align: justify;">
Last year there was a partial recovery for some of the liner companies, but others remained with operating losses.</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
After the 2008 GFC, CMA-GGT nearly went into bankruptcy. They were compelled to take on a Turkish partner for fresh capital. Only recently last year did CMA-CGT start to generate again operating profits. This despite a merger with APL and moving operations to Singapore.;</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
The CEVA acquisition is an major attempt to revise their business model. But CMA-CGT remains with a weak balance sheet and the merger execution is a major financial challenge for them. They are looking to divest of their terminal business to raise cash to complete this merger. CMA-CGT has also ordered a new generation of LNG powered containerships.<br />
<br />
<span style="background-color: white; color: #212529; display: inline; float: none; font-family: "sueca" , "times new roman" , "times" , serif; font-style: normal; font-weight: 400; letter-spacing: normal; text-align: left; text-indent: 0px; text-transform: none; white-space: normal; word-spacing: 0px;">CMA CGM is saddled with US$ 20 bio debt and serious liquidity issues. They must get a grip on their debt and improve liquidity in 2020 or CMA CTGT may have to restructure its balance sheet, </span></div>
<div style="text-align: justify;">
<b></b><i></i><u></u><sub></sub><sup></sup><strike></strike><br /></div>
<div style="text-align: justify;">
Meanwhile the liner industry faces further challenges. The Chinese economy is maturing and China is moving to slower GDP growth. Trade patterns are changing. Trade is becoming more regional. Production is moving closer to consumption areas.</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
The general containership outlook remains bleak. Box rates are likely to remain low. Older vessels may be subject to extraordinary value depreciation. We have seen this before with container vessels even younger than 20 years going to scrap.</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
The only bright side is improved supply-demand balance in interregional trade and better time charter rates for old Panamax vessels and smaller containerships.</div>
<ul>
</ul>
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Diran Majarianhttp://www.blogger.com/profile/07818842231575871539noreply@blogger.com0tag:blogger.com,1999:blog-6796651338160395539.post-5110214473128503272018-11-05T10:59:00.000+02:002018-11-05T11:12:03.257+02:00More Aegean woes<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
Latest from Lloyd's List:</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
<i>Aegean Marine Petroleum Network has laid out its findings to date from a lengthy internal investigation by its audit committee and it does not make pretty reading for shareholders of the New York-listed company, with up to $300m of company cash and other assets now held to have been “misappropriated” through fraud. </i></div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
I met some Glencore management, who run their fuel oil business from the Chemoil merger, just last week at a
conference in Athens. They alerted me to the fact that despite so many months since the Mercuria take over, the company was still a mess and there were no published accounts.</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
We will see whether the US authorities will intervene on the fraud charges related to the receivables. Usually this goes nowhere and the shareholders simply lose their money.</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
I never liked this set up from the initial IPO. This is reflected in my previous blog articles. The company was very badly run in a difficult and low margin business with a lot of debt against receivables. That was an unsustainable and high risk business Strategy.</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
Since the initial IPO, I have consistently advised countless institutional investors to stay away from ANW.</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
Mercuria have the financial and operational means to turn this around but it will need a lot of restructuring. IMO 2020 is going to be a revolution to the fuel supply industry and likely to change the credit terms with the substantial increase in fuel costs.
</div>
Diran Majarianhttp://www.blogger.com/profile/07818842231575871539noreply@blogger.com4tag:blogger.com,1999:blog-6796651338160395539.post-58260422440054508532018-10-22T16:36:00.003+03:002018-10-22T16:38:24.144+03:00The scrubbers conundrum<br />
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IMO 2020 is a daunting challenge for the shipping industry. After initially a long period of ‘wait and see’ with considerable verbal resistance to retrofitting their ships with scrubbers, there is a sudden rush since June this year of companies jumping on the bandwagon to retrofit their fleet with scrubbers. Whether over time this proves an effective means to meet the environmental challenges ahead for the industry remains to be seen. It is likewise questionable in terms of the interests of the shipping industry as a whole. </div>
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The IMO 2020 regulation places an impossible burden on the shipping industry. Normally environmental regulations on matters like exhaust emissions start with the engine makers and refining industry, not with the end users of the equipment. </div>
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Here the shipping industry will be monitored and fined for exhaust emissions from not using compliant low sulfur fuel oil (LSFO). The existing fleet is equipped with engines designed to burn heavy sulfur fuel oil (HSFO). It not clear that the refining industry will be able to supply sufficient LSFO. The refinery industry is not mandated to do this under IMO 2020. They do not know themselves how much HSFO will continue to be used and how much LSFO will be needed. Changing the refinery cycle to produce LSFO requires investment. Also possibly this will necessitate change of supply chain for crude oil in favor of lighter crude grades more amenable for production of LSFO.</div>
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None of the means of compliance for ship owners is guaranteed to be without risks, expenses and issues. </div>
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<li><div style="text-align: justify;">
Scrubbers are an exception in the IMO 2020 legislation that allow ship owners to continue to burn HSFO in their engines. No one knows for how long the regulatory authorities will continue to permit this exception. The technology is based on land applications in heavy industries like power plants. Scrubbers are heavy and expensive equipment. The residues from the process have a disposal issue. The process requires additional energy and has maintenance costs. Fitting scrubbers is a costly capital investment in the millions of dollars per vessel as well as requiring off-hire and expenses for installation. The CAPEX may be recovered in the operation of the vessel with cheaper HSFO but no one yet knows how much the price differentials will be between HSFO and LSFO and how long or soon will be the payback. The growing sentiment for scrubbers at least for larger tonnage comes from fear of being left out with charterers, who will give preference to vessels that can burn the cheaper HSFO. Some major oil company charterers are offering period charters at substantial premium to current T/C rates for vessels fitted with scrubbers. </div>
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Burning compliant LSFO will have considerably higher costs than previously with the HSFO. Nobody knows whether there will be sufficient supply. Ships could be forced to wait for supply and be immobilized. There are no clear fuel standards. There are technical and safety issues in burning LSFO in conventional engines built to run on HSFO. </div>
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LNG is prima-facie an elegant alternative but this practically can only apply to new buildings since the costs of refitting existing vessels with new main engines is simply not practical nor feasible. The major oil companies are preparing to supply LNG for fuel but so far availability is only at a few major ports and use of LNG as fuel is only feasible regionally in ECA areas like the Caribbean, Northwest Europe and the Baltic Sea. With LNG, there is another potential environmental issue with methane slip, where there might be future regulation. </div>
</li>
</ul>
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Lately in the Trump administration in the US, there is growing concern about the impact of higher transportation costs to consumers from IMO 2020 and talk about finding some means for delay in implementation of IMO 2020. Since these regulations have been ratified many years ago, the general feeling is that delay in implementation is not too likely. Simply, 2020 will be a tumultuous year in the fuel business and there will be considerable lenience until supply issues are settled. </div>
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There will be three categories of vessels: </div>
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Those fitted with scrubbers, mainly larger vessels with higher fuel consumption that perform long haul voyages. </div>
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The modern ECO vessels without scrubbers with low fuel consumption.
• All the other vessels available.
•</div>
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Smaller vessels will be the least affected. Many of them are burning mainly gasoil distillates, trading in ECA’s. They are too small physically to fit scrubbers.</div>
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A key issue for the shipping industry is the incidence of the higher fuel costs – on the ship owners or on the charterers? The shipping industry is a very low margin business with some sectors like tankers making operating losses. Already fuel costs are mounting this year with the rise in oil prices internationally. The liner companies are posting fuel surcharges. Already some are starting surcharges for IMO 2020. The shippers are protesting but given that this sector also is low margin and low making, there is not much to protest or otherwise more liner company bankruptcies. </div>
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My view is that the shipping industry would be best served to boycott scrubbers and force the higher fuel costs on the charterers, letting the politicians face the regulators over the higher costs to consumers for use of more expensive fuel. Also slow steaming is a constructive measure that reduces emissions as well as oversupply of vessels for better utilization of the existing fleet. </div>
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The shipping industry, however, is highly fragmented. Shipping companies have no market pricing power. They are price takers. Essentially it is a highly competitive, low margin business with low returns on assets and investment, except for market swings and asset arbitraging. </div>
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2020 will be an interesting year. There may be a silver lining in term of more cargo volume, especially in the product tanker sector to supply LSFO and generally lower supply of vessels with increased scrapping pressure on older, less fuel efficient tonnage and vessels taken out of the market for scrubber refitting. </div>
Diran Majarianhttp://www.blogger.com/profile/07818842231575871539noreply@blogger.com2tag:blogger.com,1999:blog-6796651338160395539.post-24934590747245315242018-10-22T16:16:00.000+03:002018-10-22T16:37:59.716+03:00How IMTT/ MIC compares to the major international players like VOPAK and Oil Tanking.<div style="text-align: justify;">
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The Macquarie Group (MIC) made a strategic decision in 2014 to acquire International Matex and enter into the liquid storage business. Liquid storage is an international business dominated by VOPAK and Oil Tanking both with a global presence of terminals in key hub locations, either direct investment or in joint ventures. Generally the share performance of MIC has disappointed compared to VOPAK. They are very different business models. </div>
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MIC owns, operates and invests in a portfolio of infrastructure businesses in the United States.</div>
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The heart of MIC is International-Matex Tank Terminals (IMTT). IMTT has ten marine terminals located on the East, West and Gulf Coasts and the Great Lakes regions of the United States, and two partially owned terminals in the Canadian provinces of Quebec and Newfoundland.</div>
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IMTT has a dominant market position in the New York Harbor and lower Mississippi River, which are two key port areas in the United States. </div>
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IMTT enjoys approximately a one-third market share for bulk liquid storage in the NYH (the largest terminal), and has approximately two-thirds market share on the lower Mississippi River with the St. Rose, Gretna and Avondale, Louisiana facilities. </div>
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They compete in the liquid storage business with Royal Vopak among others. VOPAK is the world’s leading independent tank storage company. They have a 400 year history and operate a global network of terminals located at strategic locations along major trade routes. MIC management is a relative newcomer to the liquid storage business, buying an existing operator with a 70 year history.</div>
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MIC entered on the surge of the US energy renaissance with increased domestic production. They have focused on the US regionally. Whilst liquid storage is a major part of MIC, their focus is portfolio investment in infrastructure and IMTT is only one of four business segments: </div>
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<li><div style="text-align: justify;">
Atlantic Aviation: a provider of fuel, terminal, aircraft hangaring and other services primarily to owners and operators of general aviation (GA) jet aircraft at 70 airports throughout the U.S.</div>
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<li><div style="text-align: justify;">
International-Matex Tank Terminals (IMTT): a business providing bulk liquid terminals, </div>
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<li><div style="text-align: justify;">
MIC Hawaii: comprising an energy company that processes and distributes gas and provides related services (Hawaii Gas) and several smaller businesses collectively engaged in efforts to reduce the cost and improve the reliability and sustainability of energy in Hawaii;</div>
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<li><div style="text-align: justify;">
Cntracted Power: comprising electricity generating assets including a gas-fired facility and controlling interests in wind and solar facilities in the U.S. </div>
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MIC had major earnings miss in February and reported that its free cash flow would likely decline by between 8 and 10 percent in 2018. It announced cutting its dividend by 28%. This resulted in a major share sell off over 40%. Since then its share value has not recovered significantly. In July, MIC entered an agreement to sell their Bayonne Energy Center for US$ 900 mio with a net proceeds of US$ 650 mio of which US$ 150 mio will be used to reduce their revolving credit facilities. MIC has a BBB- credit rating by S&P. </div>
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MIC has had a public dispute with MOAB Capital over debt levels and executive compensation. This happens in these cases of disappointing investor results. </div>
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VOPAK operates 66 terminals in 25 countries. It concentrates entirely on the liquid storage business. It has an AAA- credit rating by S&P and a much more consistent earnings results and dividend history than MIC. </div>
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The liquid storage business has had its challenges the last few years. Much of this has to do with declining occupancy rates in oil storage, which a major component for both IMTT and VOPAK. Oil storage is very sensitive to price arbitrage and oil futures. In backwardization pricing environment, there is little incentive to store oil. This year the rise in oil prices has restored contango and a better environment for storage. </div>
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Fuel oil remains an unsettled market with impending implementation of IMO 2020. The fuel importation market looks promising with structural deficits. VOPAK has invested heavily in LNG/ LPG storage in anticipation of future growth demand. IMTT has largely ignored this sector. It has a much larger exposure to refined products than VOPAK, which has a more balanced mix of products.
