Major Management changes after Aegean Petroleum disappoints with signficant earnings shortfall

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.  The company reported much worse than expected earnings for 1st Quarter 2017. Its CEO John Tavlarios resigned.  Neither Tavlarios - as director - nor Peter Georgiopoulos as Aegean Chairman garnered enough shareholder votes to continue on the Aegean Board of Directors.  Aegean announced that they want to move to an asset light business model, effectively throwing in the towel and following their competitors’ business model.  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.

I have been warning for years on Aegean and its weak and incoherent business strategy.  See my previous posts.  Aegean Marine Petroleum Network: lagging competitors with low return on investment and mounting financial expense eroding earnings margins http://amaliatank.blogspot.gr/2013/01/aegean-marine-petroleum-network-lagging.html.

The marine bunker business has the worst earnings margins in the fuel business.  The competition is brutal.  The normal course of most marine bunker companies is eventually to sell out to competitor companies.  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. 

Many of the peer companies are arms of major commodities traders such as the case of Chemoil that was acquired by Glencore.  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.  They are companies that have low leverage and are able to finance their sales with ample working capital. 

Aegean followed an inherently Greek strategy to build up assets and leveraged up in the process with debt.  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.   

Why Aegean attracted so many major value investors is something that I find inscrutable.  I have done consulting work on Aegean over the years for some of them and the experience was disconcerting.  I discovered the most incredible misconceptions about Aegean.  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. 

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.   

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.  The logic was along the same lines as its fleet of bunker tankers.  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. 

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.  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.   They all fostered an asset light business model to support their bunker trading business competitively given the very low margins on sales.  Concurrently, they wanted to keep finance costs to a minimum. 

Aegean actively bought market share as a growth strategy and raised additional capital to do so.  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. 

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.  But these dramatic events where Aegean now publicly want  themselves to move to a more asset light business model that they have finally seen the light and thrown the towel here. 

Agile low-cost newcomers are cropping up in their major fuel hubs.  The market is saturated with back to back trading entities.  Aegean is going to have to start selling off its assets, deleverage and consider potentially exiting less profitable markets. 

The biggest jack asses in this mess are Aegean’s two largest shareholders  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.  The case speaks for itself!  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.

BREXIT and other challenges for Greek Shipping

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. 

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.

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.

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.

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.  

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.

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. 

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. 

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.

Seaspan’s Yang Ming moment

Gerry Wang, Seaspan’s ebullient CEO, frequently refers to his business model as a ‘leasing” operation.  I have long questioned this.  In fact, Seaspan is a conventional vessel provider to liner companies.  Their contractual relations are long-term time charters with performance risk.  Yet this latest deal to order 14.000 TEU mega-ships and then charter them to Yang Ming Transport Corporation for their liner service has many interesting parallels to the ship leasing business that are illustrative of the business risks and rewards in the Seaspan business strategy.

Yang Ming recently announced consecutive losses TWD 2.6 billion (US$ 87 million) in the 2nd quarter 2013 earnings conference.  Revenue for the quarter was TWD 30 billion, a year-on-year decline of 14%, but a small quarter-on-quarter bounce of 9%.  The poor performance was blamed on depressed freight rates for the Asia-to-Europe trade lane from which Yang Ming derived about 27% of its revenue in 2012.

Yang Ming suffers from an over-leveraged balance sheet with too much debt and is struggling to shed assets for liquidity by selling off terminal operations and leasing them back.

Consequently, they are in no position to contract 14.000 containerships.  So they have now entered into an agreement to charter in ten additional 14,000-teu containerships from Seaspan, which are slated for delivery in 2015-16.  The logic is the usual in this business of ever-declining margins and over capacity:  “These mega vessels are expected to be deployed on the Asia-Europe route and are expected to bring unit costs to down better complement the fleet of the CKYH alliance,”  according to Jon Windham, a Barclay analyst covering them.

Seaspan initially ordered speculatively these mega-ships, paying US$ 110 million per unit at Hyundai Heavy Industries. With ten new units now committed to Yang Ming, Seaspan is now turning to Taiwan’s CSBC Corporation for five additional 14,000-teu vessels on the same price terms as the earlier Hyundai order as an added sweetener to this Taiwan deal.

No doubt, Seapan is offering Yang Ming a considerable service with these units that they could not afford to contract themselves.  Yang Ming is paying them a rate of US$ 46.000 per day upon delivery for the next ten years.

All this, however, cannot eradicate the bare facts that Seaspan is openly speculating in assets against charters often to financially weak liner companies in an industry that is suffering chronic overcapacity.  They wagering on an eventual cyclical market turn-around with increased box traffic.  Yet the heavy ordering of megaships contributes to over capacity. Unless there is real turn around in terms of increased container traffic and demand for box slots, this almost resembles a Ponzi scheme.

Of course, nobody can deny the tenacity of Gerry Wang and business standing of Seaspan in the liner industry.  Greek-listed container vessel companies like Danaos, Box Ships and Diana containers pale in comparison as poor relatives and much weaker management teams. 

The only really strong and healthy listed Greek containership company is  Costamare, whose largest vessels are 9.000 TEU.  They have a history of sustained profitability and they have not rushed into the megaships.  Many of their units are employed in feeder services, which are a growing and generally profitable subsector due larger ships on head haul routes, use of hub ports and increasing demand for distribution of boxes to smaller ports.

The business risks for Seaspan are similar to finance leasing companies in their business of high cost finance generally to a clientele of financially weaker shipping companies.  Sometimes the companies have liquidity problems and are looking to sell assets and lease them back.     Other times, they are expanding rapidly and have exhausted conventional lower cost bank finance.  The leasing companies bet on company turnaround and stronger markets to prop up their financially weak clients. 

Seaspan’s prime universe for these mega-ships is financially weak liner companies without the resources to order directly the vessels themselves.  Success of the venture depends critically on a market turn around.  Should this growth even finally level off with Far East trade rebalancing and slow recovery in Western economies leading to a belated and major shakeup in the Liner industry with few companies, some major bankruptcies, etc., then Seaspan might find itself badly exposed with such aggressive ordering.

So far Seaspan has managed to weather well the shock back in 2008 without a single order cancellation and is continuing its aggressive growth.