MIC is investing in a US$ 225 mio program to repurpose and reposition IMTT, leveraging IMTT’s privileged position to respond to market changes and capitalize on growth opportunities. By comparison, VOPAK is spending end maximum EUR 750 million on sustaining and service improvement capex for the period 2017-201 as well as an additional EUR 100 million in new technology, innovation programs and replacing IT systems including terminal management software in the US with the latest in cybersecurity. </div>
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I have always considered VOPAK a much better managed business than MIC. Of course they have different approaches and they are not entirely comparable. VOPAK is a dedicated international liquid storage provider. IMTT is a major part of MIC, it is a US liquid storage provider. MIC is invested in other infrastructure projects beyond liquid storage.
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Diran Majarianhttp://www.blogger.com/profile/07818842231575871539noreply@blogger.com2tag:blogger.com,1999:blog-6796651338160395539.post-20752892533316751602017-07-28T18:06:00.000+03:002017-07-28T18:13:35.103+03:00Brookfield buys into TeeKay Offshore<div style="text-align: justify;">
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<span style="font-family: inherit;">TeeKay Offshore Partners (TOO) has been an industry leader in the shuttle tanker and floating storage business. It most direct competitor is Knutsen Offshore, more recently listed but an established operator with Japan’s NYK as partners. Although the offshore business is under stress, shuttle tanker are on long term employment, there are entry barriers to the business and the assets are in limited supply. TOO has recently struck up a new business partnership with Brookfield Business Partners - a new dominate shareholder - that rewrites their balance sheet. This ring fences TOO liabilities for parent TeeKay Corp and makes TOO a formidable player in the marine offshore infrastructure market.
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<span style="font-family: inherit;">Latest 1st Quarter financial results for TOO showed profits of US$ 15 mio and distributable cash flow double that amount. Both the shuttle tankers and the FPSO floating storage business were profitable. There were no Auditors remarks. These were better result than a year ago 1st quarter 2016, when they had some small losses, most likely from asset impairment charges. Their bank leverage is on the high side (70%) but not yet to the point of breaching LTV covenants.
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<span style="font-family: inherit;">What destabilized TOO was the generally poor business climate and concerns about possible future difficulties. The catalyst for this was last June when their Lenders
sold some US$ 75 mio of the company's secured debt in the secondary market at a discount, reportedly at levels between US$ 0.75 and 0.85 on the dollar.
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<span style="font-family: inherit;">This precipitated a panic in the share price and spiked over to the parent company TeeKay Corp. It was all about future issues, not present liquidity issues that risked possible insolvency. There was the matter of future asset values for very specialized assets in a narrow resale market. Oil rig assets in recent distressed sales have lost as much as 60-70% of their value. There was the matter of future contract renewals. In fact, TOO was recently obliged to renew at reduced rate one of its FPSO contracts. Queiroz Galvao Exploracao e Producao. Finally, there was the impact on TeeKay Corp struggling itself in the currently beleaguered tanker market. </span></div>
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<span style="font-family: inherit;">The situation was an opportunistic investment for Brookfield Business Partners with a capital injection of US$ 610 million. Brookfield is taking a 60% stake in the company. TeeKay Corp retains a 14% share in the business, injecting a smaller capital amount of US$ 30 mio. Brookfield is also taking a 49% stake in the general partner and providing them an intercompany loan of US$ 200 mio, allowing them to restructure their debt and extend maturities.
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<span style="font-family: inherit;">They are planning to separate the shuttle tanker business from the offshore floating storage and placing an order for four additional shuttle tankers.
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<span style="font-family: inherit;">Brookfield is reputedly a low risk investor, seeking 15% long term returns, which is a realistic target in the shipping industry. Given the general situation in Offshore and uncertainties with low oil prices, etc,, it may take a few years until recovery but there is a fair likelihood that the curtailment of new offshore projects the last few years will lead to shortages as older fields like the North Sea are depleted and new projects in the future.</span>
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Diran Majarianhttp://www.blogger.com/profile/07818842231575871539noreply@blogger.com0tag:blogger.com,1999:blog-6796651338160395539.post-39358364037471395592017-06-22T18:54:00.003+03:002017-06-22T18:56:57.753+03:00Odfjell acquiring Georgiopoulos chemical vessels to be delivered and taking the commercial management of the delivered vessels in a common pool.<div style="text-align: justify;">
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When Peter Georgiopoulos jumped on the band wagon back in 2014 and moved into the chemical tanker sector with a speculative order in China and establishing Chemical Transportation Group, it was clear that the MR/ handysize stainless sector was clearly going to be over invested and rates would disappoint from the excess capacity. I have mentioned this in a prior post: Is <u>Peter G’s sudden foray into chemical tankers a clear signal to short the sector?</u> http://amaliatank.blogspot.gr/2014/04/is-peter-gs-sudden-foray-into-chemical.html.</div>
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Peter was a chemical tanker outsider with no knowledge of the industry and a career of speculative asset plays. Peter G is essentially an asset trader with mixed reputation on operating profits. He has made some very good asset plays and had also some very bad calls resulting in disastrous hits for his investors that crashed into bankruptcy and reorganization like Genmar and Genco.
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Now we see Georgiopoulos monetizing half of his chemical fleet and breaking off from his pool managers, Hansa Tankers, to a new pool with Odfjell, who already has Celsius Tankers backed by Breakwater as clients. This appears a wise move on his part. Doubtful that he is making the profits that he expected but then he walked into a sector of the market where he had no experience.
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Chemical tankers have had traditionally poorer returns on asset than any other shipping sector. It is small market that is only 3% of the entire tanker market. Stainless steel chemical tankers are expensive, specialized assets that only a few can operate efficiently because of the parcel nature of the cargo lots and the need for a contract base with end users. The vessels are often built to order for the needs of the major operators. It is generally a very narrow resale market where the best contenders are a handful of peer operators. It is difficult to time the sales because the vessels are committed to contracts and cannot easily be freed up. Because it Is a relatively small market size, it does not take a lot of ordering to flood the market with over capacity.
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A great deal of ordering has been motivated by the shipyards. In this particular cases, Ding Heng in China wanted to develop a niche market reputation for handysize stainless-steel chemical tankers. Building a stainless chemical vessel is much more difficult than an LPG carrier. In the case of LPG vessels, the cargo tanks are pre-fabricated by the manufacturer and then mounted into the vessel by the shipyard. LPG vessels only have a very few cargo tanks. In the case of stainless steel vessel, the cargo tanks are many and they have to be built into the vessel. This work is very costly and requires skilled welders that know how to work with stainless steel. It can also result in painful, loss making contracts for novice shipyards with higher construction costs, unexpected delays and performance problem.
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The Italians built the last generation of stainless vessels back in the late 1990’s under state yard subsidy schemes. They were replaced in part by a new generation of vessel with Marine Line coating built speculatively in Turkey. None of these vessels built every made much money for their owners from these two periods of ordering binges. </div>
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The Japanese have been very successful in building high quality clad stainless vessels with very standardized designs without room for modifications. They are supported by domestic Japanese owners, who then time charter them on a long term basis to the major operators like Stolt, Odfjell and Tokyo Marine. These are very reliable cookie cutter designs of good quality.
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The above major chemical tanker operators are a ‘defacto’ industry oligopoly. The entry barriers with the end users for major contracts are substantial. They create base cargoes for which profits come from the completion cargos on the spot market. As in any competitive, relatively low margin business, the major operators are best served with a mixed fleet of chartered and owned vessels, where they can add and subtract tonnage according to market conditions. Speculative owners are very much price takers in this process.
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Georgiopoulos tried to soften this by turning to Hansa Tankers in Bergen, Norway for pool employment. Hansa was a break off from the collapse of Bryggen Tankers where one of the partner, Hans Solberg, decided to go on his own. Hans Solberg has built up a very impressive commercial/ pool management business in this sector with an impressive roster of clients, comprised of some major Japanese names, some institutional investors in the sector like Princimar and Greek operators like Interunity and Georgiopoulos who moved into the sector a vessel operators without chemical tanker commercial management skills. Commercial management in the chemical sector is a lucrative business.
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Currently, the chemical markets are weak. Last year was not a good year and this year is proving difficult. The Odfjell move makes sense and is no surprise as part of the inevitable chemical tanker industry consolidation process. You have a major chemical tanker operator partially absorbing a novice operator as well as undercutting Hansa commercial management and poaching the existing Georgiopoulos vessels to their own management.