Landmark shareholder victory against Eagle Bulk management and directors for abusive and excessive executive compensation

Eagle Bulk Shipping has been one of the poorest performing shipping stocks in its peer group.  From lofty levels in excess of US$ 100 per share in its salad days, the stock crashed below US$ 20 in the fall of 2008.  From then on, it has been a slow attrition with charter party defaults, bank covenant violations and loan restructuring agreements with the stock presently trading at US$ 3,56.  Latest quarterly results were losses of US$ 3 million for the 2nd quarter 2013.  Yet its management sat at or near the top of shipping’s executive pay lists  for years.  Its directors who were earning more than their counterparts at large Fortune 500 companies without offering any oversight.  Shareholders who have lost literally their shirts appear to have succeeded to force Sophocles Zoullas and his management team to roll back their pay to more reasonable levels, albeit still quite high for such miserable value destruction and bad performance.

I have signaled Eagle Bulk at a very early stage back in January 2009 as a potentially problematic company: “EGLE: Conflicts between sound business principles and Wall Street 'value-building' concepts” http://amaliatank.blogspot.gr/2009/01/short-term-wall-street-objectives-can.html.

Its management followed an antiquated vessel provider business model with heavy dependency on third party charterer counter risk.  They scaled up their fleet at lofty values in large block deals, exposing the company to serious problems with loan to value covenants when the shipping markets crashed.  Eagle Bulk was badly exposed to the Korean Lines bankruptcy, with little transparency for years as to their charterers and counter party risk profile. 

If Eagle survives today as a zombie shipping company, this is by the mercy and desperation of their bankers, particularly the Royal Bank of Scotland, who did a trend-setting debt for equity swap last year  http://amaliatank.blogspot.gr/2012/06/eagle-bulk-in-trend-setting-equity-for.html to keep them alive.

Miraculously, tenacious shareholders managed to rebuff Eagle’s attempts to have their legal action thrown out by summary judgment in November 2011 and despite the high hurdles facing plaintiffs under Marshall Islands law. Eagle Bulk management executive pay practices were so abusive and egregious that facts suggested a “quid pro quo” arrangement may have existed between Eagle officers and directors, thus barring Eagle from using a so-called “business judgment” defense.  This has led to the present compromise agreement with Eagle management pending final court approval. 

The major bullet points are truly eye-opening in terms of the money and benefits that management had been extracting from the company despite its dire financial condition with its creditors and serious operating losses:

•    Cancellation of all stock options (180.704) granted to Eagle officers and directors between 2008 and 2011.
•    Shortening the expiration to five years from 10 for 1.4 million options granted to the Zoullas brothers in 2012, with an estimated US$ 1 million savings to Eagle.
•    Limiting average compensation to non-management directors to US$ 240.000 through 2015, compared to US$ 432.000 in 2011.
•    Limiting executive compensation through 2015 to the average paid by five peer companies — Dryships, Diana Shipping, Excel Maritime, Navios and Genco Shipping — rather than “prior practice of paying at the top of the industry”.
•    Requiring Eagle to bill Zoullas’ private Delphin Shipping US$ 237.000 for services it has rendered, and tightening dealings between the two “to ensure that Mr Zoullas does not derive an unfair advantage.”
•    Terminating the 2011 equity incentive plan and 4.3 million shares that could have been issued under it.

Among other practices in Eagle Bulk adding insult to injury is Zoullas appointing his brother Alexis as President making this listed company a family affair.

Lenders and other shareholders should rejoice, as Eagle still faces a difficult struggle to stay alive with continuing operating losses until dry bulk markets recover. 

Here below is a comparative graph of Eagle Bulk share performance with peer dry-bulk companies over the last five years:

Eagle is one of those at the bottom of the chart.  This case reinforces my concerns about a competitiveness problem for Greek listed shipping companies compared to non-Greek peers in terms of return on investment.  Pacific Basin, for example, in Hong Kong makes Eagle management look rather ridiculous and amateurish, not even worth their revised remuneration levels.  The best performing Greek peer company is Angeliki Frangou’s Navios Holdings, one of the very bright exceptions in the Greek market.

Keynote Speaker at Hong Kong Shipping Forum on Business Models and Strategy in the Shipping Industry

Structural changes in the crude oil tanker sector: failure of companies to adapt may prove fatal!

The crude oil tanker sector faces the double whammy of excess capacity from overinvestment as well as structural changes in trade flows.  It is not a growth industry.  Developed economies have proved successful in rolling back consumption and diversifying in alternative fuel sources.  Marginal demand growth to fill the slack depends on emerging market economies.  The degree of hard landing in China and future level of growth rates in emerging market economies thereafter is very critical in the short and medium term.   Those tanker companies heavily dependent on traditional crude oil transport – VLCC’s, Suezmax and Aframax – without other revenue sources are severely exposed.  Those with high bank leverage are in severe distress.

Spot market tanker rates can be very volatile. These vessels are dependent on one cargo only: crude oil. Demand is driven by inventory levels; futures pricing, oil production levels and underlying oil import needs. Oil production is in part manipulated by the oil producer cartel OPEC and particularly Saudi Arabia as a swing producer, so productions levels play a key role in available cargo volume for transport. Politics plays a big role with the Iran oil sanctions. Speculation plays a role depending on the future pricing curve whenever it is favorable to buy and store the physical commodity in chartered tonnage for sale at a later date, taking this out of the transport market, leaving less tonnage available for lifting cargos to destination.

As the US has been the greatest consumer of crude oil in cargo volume, the VLCC trades were developed as the most economical means per unit cost to transport crude oil to the Houston area for refining from the Middle East. With the China and emerging market boom of the last decade, there was a deluge of new refinery projects in the Middle East, China and India.

Middle East producers wanted to develop a more value-added economy, investing their profits from oil sales into refineries to produce products at source for export. This led to great optimism in the product and chemical tanker sector that jumped the gun in over investment in these sectors. Since the 2008 global financial crisis, some of these projects have been cancelled, some delayed and some progressed and are on stream. Demand was less than expected for the ship owners.

One of the most novel projects from the Middle East was the Motiva refinery. This is a 50-50 Shell and Aramco joint investment of three new refineries in the US Gulf region. It is the reverse concept of the Middle East refinery projects. They transport crude to the US and refine there. This has been a boon to the product tankers trades in US Jones Act cabotage trade; albeit due project delays and a refinery closure due an accident, it has been slow to come on stream.

Conversely, there have been some overwhelmingly negative structural changes that threaten crude oil trade to the US, namely:

• Technological evolution in the production of tight oil and shale gass, allowing more US domestic energy production, together with the Keystone pipeline project facilitating Canadian oil imports. Whilst this is another potential boost to US Jones Act shipping for distribution of products, it is one of the main contributing factors this year to a dreadful international tanker market.

• Expected increased domestic use of energy resources in the Arabian Gulf, making less crude oil available for export. This is developing on several fronts. First, there is the political front with the Iran oil embargo. Second, there was a drastic reduction of Saudi oil exports during the summer where the oil was diverted to domestic use for electricity production. Finally, the above-mentioned refinery project now coming on stream to produce clean products and chemicals for export. After the GFC, about a third of the projects were cancelled and another third in delay, but the last third is now coming on stream and exporting. This means production at source and less crude oil for export.

The rise of gas shipping as a new growth area is also impacting negatively on crude oil transport. The LNG market is dominated by cargo operators and normally done on long period contracts. Historically, returns have been less than desired and tonnage ordering has overshot the market, but the Japanese tsunami provided the catalyst to rekindle this market to profitable rates with attractive returns to investors. The vessels are much more complex to build than crude oil tankers and capital costs are significantly higher, providing serious entry barriers. The limited number of yards that can turn out such specialized vessels has created a two-year window of opportunity for nice run on rates with existing tonnage in relatively short supply.

Increased LNG production as a long-term secular trend means also downstream enhanced prospects for LPG shipping. Together with the offshore sector, these are presently the major growth sectors in the tanker markets.

Conversely, the crude oil tanker market – except for sudden brief demand spikes in refinery restocking – does not seem to offer good long term growth prospects in the face of these secular trends. A number of established tanker operators like BW Shipping have been shedding VLCC tonnage.  BW like Teekay Shipping and major private owners like Angelicoussis in Greece, foreseeing these secular treds  have diversified themselves in timely fashion into other more attractive areas like LNG shipping and offshore, positioning their businesses with profits from these new growth areas that shelter them from the current losses on their tanker tonnage.

Some like TeeKay Shipping have sought to develop a franchise in tanker trades demanding special expertise, namely shuttle tankers offloading directly from oil rigs. These vessels have special mooring fixtures and are equipped with dynamic positioning technology. They require specially trained crews. An extension of this offshore business is the FSO and FPSO business with floating oil storage and production facilities, another current growth area in shipping.

Companies who have been slow to adapt to these developments are generally in deep trouble. General Maritime (GMR), for example, just recently got out of Chapter 11. Peter Georgiopoulos appears to have ignored totally all of these developments. His company was probably the weakest of the large listed tanker operators in terms sound commercial management. Perhaps he was distracted by his ventures into dry cargo. Now he has lost control of his tanker business and is fighting to save Genco and Baltic in the current severe bulk carrier markets correction. What Oaktree gained in taking over General Maritime remains to be seen. Presumably they were attracted by a cyclical asset play because the enterprise value of their acquisition is quite low compared to peer tanker operators.  Oaktree now seems to be ready to do a startup asset play in dry cargo with Petros Pappas of Oceanbulk.  At least this venture promises to have a lower entry and transactions costs than Genmar....

Overseas Shipping Group (OSG) was too little and too late in these structural market developments and left with heavy crude oil spot exposure. It appears to be heading to Chapter 11. Whereas their peer colleague Peter Georgiopoulos by contract proved timely and diligent bringing in Oaktree to support his company, OSG management also appears to be failing with senior lenders in prompt action in debt restructuring. Hopefully, OSG management ultimately will prove adequate to the circumstances.  I have always felt that their age and career path has made it very difficult for them to adapt to crisis management. The OSG Board made a good decision to appoint outside advisers.

In these cases, it is not only the over indebtedness of the companies, but also the failure of the business model that put these shipping groups in their present predicament. Conversely, the successful operators like TeeKay Shipping have outperformed peer tanker operators because they adapted in timely fashion their business model to anticipate structural market changes and have much better business models.

Challenges ahead for Greek Shipping

I recently had an opportunity to address the ICS 7th Annual Forum “Navigating through the Economic Storm – Setting a route in difficult time” in the questions and answers session and wish to share my thoughts on two major structural issues that could drastically reduce the competitive advantages the Greek market in years ahead, starving it of valuable human resources and entrepreneurial incubation.

Greek shipping faces two fundamental and interrelated challenges to competitiveness.

First, Greeks are no longer going to sea. The Greek government and the Greek shipping industry have been entirely indifferent to this and done nothing about it. The accession to the European Union and government policies that encouraged tourism in the islands with subsidies for rented room provided an alternative for Greeks, who normally would have chosen careers in the merchant marine. Social changes in Greece discouraged people from going to sea. Euro accession put Greek seaman at severe cost disadvantage for companies.

Greece once had numerous maritime academies, often in the islands. It also had many private marine schools in Piraeus. Today only one marine academy is still functioning at Aspropyrgos. All the private schools are closed. Greek families of marine tradition are now sending their children to US merchant marine schools for proper education that is not available in Greece. All this is very sad for a country that was one of the greatest seafaring nations in history.

30 years ago Greek ships due crew costs were cheaper on the average than peer Norwegian or Japanese operators. Now Greek companies use the same crewing resources as their peers. Far East and Indian crews with sometimes Russian or East European officers. Their costs are identical.

The Greek crews were a source of middle management for the Greek offices that gave them an unbeatable operational advantage as vessel providers with an indelible bond between the office and the vessel. Today, with fewer and fewer Greek seafarers, the labor pool for middle manager Port Captains and Port Engineers is drying up and is increasing elderly in age. Some Greek companies are beginning to use Indians from abroad, for example, in their headquarters, so why not management from Dubai or Singapore?

Second, Greek medium. small companies are now shut out of bank finance with the Greek banking system locked up in Greek sovereign debt crisis. Typically these companies have small fleets of older units, mainly bulk carriers. They buy elderly tonnage close to scrap-level, trade them a few years, building up net worth. They then roll over their fleets, buying somewhat newer units and selling the older units for scrap. Greek banks were specialists in this kind of lending with higher pricing and shorter tenor. These companies are too small for foreign bank finance and their vessels do not meet bank age criteria.

These companies are a critical entrepreneurial incubation crucible for a continuing renewal of Greek Shipping community. The best of crop become ultimately the Greek shipping powerhouses of the future. The offices are a major source of office employment in Greece. They contribute to the support of a large marine service industry in Greece.