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Diran Majarianhttp://www.blogger.com/profile/07818842231575871539noreply@blogger.com0tag:blogger.com,1999:blog-6796651338160395539.post-19006818880022199672017-06-19T18:29:00.000+03:002017-06-20T17:11:45.219+03:00Major Management changes after Aegean Petroleum disappoints with signficant earnings shortfall<br />
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<span style="font-family: inherit;">Aegean Petroleum (ANW) with its
unusual business model compared to its bunker supplier peer competitors has
been courting trouble for a long time that is finally beginning to roost on is
management.<span style="margin: 0px;"> </span>The company reported much
worse than expected earnings for 1st Quarter 2017. Its CEO John Tavlarios resigned.<span style="margin: 0px;"> </span>Neither Tavlarios - as director - nor Peter
Georgiopoulos as Aegean Chairman garnered enough shareholder votes to continue
on the Aegean Board of Directors.<span style="margin: 0px;"> </span>Aegean
announced that they want to move to an asset light business model, effectively
throwing in the towel and following their competitors’ business model.<span style="margin: 0px;"> </span>In my mind, it was a miracle that they were
able to continue their previous course for so long in this brutal, overly competitive,
low margin business.</span></div>
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<span style="font-family: inherit;">I have been warning for years on
Aegean and its weak and incoherent business strategy.<span style="margin: 0px;"> </span>See my previous posts.<span style="margin: 0px;"> </span><u>Aegean Marine Petroleum Network: lagging
competitors with low return on investment and mounting financial expense eroding
earnings margins</u> http://amaliatank.blogspot.gr/2013/01/aegean-marine-petroleum-network-lagging.html.</span></div>
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<span style="font-family: inherit;">The marine bunker business has
the worst earnings margins in the fuel business.<span style="margin: 0px;"> </span>The competition is brutal.<span style="margin: 0px;"> </span>The normal course of most marine bunker
companies is eventually to sell out to competitor companies.<span style="margin: 0px;"> </span>Aegean stock price performance – always below
NAV - has been crying out for years that its shareholders would be better
served by this path given that a merger with an established competitor like
World Fuel would offer them better value. </span></div>
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<div style="margin: 0px; text-align: justify;">
<span style="font-family: inherit;">Many of the peer companies are
arms of major commodities traders such as the case of Chemoil that was acquired
by Glencore.<span style="margin: 0px;"> </span>Others like World Fuels
(INT) are highly diversified in the fuel business in other more profitable
areas like fuel for land trucking and jet aviation.<span style="margin: 0px;"> </span>They are companies that have low leverage and
are able to finance their sales with ample working capital. </span></div>
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<span style="font-family: inherit;"><br /></span></div>
<div style="margin: 0px; text-align: justify;">
<span style="font-family: inherit;">Aegean followed an inherently
Greek strategy to build up assets and leveraged up in the process with
debt.<span style="margin: 0px;"> </span>Their IPO was to acquire an owned
fleet of double hull bunker vessels and somehow gain competitive advantage with
this delivery system. Never mind that marine bunker supply is a trading
business and these assets are cost to them as part of their delivery system in
their sales to customers, making this a ludicrous strategy for competitive
advantage.<span style="margin: 0px;"> </span> </span></div>
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<div style="margin: 0px; text-align: justify;">
<span style="font-family: inherit;">Why Aegean attracted so many
major value investors is something that I find inscrutable.<span style="margin: 0px;"> </span>I have done consulting work on Aegean over
the years for some of them and the experience was disconcerting.<span style="margin: 0px;"> </span>I discovered the most incredible
misconceptions about Aegean.<span style="margin: 0px;"> </span>Many
actually believed that Aegean with its bunker vessels was another Greek shipping
company with tankers instead of a bunker supplier!!!! They were shocked when I
tried to bring them to reality of the Aegean business model and explain to them
how the bunker fuel business works. </span></div>
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<div style="margin: 0px; text-align: justify;">
<span style="font-family: inherit;">Several years later under the
urging of Aegean’s founder, Mr. Melissanides, who had some land in Fujairah,
Aegean embarked upon a strategy of building oil terminals for its bunker oil to
be sold to customers.<span style="margin: 0px;"> </span> </span></div>
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<span style="font-family: inherit;"><br /></span></div>
<div style="margin: 0px; text-align: justify;">
<span style="font-family: inherit;">Now liquid storage for third
parties as a business Is normally more profitable with better returns than
selling bunker oil or even transporting oil for third parties, but this was to
acquire the physical commodity and then sell it to its customers in competition
with its peer competitors.<span style="margin: 0px;"> </span>The logic was
along the same lines as its fleet of bunker tankers.<span style="margin: 0px;"> </span>Adding these assets to the balance sheet as
well as the bunker fuel inventory required additional financing, for which
Aegean increased its leverage and finance costs. </span></div>
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<span style="font-family: inherit;"><br /></span></div>
<div style="margin: 0px; text-align: justify;">
<span style="font-family: inherit;">By comparison, Glencore – a major
trading company – upon acquiring Chemoil started to divest of Chemoil storage
facilities to lighten up the balance sheet on the logic that rented space would
be cheaper and more efficient.<span style="margin: 0px;"> </span>Moreover,
peer competitor companies generally avoid physical bunker commodity, preferring
to purchase from producers like major oil companies and hedge their sales to
customers with derivatives.<span style="margin: 0px;"> </span>They all
fostered an asset light business model to support their bunker trading business
competitively given the very low margins on sales.<span style="margin: 0px;"> </span>Concurrently, they wanted to keep finance
costs to a minimum. </span></div>
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<div style="margin: 0px; text-align: justify;">
<span style="font-family: inherit;">Aegean actively bought market
share as a growth strategy and raised additional capital to do so.<span style="margin: 0px;"> </span>Over time, Aegean got more and more bogged
down with a heavy asset based balance sheet and aimless expansion without a
coherent strategy for competitive advantage and better earnings margins.<span style="margin: 0px;"> </span></span></div>
<div style="margin: 0px;">
<span style="font-family: inherit;"><br /></span></div>
<div style="margin: 0px; text-align: justify;">
<span style="font-family: inherit;">Personally, I give enormous
credit to John Tavlarios that he managed as well as he did to hold on for so
long given the extensive challenges that he faced with such an unproductive business
strategy against a lean, brutal competition.<span style="margin: 0px;">
</span>But these dramatic events where Aegean now publicly want<span style="margin: 0px;"> </span>themselves to move to a more asset light
business model that they have finally seen the light and thrown the towel here. </span></div>
<div style="margin: 0px;">
<span style="font-family: inherit;"><br /></span></div>
<div style="margin: 0px; text-align: justify;">
<span style="font-family: inherit;">Agile low-cost newcomers are
cropping up in their major fuel hubs.<span style="margin: 0px;">
</span>The market is saturated with back to back trading entities.<span style="margin: 0px;"> </span>Aegean is going to have to start selling off
its assets, deleverage and consider potentially exiting less profitable
markets. </span></div>
<div style="margin: 0px;">
<span style="font-family: inherit;"><br /></span></div>
<div style="margin: 0px; text-align: justify;">
<span style="font-family: inherit;">The biggest jack asses in this
mess are Aegean’s two largest shareholders<span style="margin: 0px;">
</span>Canada’s Senvest Management and US-based Towle & Co. who bought into
Aegean and are the largest shareholders. They should have realized years ago the incongruities in Aegean with its asset heavy approach.<span style="margin: 0px;"> </span>The case speaks for itself!<span style="margin: 0px;">
</span>Hopefully, they will work themselves out of this to create some value
for their investors. Despite the challenges, I believe that Aegean shareholders could see better days with the management in the right hands.</span></div>
<div style="margin: 0px;">
<span style="font-family: inherit;"><br /></span></div>
<div style="margin: 0px;">
<b></b><i></i><u></u><sub></sub><sup></sup><strike></strike><span style="font-family: inherit;"></span><br /></div>
Diran Majarianhttp://www.blogger.com/profile/07818842231575871539noreply@blogger.com18tag:blogger.com,1999:blog-6796651338160395539.post-53497734101739597892017-06-14T16:42:00.004+03:002017-06-14T22:52:15.927+03:00Hunter Maritime Capesize acquisition deal flops<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
It is very surprising that a shipping acquisition deal promoted by the Saverys SPAC, Hunter Maritime and a major NY investment bank, Morgan Stanley would fall flat on its face with investors. Saverys is a well-known and regarded figure in shipping circles. Morgan Stanley is a major Wall Street investment bank that has done a lot of high profile shipping deals. What went wrong???
</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
This deal was for the purchase of the 175,000-dwt Charlotte Selmer and Greta Selmer (built 2011), the 175,000-dwt Tom Selmer (built 2011), and the 175,000-dwt Lene Selmer and Hugo Selmer (both built 2010). They were all built by Chinese shipyard New Times Shipbuilding. It was a pure asset deal, not the purchase of a going concern company. </div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
The originally announced price tag of US$ 139,4 million was higher than the US$ 123 million market valuation. Eventually the price was reduced to US$ 133.5 million, still a rather hefty premium.
The deal hinged on completing a tender offer to buy back 8.2 million of its Class A common shares, roughly half of the shares sold to the public last year, at $10 per share. Too many shares were tendered. </div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
Several knowledgeable sources explained that Investors hated this proposed deal. Normally to induce SPAC investors to stay and recycle the investor base to de-SPAC, there has to be an acceptable arbitrage over the nominal US$ 10 share value. The share buyback, moreover, was at par and gave shareholder nothing from it. The deal was poorly put together: small for a US$ 150 mio raise. Even worse arbitrage and in a sub-sections that traded at a discount of P/Nav!!!
<br />
<div style="text-align: justify;">
<b></b><i></i><u></u><sub></sub><sup></sup><strike></strike><br /></div>
<div style="text-align: justify;">
Morgan Stanley is not considered by the Street a SPAC bank. They appear to have fallen flat on their faces, unable to help Saverys/ Hunter recycle the shares nor assist in structuring the deal properly to be workable with shareholders in term of the share arbitrage.