Without the human resources of seafarers and the entrepreneurial incubation of new companies, the future of Greek shipping may well be in jeopardy. Shipping in Greece risks the danger of a mature industry that consolidates with a few major players, but a much smaller base than previously where Far East and other competitors become the growth area of the industry in the future.

Capital profit disappoints, so why is Evercore pushing this stock?

Since Jonathan Chappell moved to Evercore from JP Morgan, he has been touting the virtues of Capital Products Partners and the management of Evangelos Marinakis. Chappell even went so far as to replace Teekay Tankers in Evercore Partners' conviction buy list. Despite my high personal regard for Chappell as an analyst. I find this viewpoint to be misguided. Recent financial results seem to corroborate my reservations.

Stripping out all of the noise, Capital’s bottom line stood at US$ 1.7 million, well short of the US $6.6 million the market was expecting from vessel operations. Most of its profit was made up of an accounting gain on the takeover of Crude Carriers.

Capital’s CEO Evangelos Marinakis holds the conventional view that the products market is amongst the most attractive in shipping right now. The theory is that this class of vessel, especially MR (medium range) tankers, has less of an order book overhang and will see more demand growth from new refinery projects than the crude sector.

Not everyone shares this viewpoint. DvB Bank, a transportation specialist, warns that product tanker values could fall by a fifth if the European sovereign debt crisis negatively affects all global economic markets and creates a significant drop in demand to ship refined oil products. DvB expects product tanker fleet utilization to remain less than 90% until 2013. Platou Markets - who normally have a fairly positive bias - also do not see relief in tanker markets until 2013. Recent large losses of TORM, an established top tier product tanker operator are ominous for this sector.

What confounds me is why Chappell sees Capital in a more favorable light than methodical players like TeeKay or Scorpio which both have greater depth of management? Compared to these peers, Capital is a relative newcomer without much intrinsic value. It was only last year that Capital began its foray as a listed pure play product tanker company.

By contrast, TeeKay has a proven track record and has made every effort to build intrinsic value in its business. It has a strong presence in higher margin niche businesses like shuttle tankers and LNP and in its cargo book operations where it has built up tanker pools. Scorpio invested in an exceptional chartering brokerage team as well some ex-OMI senior management. It also built a cargo book before entering into capital markets to acquire tonnage.

Marinakis has been more of a Greek wheeler and dealer with his Olympiakos football team involvement. I do not see the same management depth at Capital. Does it belong in the same league as the above mentioned peers? Marinakis tends to be very mercurial in his decisions. After launching his pure product tanker play, he then used company funds to buy a bulk carrier that he chartered to Cosco. A year later, he decided to merge his crude tanker listing into this venture, adding VLCC’s and Aframaxes with significant spot exposure.

Although Chappell is cautious in his market projections in both dry and tanker sectors, there seems some irrational exuberance in betting on Capital over other peer companies with more solid management.

Revisiting the impact of the 2008 financial crisis on the shipping industry

The rebound from the 2008 financial meltdown has been the best bounce back on average in the post-war period for large corporations, but most shipping stocks have stabilized at low levels with only a few companies making full recovery. Because their smaller would-be competitors are still having more trouble accessing credit, big companies have done disproportionately well. This is particularly true of the shipping sector and the Greek market.

Back in the fall 2008, tankers were faring comparatively better than dry cargo and containers. Dry cargo staged a remarkable recovery on the back of the Chinese stimulus program in 2009. Tankers, initially supported by storage demands and phase-out were hit hard from the 2nd semester 2010. Dry bulk started to feel some pain in summer 2010. 2011 started very badly for this sector with the orderbook overhang and the Korean Lines bankrupty. Conversely, containers - after massive losses and a dismal year in 2009 - staged a remarkable recovery in 2010 first primed by slow-steaming and then a pickup in headhaul Far East export routes, especially the Asia to the US transpacific route.

Structural changes are evident. The publicly listed company model - strongly resisted by some family shipping die-hards in Greece - proved resilient. Not only did the model offer salvation to laggards by recapitalization through ATM follow-on share offerings to cure bank covenant violations from investing in over-priced vessels and taking on high debt levels, but it also allowed the leaders to raise funds more flexibly and effectively to expand their fleets in a damaged financial system  at lower asset prices and financial cost than their competitors.

Major international shipping banks have tightened on their age criteria for vessels to be financed making CAPEX a higher ticket item for fleet renewal. Smaller companies, especially local Greek operators with older tonnage are dependent on domestic Greek banks and face difficulties in rolling over their fleets and moving to newer vessels as credit has dried up with more bank resources going to assist the ailing Greek public sector rather than productive private investment.

The shipping sector may not be out of the woods yet.  All shipping investments are highly dependent on future growth in Far East emerging economies - particularly China - to bring rates to better levels for acceptable investment returns. Any slow down in the Far East would lead to a situation of attrition for overly stretched financial laggards anxiously waiting for market recovery before the next round of covenant extensions with their lenders.

The orderbook overhang situation will continue to depress rates. Added to this problem, higher bunker costs from the rise in oil prices are again eroding earnings margins.  Financially stronger, larger companies will be looking to assert their strength and push for more industry consolidation.

Each company and shipping sector must be carefully examined on its merits.

George Economou vs Jim Kramer

Both George and Jim are iconoclastic personalities. They both have had a mixed performance record with personal ups and downs. Until 2008, DRYS had an exceptionally successful strategy of building up its fleet by retained earning from profitable operations and vessel sale transactions. The company seems often a one-man show with lack of transparency with the Principal appearing to use his private company for business development and passing the transactions to the public company for financing. Stockholders have benefited by this process in results in the past but lately they have been taking some hard hits. The turning point for DRYS was Economou's decision to diversify into the offshore drilling business acquiring OceanRig and ordering additional deep water oil rigs. The financial crisis hit DRYS very hard. Since then, DRYS has been increasing capital with major share dilution. George Economou is not as bad as Kramer says but he has been struggling lately.

The offshore transaction was large for the existing DRYS balance sheet. It absorbed the companies reserves and required a substantial increase in leverage. The company postured itself by reducing spot market exposure on its fleet and moving to longer term employment. The timing was good.

Last fall Economou added some new building contracts generated from his private company that later DRYS was forced to cancel and take losses. This caused some negative comments.