Why was Morgan Stanley not on the ball here???</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
Hunter has a 24-month deadline from its public offering last November to find potential acquisitions or return capital to its shareholders. The company said it is still looking for potential acquisitions.</div>
</div>
Diran Majarianhttp://www.blogger.com/profile/07818842231575871539noreply@blogger.com0tag:blogger.com,1999:blog-6796651338160395539.post-31710723585482734082016-09-06T09:43:00.002+03:002016-09-13T13:28:39.836+03:00Hanjin collapses into bankruptcy and receivership: Sursum Corda!<span style="color: #1f497d;"></span><br />
<div style="text-align: justify;">
<span style="color: #1f497d; font-size: 11.0pt;"><span style="font-family: inherit; font-size: small;">I have been
predicting this sort of high profile bankruptcy of a major liner company
as inevitable for years now. There are just too many loss making liner
companies and sooner or later state support would reach its limits. The
whole matter of counterparty risk for the vessel provider companies has been
misconstrued for years now on the false assumption that the liner companies
were just too big to fail.</span></span><span style="color: #1f497d; font-size: 11.0pt;"><span style="font-family: inherit; font-size: small;"> </span></span><br />
<span style="color: #1f497d;"><br /></span>
<span style="color: #1f497d;">Seaspan's Gerry Wang calls the Hanjin bankruptcy a nuclear bomb and mixing his metaphors a 'Lehman moment', but did not Wang see this coming? For years, he was ordering aggressively and chartering out to loss makers like Hanjin. His policies contributed to this!</span></div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
<span style="color: #1f497d; font-size: 11.0pt;"><span style="font-family: inherit; font-size: small;">This industry suffers from
chronic overcapacity and low margins. Further their business model based
on China and head haul routes is in risk of becoming outdated with the slowing
of Chinese growth and trade rebalancing as well as technologically obsolescent
with the robotics, 3-D printing, etc. I have always been in agreement
with my friend Christopher Rex of Danish Ship Fund on this industry and its
prospects.</span></span><span style="color: #1f497d; font-size: 11.0pt;"><span style="font-family: inherit; font-size: small;"> </span></span></div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
<span style="color: #1f497d; font-size: 11.0pt;"><span style="font-family: inherit; font-size: small;">I have argued this time and
again with my Wall Street investment bank friends. Hopefully, with this Hanjin
case, they will start to wake up and understand better the container industry
dynamics. See some of my blog articles on this subject over the
years. For example, I was very early to point out the large exposure of
Danaos (NYSE: DAC) to financially weak liner companies.</span></span><span style="color: #1f497d; font-size: 11.0pt;"><span style="font-family: inherit; font-size: small;"> </span></span></div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
<span style="color: #1f497d; font-size: 11.0pt;"><span style="font-family: inherit; font-size: small;">Danaos was somewhat fortunate with the HMM charters receiving shares in restructured HMM in return for reduced charter rates. In the case of Hanjin, DAC has estimated exposure of US$ 560 million on Hanjin. First estimates are creditor returns of 35% for secured claims. But only 5% for unsecured claims and zero on liquidation. That is quite a mark down!</span></span></div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
<span style="color: #1f497d; font-size: 11.0pt;"><span style="font-family: inherit; font-size: small;">Over the years, Wall Street
has made some bad shipping calls like the earlier reckless, irresponsible dry bulk
speculative asset plays. Investors in shipping stocks have frequently
lost their shirts. </span></span></div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
<span style="color: #1f497d; font-size: 11.0pt;"><span style="font-family: inherit; font-size: small;">Of course, the great thing about shipping markets as
opposed to politics in the US and EU - where the usual reaction is to double up
on failed policies, buy time and hide the truth from the public - is that you
cannot hide financial losses, financial resources are limited and there are
natural market corrections, asset write downs and consolidation. Raw Schumpeter capitalism always prevails keeping the industry lean and mean over the long run, but not without significant volatility and market swings. </span></span></div>
<div style="text-align: justify;">
<span style="font-family: inherit;"></span><br /></div>
<div style="text-align: justify;">
<span style="color: #1f497d; font-size: 11.0pt;"><span style="font-family: inherit; font-size: small;">It is not a good idea to get lost in the noise and ignore supply chain logistics that generates the underlying cargo demand for marine transport.</span></span><span style="color: #1f497d; font-size: 11.0pt;"><span style="font-family: inherit; font-size: small;"> </span></span></div>
<span style="font-family: inherit;"><br /></span>
<br />
<div style="margin: 0cm 0cm 0pt; text-align: justify;">
<br /></div>
<b></b><i></i><u></u><sub></sub><sup></sup><strike></strike><span style="font-family: inherit;"></span>Diran Majarianhttp://www.blogger.com/profile/07818842231575871539noreply@blogger.com0tag:blogger.com,1999:blog-6796651338160395539.post-51583645182814433222016-08-29T14:21:00.002+03:002016-09-02T14:59:21.677+03:00Hanjin Shipping wins Seaspan concessions: the inevitable for the vessel provider companies!<div style="text-align: justify;">
<br />
The current plight of Hanjin is representative for the Liner industry: substantial operating losses, need for recapitalization and over indebted balance sheet. The container industry panacea of ever larger units to reduce unit costs and defend eroding earnings margins is not working out as hoped. This has created more overcapacity with cascading. Now there is talk of the Panamax sizes going for scrap. <br />
<br />
World trade growth is slowing. It is not clear that the old model of large ships for headhaul lines is going to meet the requirements of the future with trade rebalancing in China, robotics and the sharing economy of the future.</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
The cold truth is that there are already more liner companies than the market can support. A large number of liner companies are making losses. Some like NOL have been put on the block for sale and are being consolidated into other companies like CMA-CGM, others like HMM and Hanjin are staving off bankruptcy with financial restructuring.</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
Vessel provider companies like Seaspan and Danaos have built their fleets by every larger vessels that they let on term time charter to financially weak liner companies that want the larger units to defend themselves from the ordering and competition of the stronger liner companies but unable to carry the vessels themselves on their balance sheets.</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
I have repeatedly signaled out this risky business policy of the vessel provider companies on my blog. I have stressed that it was not a sound and sustainable business strategy. The vessel provider companies would face inevitable challenges in the future as the financial situation of the liner companies deteriorates, leading to bankruptcy and restructuring that would inevitably entail charter renegotiation. I pointed out the heavy exposure of Danaos to HMM and Hanjin as major charterers. I stressed the aggressiveness of Seaspan to service financially weak Asian liner companies with ever larger units. Cosco for example recently announces losses of over US$ 1 billion in their liner business, one of their customers.</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
I have always felt that Gerry Wang's assertions about having a leasing company business model were overstated and disingenuous to investors. Seaspan lets its tonnage on time charter with operating risks. With Hanjin in financial crisis, Wang took the hard line on charter negotiations for investor ears, but Seaspan is in a weak position with its exposure in large containerships. It cannot easily withdraw and redeploy its vessels because the market for these units is not large. Inevitably as its liner company customers begin to face financial difficulties, Seaspan has no choice but to accept cuts in charter rates to keep them going with their creditors as long as possible. <br />
<br />
Since the original writing of this piece, Hanjin's restructuring negotiations have not worked out and they are going into receivership. Seaspan is hoping for a merger between HMM and Hanjin and that perhaps with some sort of state support, they might be able to avoid cuts in charter rates. We will see over time how Seaspans fares. This is a test for their exposure to other weak Far East charterers and possible state intervention to keep them afloat.</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
I restate again these points because I have often met dead ears in NY investment banking circles, still enamored with the containership industry. Over time, the bankers and financial industry are going to have to face the reality: </div>
<div style="text-align: justify;">
<br /></div>
<ul>
<li><div style="text-align: justify;">
The containership industry is just as challenged as dry cargo with overcapacity. </div>
</li>
<li><div style="text-align: justify;">
The growth days from the global megacycle and China boom are over and gone.</div>
</li>
<li><div style="text-align: justify;">
Liner companies will inevitably be forced to consolidate for survival. It is not clear that very large containerships will be needed to extent anticipated.</div>
</li>
<li><div style="text-align: justify;">
Vessel provider companies are going to face a long period of thin margins as their liner company employment base shrinks in the consolidation process.</div>
</li>
<li><div style="text-align: justify;">
Inevitably there is renegotiation risk on their charters that they will not be able to avoid with their liner company customers. </div>
</li>
</ul>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
<br /></div>
<br />Diran Majarianhttp://www.blogger.com/profile/07818842231575871539noreply@blogger.com1tag:blogger.com,1999:blog-6796651338160395539.post-14762007094812776462016-07-31T21:09:00.000+03:002016-08-02T11:58:42.711+03:00Greek Maritime Cluster: Role of the small family shipping business – challenges and opportunities.<br />
<div style="mso-element-anchor-horizontal: column; mso-element-anchor-vertical: paragraph; mso-element-frame-hspace: 9.0pt; mso-element-top: .05pt; mso-element-wrap: around; mso-element: frame; mso-height-rule: exactly;">
<table align="left" cellpadding="0" cellspacing="0" hspace="0" vspace="0">
<tbody>
<tr>
<td align="left" style="background-color: transparent; border: rgb(0, 0, 0); padding: 0cm 9pt;" valign="top"><div style="-ms-text-justify: inter-ideograph; margin: 0cm 0cm 10pt; text-align: justify;">
<span style="font-family: inherit;">What will be the future
landscape of the Greek maritime cluster in the coming years ahead? </span></div>
<div style="-ms-text-justify: inter-ideograph; margin: 0cm 0cm 10pt; text-align: justify;">
<span style="font-family: inherit;">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. </span></div>
<div style="-ms-text-justify: inter-ideograph; margin: 0cm 0cm 10pt; text-align: justify;">
<span style="font-family: inherit;">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. </span></div>
<div style="-ms-text-justify: inter-ideograph; margin: 0cm 0cm 10pt; text-align: justify;">
</div>
<div style="-ms-text-justify: inter-ideograph; margin: 0cm 0cm 10pt; text-align: justify;">
<span style="font-family: inherit;">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. </span><br />
<br />
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: </div>
<div style="-ms-text-justify: inter-ideograph; margin: 0cm 0cm 10pt; text-align: justify;">
<ul>
<li>Greece is a small, relatively resource poor country. This drove many Greeks to the sea and created a maritime tradition. </li>
</ul>
</div>
<div style="text-align: justify;">
<ul>
<li><div style="text-align: justify;">
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.</div>
</li>
</ul>
</div>
<ul>
<li><div style="text-align: justify;">
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. </div>
</li>
</ul>
<div style="text-align: justify;">
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.</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
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.</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
The period of growth and success of Greek shipping from the early 1970’s was due to several key factors: </div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
<ul>
<li>The ability of Greeks to acquire older vessels and keep them running for longer than expected trading life. </li>
</ul>
</div>
<ul>
<li><div style="text-align: justify;">
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.</div>
</li>
</ul>
<ul>
<li><div style="text-align: justify;">
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 <i>landesbanks</i> and the expansion of the local Greek banks until the 2008 financial crisis and <span style="font-family: inherit;">the Greek national bankruptcy within
the Eurozone</span><span style="font-family: "calibri" , "sans-serif"; font-size: 11.0pt; line-height: 115%;"><span style="font-family: inherit;">.</span> </span></div>
</li>
</ul>
<br /></td></tr>
</tbody></table>
</div>
<div style="text-align: justify;">
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. </div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
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.