This year, DRYS has been raising capital by issuing new shares and dribbling them out at the market prices. This increase of capital was initially needed in the Groups arduous loan restructuring negotiations for its loan/ asset coverage clauses. In subsequent share issues, DRYS announced a strategy to acquire additional vessels, but there has been some market skepticism about company capacity for additional finance to leverage this new capital.

The China story has enthralled investors in the dry cargo sector for many years now. In the boom years, Far East demand consistently soaked up new tonnage in the market and drove rates to ever higher levels. China now has a great deal of over capacity that it has built largely to service its export markets in the US and EU. These markets have now collapsed.

The US seems to be improving since March this year if one takes Wall Street as a guide but mainly in the financial sector due public monetary policies to bail out lame duck companies and reflate asset prices. The EU has been worsening. It is still an open question how robust the recovery will be so the revival of Chinese export markets is still in question.

China has ample reserves for stimulus and they have probably outperformed the US in putting this money quickly to work. They have renegotiated their commodities contracts and moved to inventory replenishment that has brought a revival in the BDI for dry cargo sector. The Capesize tonnage has had the most benefit with a recent mini-boom. It is not clear whether this is sustainable.

China will most likely need to restructure their export model and this could have a negative impact on future demand projections for dry bulk commodities cargoes in coming years. Meanwhile the dry cargo orderbook is large and China has a significant share of the newbuilding contracts.

DRYS has taken large asset impairment charges for its foray into the offshore sector. It has new rigs on order that need to be financed. It also has had plans to spin off this business to a separate entity.

DRYS is facing large challenges in the present environment. Whatever the outcome, shareholders have gone through significant share dilution this year that will affect future share value. There is the issue of dry market recovery. This year things so far have gone pretty well for the sector. DRYS is completing its first round of debt restructuring. Prolonged market weakness in 2010 could lead to a much more difficult period with its senior lenders but markets may also improve and beat expectations. The main issue in the offshore side of the business is the future of the spinoff plans and its impact on DRYS shareholders. If it goes well, it could boost share value but the company is right now carrying the debt liabilities for this.

Kramer has the ease of being a pundit who can say whatever he likes without much responsibility. George Economou has a lot more weight on his shoulders. I have been critical of George for his excesses in the boom years but I appreciate his struggle in present market conditions. I think that Kramer should show a bit more generosity here. I have outlined the risks for shareholders.

A hedge fund's losses are a gain for a privately held shipping company

The financial crisis is leading to a regrouping in the shipping industry where publicly-held companies are in retreat with massive declines in share price and shrinking capital markets. This is illustrated by the recent move of Robert Bugbee and Cameron Mackey from Ospraie, a major NY-based hedge fund, to a subsidiary of the Monte Carlo-based Scorpio Group.

The Scorpio group has chosen a value-added commercial approach building a tanker pool rather than the asset expansion/ vessel-provider model of most publicly listed shipping companies. Ospraie was a major capital provider for NY publicly-listed companies. They had a sizeable portfolio of shipping shares. They have been obliged to reduce their their holdings in this sector. With listed shipping companies rolling up losses with order cancelations and impaired asset values from acquisitions made at the top of the market, sound privately-held companies stand to make a come back in the industry.

Scorpio Shipmanagement is an old established player in the tanker market. It is closed family-held business of several generations.

Contrary to most publicly listed shipping companies, Scorpio concentrated during boom years in building a tanker pool. They have a very fine group of brokers and a solid commercial base with end-users. They gave priority to investment in human resources to expand their commercial and operational capacity rather than massive scaling up in assets at bloated price levels. They did not concentrate on making quick profits nor double digit investor returns overnight. They had longer term business plans.

Where they did expand their asset base, they used cheaper European finance sources. They did not have the high transaction costs or restrictions to their business plans imposed for raising capital in US financial markets.

Presently as seen in the Bugbee move from Ospraie to a new Scorpio subsidiary in Stamford, Connecticut, hedge funds like Ospraie who have been major equity providers for NY-listed shipping companies, are now in retreat. Their massive portfolio losses due to the drop in commodities prices have forced them to start to liquidate their shipping holdings and restrict their capacity for new business.

Private players like Scorpio have a bright future in this market downturn. They are well positioned with a strong commercial base. They are not saddled with expensive asset acquisitions at top of the market prices.

They will have the opportunity to scale up with new vessels at lower prices that will give them a long term competitive advantage to many publicly listed companies.

Window of opportunity

My belief is that the coming TOPS quarterly earnings report should show improved results due the bulk carrier deliveries and especially the firmer tanker markets since 4th quarter 2007. The recent PIPE will improve the company liquidity with a new cash injection. The transaction costs will probably fall in the next quarterly report. The recent vessel sales, albeit at often disappointing price levels, allow some fleet consolidation that mitigates the rapid expansion.

TOPS faces significant future challenges. They have on order 6 product carriers coming up soon for delivery. Many forecasters express concern about the size of the order book and predict a fragile market prone to rate deterioration. The product sector is open to the risks of a more severe than expected US recession as well as possible 'cannibalization' of the product tanker market in the ME with increased use of local feedstock for chemical production at higher margins. TOPS has a relatively high cost structure that needs to be streamlined to be competitive with other operators. Their fleet of Suezmax, which is an important profit center, needs replacement and renewal. Finally TOPS has significant problems in its relations with institutional investors that need to be resolved. These risks can lead to rewards if properly managed.

For fundamental improvement in shareholder value, the TOPS management has a significant opportunity to prove themselves, take advantage of a growing experience curve and turn things around. Perhaps the expanded financial involvement of George Economou with his uncanny market instincts will assist in improving earnings. Hopefully TOPS will resolve outstanding issues with institutional investors and seek to revamp its BoD to reverse the generally mixed brand image of the company.

Management should recognize that improved financial performance and better shareholder value will increase the financial independence of the company. It will also reduce cost of capital hopefully leading to a premium instead of discount in raising new equity for future needs.

TOPS stands at a critical crossroads presently for its future. Its management should seize the opportunity!