</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
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. </div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
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.</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
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. </div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
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.
<br />
<br />
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. <br />
<br />
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. <br />
<br />
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.
</div>
Diran Majarianhttp://www.blogger.com/profile/07818842231575871539noreply@blogger.com0tag:blogger.com,1999:blog-6796651338160395539.post-42434651564327098242016-06-27T16:36:00.001+03:002016-07-31T21:14:37.522+03:00BREXIT and other challenges for Greek Shipping<span style="font-family: inherit;"></span><div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
<span style="font-family: inherit;">Despite a successful Posidonia
this year, our shipping cluster is facing many challenges. Our competitors in Scandinavia (Norway,
Denmark) and Far East (Singapore, Hong Kong) are not in the deep shackles of
Eurozone creditors and their debtor in possession bailouts nor the scorched
earth of a bankrupt local banking system from years of depression, double digit
unemployment/ emigrating youth. </span></div>
<br />
<div style="margin: 0cm 0cm 10pt; text-align: justify;">
<span style="font-family: inherit;">These countries have their own
issues, but no crushing legacy debt burden and also more promising growth
prospects than the EU, whose share in world trade has been steadily shrinking
over the years and suffers from serious structural problems with a political
class in self-denial and complacency and dangerously disconnected from an
increasingly desperate electorate on which they have been consistently
exploiting by monetizing enormous financial losses from years of constant
policy failures. </span></div>
<div style="margin: 0cm 0cm 10pt; text-align: justify;">
<span style="font-family: inherit;">These points have become even
more salient by the recent BREXIT vote in the UK, which is both a challenge and
opportunity. If the EU choses to punish the United Kingdom by
repressive actions for the anti-EU popular vote, this will not only disrupt
existing trade relations and cause a general recession in Europe but also
further inflame voter antipathy to the
EU elite and more exit-type referendums. If the EU opens a dialogue to correct its
existing dysfunctionalities and gives more devolution to its members, this may
actually lead to better growth and more harmonious trade relations.</span></div>
<div style="margin: 0cm 0cm 10pt; text-align: justify;">
<span style="font-family: inherit;">The Scottish issue is a microcosm
of Greece. The Scots live above their
means with perks like a generous pension system, subsidized by British
taxpayers. The EU could encourage the
Scots to seek direct EU membership to spite and pressure the withdrawing UK,
but such actions would be detrimental to both the Scottish people and the EU
with another weak new member needy of EU transfer funds and who cannot support
a heavy currency like the Euro (more of the same EU failure pattern). In a short time, Scottish unemployment would
rise, more Scottish youth will emigrate and Scotland will be become a debt
slave of Brussels. An ‘emancipation’
that risks degenerating to Brussels colonialization and an additional EU vassal
state that the Brussels would be ill supported to carry.</span></div>
<div style="margin: 0cm 0cm 10pt; text-align: justify;">
<span style="font-family: inherit;">The better outcome would be that
the UK is given an exit agreement similar to the present EU trade status of
Norway. This arrangement could become a
benchmark for other suffering EU members, who want more sovereignty and
breathing space from Brussels bureaucracy and escape the stranglehold of German
debt deflation economics for better growth rates. It might even facilitate a future GREXIT
along with generous debt forgiveness to allow a new start to Greece as another
Norway-like associate membership. That
would be more suitable for Greece as a sea power and on the EU Periphery. </span></div>
<div style="margin: 0cm 0cm 10pt; text-align: justify;">
<span style="font-family: inherit;">A customs zone for the EU
Periphery would be the best outcome, where the core might still remain in the
Eurozone and could support more integration in a controlled and workable context that is unworkable for the periphery countries.</span></div>
<div style="margin: 0cm 0cm 10pt; text-align: justify;">
<span style="font-family: inherit;">Finally our maritime cluster has
excessive exposure in dry bulk, where there are few entry barriers, low
earnings margins, no control over pricing and tremendous over supply of
ships. </span></div>
<div style="margin: 0cm 0cm 10pt; text-align: justify;">
<span style="font-family: inherit;">The Greek vessel provider business
model is very heavy in relatively low yielding assets and weak on commercial,
trading platform. This setup works
extremely well coupled with low cost bank leverage in times of high inflation,
but it’s not effective in times of deflation, where the bank debt and interest
expense burn up liquidity and eventually lead to negative equity and bankruptcy
or zombification from pretend and extend lending practices of which the Germans
are probably the world champions. </span></div>
<div style="margin: 0cm 0cm 10pt; text-align: justify;">
<span style="font-family: inherit;">Our maritime cluster needs to
take more elements from Norway and Denmark, moving to a wider marine service
economy with a bigger cargo operator element over the current vessel provider
business model. We also need to lighten up
and consolidate on dry cargo exposure as well as continue expansion into more
diverse marine sectors like industrial shipping where there is better pricing
power, more of a trading element and less asset speculation.</span></div>
<b></b><i></i><u></u><sub></sub><sup></sup><strike></strike>Diran Majarianhttp://www.blogger.com/profile/07818842231575871539noreply@blogger.com0tag:blogger.com,1999:blog-6796651338160395539.post-1852010575666284002015-11-02T16:57:00.001+02:002015-11-02T16:57:30.988+02:00Pyxis reverse merger: an imaginative capital market entry with big challenges<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
Pyxis marked the first time a Greek managed shipping company became publicly listed via a reverse merger. They are merging with a San Francisco-based tech outfit LookSmart, already listed. </div>
<div style="text-align: justify;">
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<div style="text-align: justify;">
It was a novel entry to public markets by a small product tanker company, who failed to develop sufficient interest in a previous attempt to do an initial public offering.
Will this entry allow them to raise capital in public markets as they would like, or will it prove in the end nothing more a Pyrrhic victory that simply increases administrative expenses for the public listing without any benefits to capital markets access for fund raising? </div>
<div style="text-align: justify;">
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<div style="text-align: justify;">
Present conditions in capital markets this year have not been easy for fund raising in shipping ventures. Enthusiasm and interest among institutional investors to put money on shipping assets has waned considerably over the past two years. Funding for expansion has reverted again to traditional bank financing. The market has become generally very selective on shipping projects. </div>
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<div style="text-align: justify;">
Investors have been burned by bad positions in dry cargo shipping companies, where the markets turned against them, ship values have declined and these companies are making substantial operating losses.
Even in the tanker sector, which is doing quite well this year with resurgence in freight rates and cargo volumes, investor interest is limited only to a handful of large tanker companies. Conversely, a number of private equity joint ventures are putting their tanker assets on the market for sale to monetize their positions. </div>
<div style="text-align: justify;">
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<div style="text-align: justify;">
Pyxis would probably never have succeeded in their reverse merger operation without the support of Larry Glassberg at Maxim Securities. Maxim is mid-sized investment banking firm that has not only a base of institutional investors but also a substantial base of retail investors. Glassberg has an exceedingly long experience in the investment bank industry and shipping operations. </div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
Pyxis did not attract sufficient interest for an IPO (initial public offering) because it is a relatively small operation with a fleet of six MR product tankers, two smaller chemical feeder tankers and one MR new order yet to be delivered. Vessel age ranges from three units built in the late 2000’s to a small two-vessel MR NB order of which one unit has been delivered. </div>
<div style="text-align: justify;">
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<div style="text-align: justify;">
The company is certainly on the right side of the market in product tankers, but they face much larger peer companies like Ardmore and Scorpio Tankers. Major established companies like BW Pacific and Hafnia Tankers would like to list publicly, but are themselves constrained to wait for improved market conditions to do an IPO listing. It’s only a matter of stock flotation, but also obtaining favorable valuation with their listed peer tanker companies still trading below or close to NAV despite a surge in profits. This was a basic hurdle that Wilbur Ross was not willing to accept in the case of Diamond S going public. </div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
Vessel values have improved but still remain below what would be expected given current earnings. Part of this may also be due to the restricted bank financing market, where loans are given only to existing customers and preference to larger clients.
</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
The true test here will be if Pyxis can leverage their public listing to raise capital to facilitate growth. That is clearly the motivation of Pyxis for the costs and increased administrative expense of a publicly listed company. With a fleet of eight vessels, they will have to absorb additional administrative expenses of at least US$ 800.000 to 1.000.000 annually.
Pyxis as a listed company has an estimated US$ 70 million market cap, of which US$ 66 million will be controlled by its principal, Eddie Valentis. The remaining US$ 4 million of stock has traded less than $100,000 per day. Pyxis remains essentially a private company under total control of its owner. It has no trading volume and will not attract any analyst coverage.
</div>
<div style="text-align: justify;">
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<div style="text-align: justify;">
Going into the market to raise capital, the valuation issue becomes critical. Pyxis will likely trade at a discount to NAV [net asset value] and to established companies like Ardmore Shipping or Scorpio Tankers. Should investors put a low valuation, what will be the appetite of the principal shareholder, Eddie Valentis, to dilute his personal share holdings, selling his stock to investors at a discount?
Of course, there are other means to raise capital. Pyxis could look to bond issues, for example. Financial expense will be higher than a conventional bank loan, but amortization schedules may be more favorable, providing more free cash flow liquidity that could be reinvested in further expansion. They could also consider convertible bonds or CoCo’s that would get around the share dilution conundrum.
</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
At least, Pyxis is on the right side of the market in the tanker sector. They have a relative young fleet. This listing operation may prove a spring board for future growth, depending on the quality of incremental investment that they take to market for investor support and the prevailing market appetite to invest in the shipping sector.