Comments on DryShips DRYS

If one looks at the current graph of the DRYS at the time this article is posted, it appears a bubble situation. A lot of bubble has already evaporated. Peter Georgiopoulos of Genmar/ Genco recently challenged George Economou, saying that the market has to separate the 'goats from the sheep'. He was angered by the sudden Economou move to the oil rig business contrary to the purported mission of DRYS and rumors about a finder's fee for the bring the business to the company. Against this backdrop, let me comment on DRYS:

• George Economou is a veteran very successful, but maverick ship owner. In the bond boom of the late 1990's, Economou did a controversial bond issue with aging bulk carrier assets that then led to a default on the first payment. He renegotiated and the bondholders took losses. Since then he made a tremendous comeback.
• Economou gives the impression of the traditional private entrepreneur who has unbeatable instinct and does as he pleases, rather than the corporate manager who operates by mutual consent. Right now, he holds most of the officer positions in DRYS – CEO, CFO, etc. The BoD members evidently do not play a strong role. Privately he is seeking to fill these positions and restructure his management team.
• Economou maintains a private company shipping Cardiff as well as being CEO in DRYS. This is a common situation in Greece. The Greek owners often have both a private shipping company, a management company and a publicly-traded company. There are potential conflict of interest issues with both the private shipping company and the management company, which manages the vessels in the public company. Tsakos (TEN), for example, has had for years a similar structure with a private management company and has succeeded to establish a high level of investor confidence.
• DRYS has enjoyed a large profit margins in 2007 for two reasons: there are many units spot enjoying good rates and there have been good at resale profits. The company performance in 2007 is to be commended. Economou succeeded to get the timing right for the bulk carrier boom. Shareholders have benefited, but there is no guarantee of future performance.
• On the other hand, with the company leverage rising, there is increased default risk if the market suddenly turns sour. Finally, it is possible that DRYS is expanding faster than their free cash and this may lead to growing liquidity problems. These last points are from third-party sources and subject to further examination.

As a postscript to this article, DRYS has recently enjoyed a recovery in share price. Latest quarterly results show a doubling of profits, which is excellent for free cash flow and will lower leverage so long as this lasts. One of the benefits of having a large number of units in the spot market is the advantage of higher earnings from the rate volatility.

Economou seems to be making some smart moves, particularly the acquisition of Heidmar for a broader commercial base. With current high oil prices, the oil rig business gambit may eventually pay off .

Challenges ahead for Stock Exchange listed Greek shipping companies

With the Tradewinds recently reporting a count of 24 publicly listed shipping companies in Greece, I firmly believe that we are moving to a period of consolidation, mergers and restructuring over the next few years. Some companies will grow and prosper and evolve into world-class businesses. Others will fail and cease to exist.

Common statistics for US stock exchange IPO's are that up to 75% of these companies cease to exist over the first years from inception. For Greek companies coming from a culture where even 10-15 years ago, many business men had difficulties with balance sheets and relied on their bank account statement for their financial position, this poses some formidable challenges ahead.

Most businesses in Greece are small, closed family owned operations. Greek managers are not used to having to operate under an arms-length board with US-style corporate governance. The traditional management style has been highly centralized even to the point of physical limits. Often all decisions are concentrated to one key person and there is little tradition in delegation of responsibilities. Decision making is often very much like a line manager with quick decisions based on limited information rather than a corporate integrated style based on a team approach.

Institutional regulation in the domestic Greek Stock exchange has been notoriously lax. The notion of maintaining share value or management accountability are new concepts in Greece. The notion of hostile take-overs and management changes due bad performance is virtually unheard of.

US-listed Greek shipping companies appear to be exempt of the direct requirement of the Sarbanes-Oxley Act, but there is a system of self-policing where they are required to have an audit committee and report any material non-compliances.

Most Greek IPO’s tell more or less the same story:

• The BoD’s are very often friends of the management with little industry scope and little weight in corporate oversight on business and financial decisions: lawyers, average adjusters, retired bankers. Rarely do you see Boards with strong independent shipping figures. There are exceptions, of course. Stelmar before being taken over by OSG had a chairman, who was a Major Oil company executive. This added value to the stock and led to a better payout in the eventual sale of the company. More recently, Aegean ANW has a well constructed BoD due in part to the involvement of Hamish Norton in the IPO and Peter Georgiopoulos as major shareholder. Unfortunately many other cases are weak and this is not good for effective oversight that could enhance company performance and share value. There is serious shortage of qualified people for board positions as well as most other senior management positions in shipping these days.
• Management are often relatives and friends. but outside professional managers are becoming more common. Stelmar above led the way with a professional management team that organized the company. This poses an increasing management talent demand for listed-companies. Some like Diana DXS have turned to managers from multinational companies outside of shipping.
• Of course, it is not only the titles. The people have to be productive and have something to offer. There has to be some real accountability of management to the BoD and BoD/ management to shareholders. Since Greek management comes mainly from closed, family businesses, this is often a new world for them. They are used to imposing their decisions on their subordinates. They are not accustomed to selling ideas internally, working integratively nor to accounting for past performance. Not unexpectedly, some shelter themselves with elaborate "poison pills." This can have a negative effect on share performance.
• Greek companies often suffer from lack a productive corporate culture. Little attention is paid how to organize these companies with motivated staff that is efficient and gets results. Most local shipping companies have fairly formalistic ISM systems. Frequently in practice, there are seldom clear job responsibilities. People do not have objectives, etc. Insufficient money is spent for training and continuing education. The worst part of it is that in many larger companies in such environments with weak corporate culture, people can start to work for himself. This can easily degenerate into corruption. A number of large shipping companies in Greece have failed in the past because they lost control for these reasons.
• The business model is ship provider. The listed company does the technical management and provides the crew and the vessels. Effectively the commercial part is outsourced as the vessels are mainly time-chartered. The companies do not control their market. They often have no direct relations with end-users. Some companies, of course, do have units spot or do profit sharing deals. Even in this case there is no really coherent market strategy. What markets to develop? What kind of customer base to build? There is often a great deal of dependency on a few Charterer customers.
• The logistical concept of cargo systems or pooling where the Norwegians thrive is still rare among Greeks. The Greeks are mainly looking to play the market speculatively. Greeks have an excellent good track record in this regard, This is very different from building a service transport business with value and recurrent earnings. It is more like a hedge fund of steel commodity assets where profits are mostly from speculative and non-recurrent operations. With the size and affluence of Greek Shipping now in capital markets, this is gradually changing. Greek firms are buying into traditional cargo operators. George Economou of DRYS is buying out Heidmar from Morgan Stanley. Gabriel Panayiotides of EXM is the major shareholder of Torm.
• The future earning multiples are generated by fleet expansion. The qualitative value element is insufficient. There no concept of brand image or breakthrough performance. Market penetration and customer base is secondary. Internal capacity to take on new business and cash flow generation to support growth is often underestimated. The primary goal is having a huge fleet as soon as possible. The risks in this strategy are liquidity pressures and uncompetitive cost structure that leads to insufficient sustainable competitive advantage in the market place and declining share value.