</div>
Diran Majarianhttp://www.blogger.com/profile/07818842231575871539noreply@blogger.com0tag:blogger.com,1999:blog-6796651338160395539.post-72415867823087519452015-09-19T16:27:00.003+03:002015-09-20T10:22:21.591+03:00Is the Greek dry cargo business model now obsolete?<br />
<div style="text-align: justify;">
Of the 700 odd Greek shipping companies listed in Greece, the majority are in the dry cargo sector with small fleets of three to ten units, mainly smaller and older vessels. Apart from the ubiquitous handy size bulk carriers, Greek shipping is also heavily invested in Panamax bulk carriers. Will these companies survive this current freight market crisis? Will the crisis result in consolidation? Is the business model sustainable or will it have to change for the times?</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
Many of the publically listed dry bulk companies ranging from the smaller ones like Free Seas, Hellenic Carriers and Globus to the larger ones like DryShips and Paragon are suffering from legacy debt problems and weak earnings. The smaller private companies are at the mercy of the local Greek banking system with its insolvency and capital control issues. The best off are the cash rich, mature private Greek owners like Eastern Mediterranean or the Angelicoussis Group.</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
The predominate business model in Greece is vessel provider. The Greek shipping companies are long in shipping assets, but generally weak in commercial platforms. The majority of the companies are small and lack scale efficiencies. This is particularly true for the smaller listed companies with fleets too small to support the high administrative expenses for the public listing. <br />
<br />
This business model is entirely to be expected for historical and structural reasons. Greece is a major maritime nation. Greek seamen were the backbone of this system. The biggest strength and competitive advantage of Greek owners was the link between their offices manned by former mariners and chief engineers and their vessels. They offered low cost, high quality shipping services to charterers and end users. Greeks unlike their Scandinavian rivals were never big in cargo operations or freight trading, a particular strength of the Danish shipping industry historically.</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
The nature of the Greek shipping business model leads to asset arbitraging as a major means of enhanced earnings. Freight markets in bulk commodities shipping is highly commoditized with low earnings margins from vessel operations. This waxes and wanes with the shipping cycles, but historical mean averages have been low.<br />
<br />
The dry cargo markets in particular are very fragmented with low entry barriers. Shipping companies have no market pricing power. Vessel values rise exponentially on future earnings expectations in good markets, making vessels sales a highly lucrative business over vessel operations. It was Greek historical acumen in these skills of sale and purchase profits that has made Greek shipping so enticing to US Capital markets over the last ten or fifteen years. </div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
Major US institutional groups like Oaktree saw the same US real estate paradigm in the shipping markets. They were attracted to Greek shipping for a similar sort of play. This led to investor partnerships pioneered by Peter Georgiopoulos and more recently by Petros Pappas both very close to Oaktree Capital. This also extends to non-Greek groups like Scorpio Bulk, a highly speculative dry cargo asset venture on new building contracts, close to a futures market play.</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
This sort of play to be effective depends on the right kind of financial and freight market conditions. These conditions were at their prime thirty years ago in the heady days of petrodollars, high inflation and eager banks with abundant credit facilities for shipping companies. Since the 2008 Global Financial Crisis, with ZIRP (zero interest), QU (quantitative easing) and the end of a globalization super cycle, the environment for asset arbitrating on cyclical freight markets is becoming more and more problematical.</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
There is a glut of overcapacity globally and a dearth of demand. Banks has weak balance sheets and limited credit availability. There is enormous shipyard overcapacity. The Chinese infrastructure boom is over. Speculative investment money in shipping has more than often been a godsend to cargo interests, providing ample ship supply to service their transport needs, but it has not been kind lately to investors in the underlying shipping assets. </div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
With the credit crunch is a limited number of buyers for shipping assets compared to prior years, limiting the potential for mark up in prices. With the general weakness in commodities prices and ship yard over capacity, shipping assets are exposed to deflationary effects and fall in value over time with lower replacement cost. Falling scrap prices means lower residual values.</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
The most successful and resilient business models are the cargo operators of which the Navig8 Group has been an industry leader. They serve end users customers with chartered vessels. They are popular with ship owners, hungry for employment in weak markets. Their business has small margins and depends on high volume for profits. It is an asset light trading model.<br />
<br />
These businesses can go both long and short in shipping assets. They do not carry long term exposure in shipping assets or bank leverage. For larger vessels on standardized voyages, they can hedge their positions with freight futures desks. They can adapt quickly to sudden market changes, adjusting their cargo books and positions in vessels. These are the flourishing businesses of the times as opposed to the suffering Greek vessel providers.</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
Institutional investors have been lately turning to partnerships with cargo operators like Navig8 to adopt to the times. Oaktree and Peter Georgiopoulos incorporated this model in the restructured Genmar from the ashes from Chapter 11 reorganization proceedings, by merging with the Navig8 VLCC venture and renamed their company Gener8. This ties vessel owning long in assets with a lighter more agile trading model including chartering in vessels.</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
The question for the Greek dry cargo owners is whether their business model is obsolete and they will have to consider moving into cargo operator business models on a hybrid basis like a Norden or a Pacific Basin with mixed fleets or owned and chartered vessels.. Companies heavy in shipping assets but weak commercially lack economies of scale in the market and are weaker in understanding the freight market risks. They are overly oriented to asset arbitraging, which in present market and financial conditions is a backwards-oriented business strategy of yesterday, not effective in the present environment. Chartered vessels would create needed fleet scale for companies with smaller fleets</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
These Greek companies are facing survival risk and becoming dinosaurs. They face a double whammy of violent changes both domestically in Greece with the failure of the Greek state as well as external forces in the aftermath of the globalization super cycle of the past century.</div>
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Diran Majarianhttp://www.blogger.com/profile/07818842231575871539noreply@blogger.com2tag:blogger.com,1999:blog-6796651338160395539.post-34104709405632932392015-09-19T16:06:00.002+03:002015-09-19T21:32:43.251+03:00Greek Shipping and EU revisited<br />
<div style="text-align: justify;">
The third Greek bailout program has now been passed by the Greek parliament and at least the basic tax increases on Greek shipping have become public. We can now begin to take stock on the damage done to the Greek shipping community by the SYRIZA government and the EU/ Eurogroup bureaucracy.</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
The tax increases are hardly helpful for a business under a great deal of stress due the very poor dry cargo markets, where the majority of Greek shipping companies in Greece are concentrated. None of this is positive for the increasing unemployment in the Greek maritime sector. There are 4% tonnage tax increases each year for the next three years. There is also a continuation of the 'extraordinary' (now becoming permanent) levy on Greek maritime service businesses on the foreign exchange brought in to Greece for covering their office and administrative expenses. Already tonnage taxes in Greece are much higher than other jurisdictions. </div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
This makes third party ship management in Greece problematic given that ship managers in major jurisdictions like Cyprus, Dubai, Singapore and Hong Kong do not have this burden. Ironically, the EU approved the low rates in Cyprus, whilst insisting on rate hikes in Greece. The other jurisdictions are blessedly outside the Eurozone, without fiscal problems or over indebtedness. There is little prospect of their hunting down their businesses and citizens by repressive taxation as happens in Greece and the EU as a whole to cover their political mismanagement and losses from repeated policy failures. </div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
The only positive thing to be said in terms of advantage for Greek offices is that rents and salaries in Greece are extremely low compared to rival jurisdictions. The other places are economically healthy, Greece is in a deflationary spiral with massive unemployment and falling real estate prices. The tax increases are offset by lower personnel and administration costs in Greece as opposed to the other rival jurisdictions. </div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
There are, however, other negatives in Greece beyond these new EU tax measures on the Greek shipping industry. The two most serious negative factors are the broken local banking system with capital controls and the general uncertainty of the future, including exposure to further tax hikes and erosion of offshore status of Greek shipping in Greece. All this creates a bad business environment for an industry that is facing a lot of structural problems due changes in world trade and a particularly bad situation in the dry cargo sector, where the majority of offices in Greece are exposed.</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
The most unpleasant aspect is the situation with Greek banks and capital controls. The Greek banks are now facing new stress tests and recapitalization issues. Lending has been at a standstill for months now. The small and medium Greek shipping enterprises dependent on the local Greek banks for the financing of their fleets are suffering the consequences. The capital controls extend to their US Dollar accounts in complete contrast to the situation prior Greek entry to the Eurozone and the drachma. In those days, US Dollar accounts were considered freely convertible foreign exchange and there was never any issued about the solvency of the local Greek banks. Bank finance for vessel purchase to rollover and renew their fleets is now again on hold.</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
Ship owners like most of the Greek bourgeoisie cling to the Eurozone. This is becoming more and more problematic as the political and economic situation continues to deteriorate in Greece and the process of the Greece state insolvency takes its course without any debt relief in sight. </div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
The broader fundamentals internationally are not good. The EU is unstable with mounting sovereign debt, very poor growth and defective, dysfunctional institutional structure. The US is entering the last year of a two-term Presidency, where historically there have been major market meltdowns in US equities markets. The most important of all for shipping, global trade patterns are now changing because the China story is over with falling GDP growth rates and instability in Chinese financial markets, which have caused recently fall-on turbulence and volatility in US financial markets . </div>
<div style="text-align: justify;">
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<div style="text-align: justify;">
The China situation has had already a strong effect on dry cargo markets. The tanker markets are still buoyant with the low oil prices. With the end of the current globalization super cycle, production in the coming years may become more localized and this would have a profound impact on the shipping industry.</div>
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Diran Majarianhttp://www.blogger.com/profile/07818842231575871539noreply@blogger.com0tag:blogger.com,1999:blog-6796651338160395539.post-54487349640578338012015-07-09T18:12:00.000+03:002015-07-29T13:50:55.596+03:00Greek EU Crisis and Greek Shipping Industry: Where are we headed?<br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt; text-align: justify;">
<span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: Calibri; mso-hansi-font-family: Calibri;"><span style="font-family: inherit;"><span style="font-family: inherit;">The case of Greek ship owners and their
embrace of the Euro is but a microcosm of Greek society and the general mindset
of many in the Greek middle class.</span><span style="mso-spacerun: yes;"> </span></span></span><br />
<span style="font-family: inherit; mso-ascii-font-family: Calibri; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: Calibri; mso-hansi-font-family: Calibri;"></span><br />
<span style="font-family: inherit; mso-ascii-font-family: Calibri; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: Calibri; mso-hansi-font-family: Calibri;">Last