The concept of listed companies is good for Greek Shipping. The challenges serve as a catalyst for professional management on new level of sophistication and corporate accountablity. There is real evidence of some new world-class companies on the rise. Shipping has lived through an incredible period the last few years, riding a massive boom in commodities world-wide. With the prospects of a US recession looming in 2008 and the dry-bulk market boom fueled by port congestion and infrastructure problems, the coming years are likely to be challenging times. On the other hand, most Greek shipping companies are far more liquid and much better prepared for the years ahead than ever before.

Crewing Crisis

Having had my maritime career mainly in Greece, I can say that this problem is a major issue for the future that is likely to have far reaching consequences.

The Past and Present:

The Greek shipping business model is primarily a vessel provider, rather than cargo operator. Greek shipping always had a competitive edge in service because of the close relation between the office and the ship, which gave superior operational strength and capacity. Traditionally, the older major shipping companies used extensively crew from their islands who were friends and even relatives. They cared for their families in a paternalistic spirit. Their offices were staffed by ex-seamen, which gave them great strength in managing both the deck cargo operations and the technical condition of the vessel.

Because of the early retirement of seamen, Greek offices locally are staffed by older deck officers and engineers, who assume middle management port captain and port engineer functions. The early retirement works as an indirect subsidy on office costs and overheads for small and medium size operators. Today this office staff is gradually becoming more and more elderly due insufficient replacement. For those who go to sea, they serve much less than in the past and leave. The younger staff has limited or no sea service whatsoever. This process risks a decline in the experience factor and quality of the shore-ship link that is a great traditional strength in Greek shipping.

Originally foreign seamen were used only for rating positions and all officers were Greek. In the shipping crisis of the 1980's, companies started to use full foreign crews and lay off the Greeks. At the same time, the Greek government offered subsidies to build rooms, hotels etc to promote tourism, which led many families to move to this sector and abandon the sea. The private schools for seamen all closed. Gradually the enrollment in the state schools diminished. Generally the Greek government has always under invested in education. They have not given technical education sufficient emphasis. Only recently has there any discussion about revamping the Greek educational system nationally and improving standards to which there has been recently considerable local resistance to change and modernization.

Another adverse factor has been the mismanagement of the Greek Seamen's Pension Fund. The Greek seamen unions were ideologically opposed the use of professional fund managers to improve the endowment. The Greek Governments in the 1980's extended the Seamen's pension funds to cover pensions to refugee families from Eastern Europe from the Greek Civil War era. This undermined the economics of the fund and increased dramatically the contribution liabilities on Greek flag vessels. Many smaller and middle size shipping companies were simply not in an economic position to take on these open-ended pension liabilities and were forced to flag out. Ultimately Greek seamen suffered the consequences in diminishing benefits and the need to work on foreign flag vessels. The European Union has encouraged the Greek Government to reform and unify its pension system and progress is slowly being made.

Today with the anti-terror measures shore time is more and more restricted. Immigration formalities are burdensome and onerous for seafarers. Government Authorities have too often shown callous disregard in offering refuge to distressed tonnage. There is a nasty tend in the penalization of accidents, where Masters and senior officers are increasingly exposed to jail and penal trials. One of the ugliest examples was the Spanish Government in the case of the Prestige, where the Spanish Authorities exposed the crew to danger of their lives in refusing refuge and put the Master on an extended jail sentence after surviving the ordeal and seeing his crew to safety, refusing for months to release him on bail.

Governmental considerations for the future:

Governments need to find ways to ease traveling and immigration formalities for seamen and allow them their due on shore leave, so they have more time to let off steam from long voyages and enjoy the ports that they visit when they are off duty. Travel and seeing the world has always been an incentive for young people to go to sea.

Governments need a more rational unified response plan in case of accidents. It would be good to have the jurisdiction in case of accidents and emergencies given exclusively to shipping professionals similar to the US Coastguard and preclude any involvement of political figures whatsoever. The matter of shore refuge for vessels in distress needs to be reviewed and made more professional, so seamen have the security that the shore authorities are there in case of trouble. Some countries are a lot more advanced and professional than others on these matters. The EU should consider these issues carefully.

The matter of penal liabilities in case of accidents has to be reviewed and modernized. The Master and senior officers should not be held in jail or charged for criminal liabilities without cause, which has to be established by proper inquiry in specialized maritime legal units - perhaps similar to US Coastguard accident inquiries, etc.

Management Considerations:

Crew group pension and medical benefits that reward those who make the choice of a seagoing career with a company.

Shore job opportunities that reward sea-going experience and integrate sea-going staff with office staff.

Continuing education benefits for high training standards, reduction of accidents and better shipboard management.

Highly trained shore staff who ensure good communication, support and co-operation to the crew.

Unfortunately this process tends to favor larger companies, who have the critical mass and resources to support these overhead expenses that improve quality and productivity. On the other hand, those companies who show personal interest in their units and crews tend to get better results. Ships do not run well by remote control.

Over the past few years, salaries levels have risen enormously. For senior officers, there is gradually an international convergence of remuneration irrespective of crew nationality. Also the fleet today is much newer, communications have improved with Internet. Life on board is less isolated and more comfortable that it has ever been before. Oil company vetting and safety standards are much higher so ships and sailing are safer than ever in the past.

Hopefully attitudes will change and more people will be drawn to a sea-going career.

Skuld scare story?

Although votes in TradeWinds readers poll on insurance club mergers are still pretty evenly divided a few readers have a rather critical view of Skuld. The Swedish Club appears to have rather more fans that Skuld as TradeWinds latest internet poll draws to a close. TradeWinds will count the votes in its club consolidation poll at noon GMT this Friday so the time to participate is running out.

Diran Majarian of Amalia Tankers writes from Greece to say he would rather see the Swedish Club linking up with Gard than Skuld.