Friday before the plebiscite, I received a plea originating from Mr. Dimitris
Athanasopoulos Group Managing Director of Axia Ventures Group Ltd to vote
‘yes’.<span style="mso-spacerun: yes;"> </span>I was amazed at how so many
smart, financially literate business people could be so incredibly blind to the mess
in Greece and the stark reality starring at them in their faces: </span></div>
<ul><span style="font-family: inherit;">
</span>
<li class="MsoNormal" style="line-height: normal; margin: 0cm 0cm 0pt; mso-list: l0 level1 lfo1; text-align: justify;"><span style="font-family: inherit;"><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: Calibri; mso-hansi-font-family: Calibri;">They
were totally tone deaf to the prevailing public mood in Greece. </span> </span></li>
<span style="font-family: inherit;">
</span>
<li><div class="MsoNormal" style="margin: 0cm 0cm 10pt; mso-list: l0 level1 lfo1; text-align: justify;">
<span style="font-family: inherit; mso-ascii-font-family: Calibri; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: Calibri; mso-hansi-font-family: Calibri;">I
was amazed that these experienced business people would side with EU
Creditors and their disastrous ‘pretend and extend’ fudges that have devastated
the Greek economy.</span></div>
<span style="font-family: inherit;">
</span></li>
<span style="font-family: inherit;">
</span>
<li><div class="MsoNormal" style="margin: 0cm 0cm 10pt; mso-list: l0 level1 lfo1; text-align: justify;">
<span style="font-family: inherit; mso-ascii-font-family: Calibri; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: "Times New Roman"; mso-hansi-font-family: Calibri;">How
could they be totally oblivious to the urgent need for substantial Greek
public sector debt restructuring, as now officially attested by the IMF? </span></div>
<span style="font-family: inherit;">
</span></li>
<span style="font-family: inherit;">
</span>
<li><div class="MsoNormal" style="margin: 0cm 0cm 10pt; mso-list: l0 level1 lfo1; text-align: justify;">
<span style="font-family: inherit; mso-ascii-font-family: Calibri; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: Calibri; mso-hansi-font-family: Calibri;">Finally,
they seemed incredibly naïve that this plebiscite would solve any
problems, Greek banks could be opened in a few days and things would
quickly evolve back to normality given the complexity of the present
impasse and depth of the crisis.</span></div>
<span style="font-family: inherit;">
</span></li>
<span style="font-family: inherit;">
</span></ul>
<div class="MsoNormal" style="margin: 0cm 0cm 10pt; text-align: justify;">
<span style="font-family: inherit;"><span style="mso-ascii-font-family: Calibri; mso-bidi-font-family: "Times New Roman"; mso-fareast-font-family: Calibri; mso-hansi-font-family: Calibri;">How could they be insisting on more of
the same failed remedies of the last five years that have created social and
economic chaos, led to the disintegration of the Greek political system, put
into economic marginalization large swathes of Greek society and left Greece
more insolvent and bankrupt than ever?<span style="mso-spacerun: yes;"> </span></span>It
seemed to me incredibly foolish and masochistic.</span></div>
<div class="MsoNormal" style="margin: 0cm 0cm 10pt; text-align: justify;">
<span style="font-family: inherit;"><span style="font-family: inherit;">For years the European Union has
expressed hostility to Greek Shipping.<span style="mso-spacerun: yes;">
</span>The European Union has consistently taken positions at IMO that were
against the interests of the shipping industry in new and costly regulations
that are only held at bay by opposition from the United States and Japan with
the support of their Flag States.<span style="mso-spacerun: yes;"> </span>The EU
has never seen favorable the offshore status under Law 89 of Greek shipping
companies. Lately, Jean Claude Juncker, the EU
Commissioner has made a personal campaign to abolish Law 89 and increase taxes
on Greek Shipping companies
</span></span><br />
<span style="font-family: inherit;"><span style="font-family: inherit;"></span></span><br />
<span style="font-family: inherit;"><span style="font-family: inherit;">
The ship owning community attempt to deal with this EU hostility by appeasement has failed again and again.<span style="mso-spacerun: yes;"> </span>They agreed to equalize tonnage tax to all
vessels managed in Greece to the same levels as Greek flag vessels. <span style="mso-spacerun: yes;"> </span>Shortly thereafter they barely escaped an
extraordinary tax levy on foreign exchange brought into the country that their
maritime service industry brethren did not escape and had to pay.<span style="mso-spacerun: yes;"> </span>The following year, they tried again
appeasement with a new ‘voluntary’ agreement for increased tonnage tax for
which the Greek government reneged and passed a law that made the tax increases
obligatory and even larger than initially agreed.</span></span></div>
<div class="MsoNormal" style="margin: 0cm 0cm 10pt; text-align: justify;">
<span style="font-family: inherit;">Was the Euro needed for the Greek
Shipping industry?<span style="mso-spacerun: yes;"> </span>Clearly no!<span style="mso-spacerun: yes;"> </span>To the contrary, the Euro was a mismatch to
the US Dollar, which is the base currency in the shipping industry.<span style="mso-spacerun: yes;"> </span>The Euro made office expenses and Greek
crewing more expensive.<span style="mso-spacerun: yes;"> </span>The shipping
industry never had any real capital control restraints with ample reserves in
US dollars that allowed unlimited travel abroad.<span style="mso-spacerun: yes;"> </span>The Euro decimated their home ship repair
industry in Perama.</span></div>
<div class="MsoNormal" style="margin: 0cm 0cm 10pt; text-align: justify;">
<span style="font-family: inherit;">Did the Eurozone participation
ensure political and economic stability in Greece as an intangible benefit to
offset the economic costs to the shipping industry?<span style="mso-spacerun: yes;"> </span>Clearly no!<span style="mso-spacerun: yes;">
</span>Greece has been in turmoil for five years now whereas it had enjoyed a
long run of steady growth with the Drachma.<span style="mso-spacerun: yes;">
</span>Participation in the Eurozone dramatically reduced these growth rates,
decimated local production, caused asset bubbles in real estate and household
indebtedness and made the country dangerously import dependent. </span></div>
<div class="MsoNormal" style="margin: 0cm 0cm 10pt; text-align: justify;">
<span style="font-family: inherit;">Today, Greece is more insolvent
than ever with an even more crushing public debt for the size of its GDP.<span style="mso-spacerun: yes;"> </span>The country has lost 25% of its GDP in the
process and now suffers nearly 30% unemployment and made its youth a lost
generation with over 50% unemployment, spurring substantial emigration,
especially among younger, educated Greeks.<span style="mso-spacerun: yes;">
</span>The same applies to highly-qualified young Greeks in the shipping industry
with graduate education and professional certificates in shipping
qualifications like chartering, operations, finance and marine insurance.<span style="mso-spacerun: yes;"> </span>Foreign shipping operators are flooded with
CV’s from young Greeks, sitting idle and unemployed in Greece.</span></div>
<div class="MsoNormal" style="margin: 0cm 0cm 10pt; text-align: justify;">
<span style="font-family: inherit;">Ship owners talk about moving
abroad should Greece revert to a national currency.<span style="mso-spacerun: yes;"> </span>First, this seems shamefully unpatriotic and
total lack of any love of country.<span style="mso-spacerun: yes;">
</span>Second, it would mean the end of any value-added content from Greece or
any vestige of competitive advantage over foreign competitors for being Greek
shipping.<span style="mso-spacerun: yes;"> </span>Greek shipping was competitive
and thrived because of the Greek maritime tradition, because of the close
relation between the vessel and the office with Greek seaman and finally because
of favorable off-shore tax treatment under Law 89.<span style="mso-spacerun: yes;"> </span>The Greek business model was vessel provider
with a high quality of service to charters.<span style="mso-spacerun: yes;">
</span></span></div>
<div class="MsoNormal" style="margin: 0cm 0cm 10pt; text-align: justify;">
<span style="font-family: inherit;">This also generated a thriving
Greek maritime service industry that would be put in jeopardy with the departure
of Greek ship owners.<span style="mso-spacerun: yes;"> </span>Domestic Greek
banks supported particularly small, medium Greek ship owners, specializing in
the financing of older, bulk commodities vessels.<span style="mso-spacerun: yes;"> </span>These were invariably US dollar loans on the
Eurodollar market.<span style="mso-spacerun: yes;"> </span>The Eurozone crisis led
to the bankruptcy of the Greek banking system and undermined this access to
credit, putting smaller Greek ship owners at risk deprived of credit to roll over
and renew their fleets.<span style="mso-spacerun: yes;"> </span></span></div>
<div class="MsoNormal" style="margin: 0cm 0cm 10pt; text-align: justify;">
<span style="font-family: inherit;">Moving abroad might work for
large Greek ship owners, but it will certainly be very difficult for smaller
Greek ship owners, who were very reliant on the local Greek banks and service
industry for their operation.</span></div>
<div class="MsoNormal" style="margin: 0cm 0cm 10pt; text-align: justify;">
<span style="font-family: inherit;">I sincerely believe that that best
deal for Greece (Greek ship owners and the Greek people) would be GREXIT with
very generous public debt restructuring and transition support for balance of
payments and other related issues.<span style="mso-spacerun: yes;">
</span>Greece to be allowed to remain in EU as regular member like UK and
Nordics: Sweden, Denmark or if outside the EU, be given free-trade status that
would be an even better and more flexible arrangement to revive and restructure
the Greek economy.</span></div>
<div class="MsoNormal" style="margin: 0cm 0cm 10pt; text-align: justify;">
<span style="font-family: inherit;">The Drachma would facilitate
needed structural reforms that will take time to implement and bear
results.<span style="mso-spacerun: yes;"> </span>It would allow whatever
austerity to be offset with increased exports spurred initially by the
devaluation: a classic IMF work out program as succeeded in Turkey and other
countries.<span style="mso-spacerun: yes;"> </span>Sweden achieved this by
devaluation without any IMF program.<span style="mso-spacerun: yes;">
</span>Sweden as opposed to Greece demurred on Eurozone participation.</span></div>
<div class="MsoNormal" style="margin: 0cm 0cm 10pt; text-align: justify;">
<span style="font-family: inherit;">The Drachma would be good for
Greek shipping.<span style="mso-spacerun: yes;"> </span>It would take off any EU
pressure to modify Law 89 and offshore status of Greek shipping companies.<span style="mso-spacerun: yes;"> </span>It would recreate lost competitive advantage operating
in Greece with savings on office and Greek crewing expenses.<span style="mso-spacerun: yes;"> </span>It would allow renaissance of Greek ship
repair industry, etc.</span></div>
<div class="MsoNormal" style="margin: 0cm 0cm 10pt; text-align: justify;">
<span style="font-family: inherit;">The Drachma would not create any personal
problems for people in the Greek Shipping community.<span style="mso-spacerun: yes;"> </span>Credit cards and travel abroad would not face
any difficulties with dollar shipping income and ample foreign exchange.</span></div>
<div class="MsoNormal" style="margin: 0cm 0cm 10pt; text-align: justify;">
<span style="font-family: inherit;">Drachma would mean more
employment opportunities in Greece for Greeks.<span style="mso-spacerun: yes;">
</span>It would allow surge in investment at properly valued prices as well as
prepare ground for export boom.</span></div>
<div class="MsoNormal" style="margin: 0cm 0cm 10pt; text-align: justify;">
<span style="font-family: inherit;">Hopefully the Drachma will lead
to a new revitalized Greek political class that is outward looking and export
oriented and rid us of the present discredited political elite that drove the
country into the ground by failed EU-bootstrapping built largely on debt and transfer
money that funded unproductive, parasitic domestic crony capitalism.<span style="mso-spacerun: yes;"> </span>Hopefully, the Drachma will allow important
Constitutional revisions that create genuine institutional safeguards on debt
levels, public spending and political accountability to ensure the development
of a sound national productive base.</span></div>
<div class="MsoNormal" style="margin: 0cm 0cm 10pt; text-align: justify;">
<span style="font-family: inherit;">Hopefully GREXIT with suitable
revitalized Greek political leadership will provide the foundation for Greece
to follow the example of Singapore, keep and expand its presence and role as a
global maritime centre.<o:p></o:p></span></div>
<span style="font-family: inherit;">
</span><br />
<div class="MsoNormal" style="margin: 0cm 0cm 10pt; text-align: justify;">
<o:p><span style="font-family: inherit;"> </span></o:p></div>
Diran Majarianhttp://www.blogger.com/profile/07818842231575871539noreply@blogger.com2tag:blogger.com,1999:blog-6796651338160395539.post-41730092049646043152015-05-22T16:26:00.000+03:002015-05-22T16:26:15.149+03:00Is asset arbitraging a valid investment theory for the shipping space in today’s economic environment?<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
Asset arbitraging accounts for at least 90% of all investment in the shipping industry. It is particularly predominant with institutional and private equity investors. Major groups like Oaktree, Apollo and Bayside have taken large positions in various classes of shipping assets. The rationale is cyclical market recovery. This been the bread and butter of many ship owners in the past, but can this work in the current environment of immense shipyard overcapacity, weak global demand and soft commodities prices?
</div>
<div style="text-align: justify;">
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<div style="text-align: justify;">
I have never been a warm fan of asset arbitraging as a strategy to build value in the shipping industry. It is another version of the old stock market trading theory of buying low and selling high. The concept is that prevailing shipping assets are somehow mispriced too low. Eventually markets will pick up and the true higher prices will be revealed, when the shipping assets can be resold with a markup.
</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
This viewpoint distorts the nature of the shipping industry, which is a service business to transport cargo. The fundamental driver in this space is cargo volume. The more cargo volume to be transported for the existing fleet available, the better the freight rates. Higher freight rate expectations result in higher vessel valuations in terms of future earning capacity.
If you take away the noise from the volatility of the freight markets, long terms returns on shipping assets tend to be moderate and earnings margins restricted. </div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
Costs in shipping are highly dependent on capital and labor. Ships are very capital intensive. They are wasting assets that require considerable maintenance. They have a limited trading life until they are recycled and sold for scrap. Getting in and out of shipping assets depends on class of ship and the liquidity of the resale markets. </div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
I use the term ‘asset arbitraging’ for these shipping asset plays because it reminds us of what this process is and where it leads. Arbitraging eventually evens out market fluctuations. If enough investors see that a class of shipping asset is underpriced and then take speculative positions, then this supplies the market with ample tonnage that provides the end users more than ample vessels for their cargo transport needs and keeps a lid on freight rates. The whole effort is a wash out with no profits.
</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
The dry cargo space illustrates this situation. Several years ago there was an orgy of private and institutional money in dry bulk shipping assets. The purest version of this was Scorpio Bulk (SALT), where they made a massive play in new building orders without even having an existing operating company in dry bulk shipping. All this was predicated on the new building deliveries coming at the time of a market upturn in rates that would lead to significant appreciation in vessel values. Now Scorpio Bulk is trying to lighten up and reduce their position by resales of some of their new building contracts, even possibly some conversions of the orders to tankers.</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
Unfortunately, the current economic environment does is not supportive of these asset plays:
</div>
<ul><div style="text-align: justify;">
</div>
<li><div style="text-align: justify;">
There remains significant shipyard overcapacity. </div>
</li>
<div style="text-align: justify;">
</div>
<li><div style="text-align: justify;">
China and emerging markets, which are the main source of cargo volume growth, are slowing down.
</div>
</li>
<div style="text-align: justify;">
</div>
<li><div style="text-align: justify;">
Advanced economies are still in sluggish recovery and substantial debt overhang.
</div>
</li>
<div style="text-align: justify;">
</div>
<li><div style="text-align: justify;">
Vessel working life is growing shorter, with both dry cargo and tankers facing age restrictions and trading limitations after reaching 15 years (3rd Special Survey).</div>
</li>
<div style="text-align: justify;">
</div>
</ul>
<div style="text-align: justify;">
Added to these factors is the industry consolidation that is reducing the universe of buyers in the resale markets and the limited credit from the banks available to finance these sales.
</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
So I was not surprised by the recent Tradewinds article on Apollo Global Management putting the 12 Suezmaxes of Principal Maritime onto the market, where some finance sources expressing reservations that it will be easy to find a buyer for an all-cash deal. Also I would not expect the mark up in price to be as much as Apollo was hoping, depending on how much hard cash they can get as opposed to payment in shares from a publicly listed entity.
</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
The other factor is vessel replacement cost. I am not optimistic here. There is an overcapacity of shipyards. Order books are thinning. Steel and scrap prices have been falling. New building prices are more likely to fall in the near future than harden. </div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
Consequently, the best positioned people in these market conditions are freight traders who are asset light business models rather than those heavy in shipping assets.
The institutional money in the shipping space has done wonders for end users in providing them more than ample tonnage for their needs to transport cargo, keeping freight rates very low. </div>
Diran Majarianhttp://www.blogger.com/profile/07818842231575871539noreply@blogger.com0tag:blogger.com,1999:blog-6796651338160395539.post-25872079532947158572014-11-18T13:05:00.001+02:002015-02-02T19:41:47.591+02:00Changes in perception of Shipping Risk<div style="text-align: justify;">
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<div style="text-align: justify;">
We are now well into the fall season. The expected rebound in rates has been tepid. There is growing concern that the slowdown in global growth is structural and not temporal. Integration of economic activity across borders beginning to plateau. The vast pool of low-cost workers in China is no longer available and the credit-driven expansion cycle based on large state-sponsored infrastructure projects has reached its limits. In time, the impact on seaborne demand volumes and travel distances is likely to be profound. There may be a rise of regional production centers that shortens seaborne distances. Commodities prices are softening. Freight rates and secondhand prices may stay low for some years. Risk perception towards the shipping industry is changing, making it harder to raise money in capital markets. Investors playing a short-term asset game may find it difficult to exit with the expected profits. </div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
My concern since the 2008 financial crisis is that the central bank policies of low interest rates, quantitative easing and flattening of yield curves is compressing risk premium and distorting asset pricing, which has been spilling over into the shipping industry. Weak commercial bank balance sheets have led to a zombification of the shipping industry, keeping lame-duck companies alive and second-hand prices artificially high.<br />
<br />
Current shipping industry environment characterized by: </div>
<ul style="text-align: justify;">
<li>Deflation and weak demand, low profitability, frequent credit defaults and limited bank finance availability.</li>
<li>An inflow of speculative money into shipping assets, searching for yield from resale at marked-up prices with a cyclical shipping recovery.
· </li>
<li>Preference for new ordering rather than industry consolidation of existing tonnage since asset prices are not marked down and remain stubbornly high in relation to present earning capacity. </li>
</ul>
<div style="text-align: justify;">
To sum this up, zero interest rates together with chronic shipyard overcapacity has caused an inflow of investment money into new building shipping assets exacerbating over supply of tonnage. Weak economic recovery and slowing growth in emerging markets does not generate sufficient increased cargo volume to absorb the tonnage overhang. This puts the shipping industry into a vicious cycle of prolonged secular stagnation. </div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
The world shipping fleet age profile in bulk commodities dry bulk and tanker tonnage is composed of modern vessels and a dwindling number of scrapping candidates. Useful life of shipping assets is shrinking and ships are now going to the breakers at earlier ages. This has led to increasing asset impairment charges on older second hand tonnage that are highly unlikely to be recouped in current marginal freight markets. Buying older bulk carrier shipping assets is no longer a risk free investment secured by scrap value. </div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
On the other hand, speculative orders of new tonnage in projects like Scorpio Bulk carries more risk than normally perceived because new building prices may begin to soften again in the next few years. The price of steel has been steadily weakening, making potential replacement cost lower. In the meantime, Scorpio Bulk efforts to develop a chartered fleet for an operating company prior the new deliveries has resulted in operating losses due adverse arbitrage and compressed earnings margins. New deliveries in a period of slack demand and softer replacement cost would create a perfect storm that no one in this venture was originally prepared.</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
Industry consolidation in mergers like the Oaktree-generated merger of Excel Maritime into Star Bulk is no industry panacea. This is a drop in the bucket in terms of the overall fragmentation in the dry bulk sector and does little to consolidate pricing power. The speculative new ordering at Star Bulk in open employment positions offsets pricing power.</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
This is an operation - like Scorpio Bulk - with a highly concentrated position in dry bulk shipping assets. Present returns on shipping
assets are low. Profit margins frequently cannot cover depreciation expense. The whole investment exercise depends on the degree and timing of a cyclical market recovery and sufficient financial liquidity to turn over the assets at marked up prices to lock in the capital gains profits on assets. No shipping investgment can make acceptible returns without asset gain on market uplift in future years.</div>
<div style="text-align: justify;">
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<div style="text-align: justify;">
Case in point is Scorpio Tankers - heavily exposed to the MR product tanker sector and underperforming with the eco-ship argument - where the only appreciable profits have been capital gains from VLCC's sales and potential sale of the Dorian shares from the LPG sector, which has performed well this year.</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
There are pockets of better quality shipping business in the tanker sector and specialty trades like gas shipping. But there always hangs the Damocles sword of shipyard over capacity where earning margins can be put under jeopardy with new ordering that quickly leads to softening of freight rates. We have seen this in the LNG sector very recently. Rates are beginning to soften in the LPG sector after a very good run this year.</div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
Sentiment on shipping risk is changing. Capital market deal volume for shipping transactions is down from last year’s levels. Investment groups have moved on to other sectors. There is increasing discussion about how institutional investors are going to divest of their present shipping holdings in the current climate and how the expected mark up in asset prices for a cyclical shipping recovery may disappoint. </div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
I have long been skeptical of how this would ever work on any scale to repeat the boom years, not only because of the changed macro-economic conditions with slower Chinese growth rates and chronic ship yard overcapacity, but also because of the finance gap in the banking market needed to facilitate sales at higher prices. What is required is greater demand and exit of the present deflationary environment. </div>
<div style="text-align: justify;">
<br /></div>
<div style="text-align: justify;">
This is still a work in progress for policy makers and central bankers struggling with an increasingly restless public!</div>
Diran Majarianhttp://www.blogger.com/profile/07818842231575871539noreply@blogger.com0