“The Swedish Club has an upper market reputation with good owners, safety consciousness and quality service. The Club has a tightly knit base of owners and functions as a 'club' in a very traditional sense. Skuld has a mixed reputation in Piraeus through its Danish office, taking on smaller owners and assisting them, but being very tough on the terms and not always offering the best service to its members,” writes Majarian.

“The Swedish Club has always enjoyed a good economic situation with their finances and back calls, whilst the Skuld has had its ups and downs,” he adds “The Skuld mission statement some years ago was to be the most desirable P&I Club, but the club has never managed to gain the stature of their other Norwegian counterpart: Gard. In many ways, the Swedish Club would be a lot more compatible with Gard rather Skuld on these above matters. In essence the Swedish Club has been a sort of cameo Gard,” says Majarian.

“Regardless of improved economics of scale, the merger opens these serious service and relationship issues for owners in the Swedish Club, who have had traditionally a much better deal that those in the Skuld. They would lose control and be overwhelmed in a much larger and very different kind of a P&I Club. Whether the new club that arises from merger would retain the positive elements that existed in the Swedish Club is a question of concern. There will be serious rebranding problems in Piraeus,” Majarian predicts.

Carl Gill of British Marine’s claims team also appears to be not a big fan of Skuld.
“I have dealt with both whilst employed by a ship management firm. The Swedish Club have a good reputation on service to assureds and for being reasonable when dealing with third parties - which is the complete opposite of Skuld,” he adds. “Skuld being larger will undoubtedly drag the Swedish Club down to their level,” Gill adds.

Mogens Jensen writes from Denmark supporting the idea of a merger in principle but says implementation will be the real test. If Skuld and the Swedish Club can make a merger work Jensen says others will follow.

Australian reader, Patrick Bradley, says the clubs have to get bigger to gain the resources to serve markets like his own. “We have got correspondents here but if we want to talk to club managers the nearest are in Hong Kong,” he adds. Bradley also thinks all the clubs are far too focussed on Europe.

TradeWinds' top ten deals

I rate the deals as follows:J - Camillo Eitzen & Co’s EUR 219m ($280m) purchase of the 14 ship fleet of French chemical tanker operator, Fouquet Sacop. I like the Eitzen deal because I have a bias in this sector of the market. Eitzen is a knowledgeable and experienced operator. I know the acquired company to be a quality operation. I - Bergesen Worldwide Gas’ $347m purchase of the 10 vessel LPG carrier fleet of Norwegian fertiliser producer, Yara. C – DP World’s $5.75bn purchase of P&O for its ports portfolio. D - AP Moller – Maersk’s $2.8bn takeover of P&O Nedlloyd. E – Hapag-Lloyd’s $2.3bn acquisition of CP Ships. F - The $600m purchase by Saade family controlled CMA CGM of North South liner trade specialist Delmas. These above deals are similar in that strategic market positioning was a major factor in the acquisition. I do not know enough about the specific aspects of the deals to comment in detail. The Bergeson LPG deal looks a like a very fine piece of business. All the companies acquired are established operations of stategic value. Unfortunately we do not see Greeks going for this upper part of the market.H – The $542m deal by Peter Georgiopoulos’ General Maritime to sell 10 suezmax tankers and nine aframax OBOs to Tanker Pacific. G – The $550m sale and leaseback of 13 tankers by Evangelos Pistiolis led Top Tankers. These deals have to do with cashing in on the current high asset prices. Georgiopoulos made a good move to restructure his fleet and will hopefully focus more on quality before further scaling up. The Pistiolis ranks lower because it is really balance sheet restructuring and they are carrying the lease liabilities. It reflects the congestion in the KG market and competition for deals. B - Tsakos Energy Navigation $530m acquisition of nine ice class tankers from Swiss oil trader Western Petroleum. Tsakos is moving into a new area and it remains to be seen how they will perform. His father's management company faces new challenges in crewing, etc in these specialised trades. A – The recent $735m purchase by Stamatis Molaris led Quintana of 17 ships from that serial dealmaker Theodore Angelopoulos of Metrostar. Whilst the scaling up is understandable, the company is moving very far, very fast with analogous challenges. The CEO has no prior personal involvement in ship management or operations, being a financial man. The company faces substantial challenges in crewing and house technical management to find suitable sea and office staff and get them properly working together so that the ships perform well for Bunge. The deal makes the company a technical vessel provider to one major client, so the in-house commercial and operational base remains small.

'Prestige' Tragedy

Although I am a member of the Piraeus Shipping Community, I only have hearsay knowledge of this unfortunate accident. Rumours have been rampant with fingers pointing both to the Spanish Authorities and to the Owners/ Managers.Well, it is anymore a liability for a company to operate over-age tonnage and it is a practice that should be avoided if possible. Regardless of due diligence and good standards, the potential fallout in case of an accident is a very high risk that outweighs the possible rewards of continuing to trade out such vessels. Further as a Manager you must face an uphill struggle with classification societies, insurers, major oil companies, etc, that makes very problematical the operation of the vessel.On the other hand, it is well known that tanker industry operating standards have improved enormously over the last twenty years and Owners/ Managers have not been recognised nor rewarded sufficiently for their high standards. Normally, the ship standards are much higher than the shore standards. It is not at all unusual to see an immaculate vessel with a highly trained crew in safety gear attempting to dock at a dilapidated terminal that does not observe any serious safety standards except lip service. Mind you I am not arguing that all ships are immaculate and all terminals are dilapidated, but certainly politically and institutionally much less noise will be made about any deficiencies at the shore facilities rather than on the vessel. The vessel does not vote nor is it a source of local employment, the shore facility is much more important to the local community. All this reminds us of a rather famous Ibsen play...I think the most troubling pattern in recent accidents in Europe is the denial of refuge to vessels in distress and the callousness of shore authorities primarily towards the lives of the seafarers and secondarily towards the property of vessel and cargo owners. Plausible arguments can be made that knee-jerk reactions ordering ships in distress to go to deep sea rather than to be allowed refuge actually increase the likelihood of marine casualties and ecological disasters.As we see currently, there is such an hysterical shore reaction that tankers with no problems at all are being ordered to sail huge distances from the shore. Vessels and their crews are becoming untouchables.Personally I do not see any light in these matters unless there is an effort to upgrade shore standards and educate shore authorities to shipping matters. We suffer presently a generation gap, where shipping standards have improved enormously, but there has not been a similar movement on shore. This is presently impacting very negatively the shipping industry.

Ice smart owners?

Traditional family Greek shipping is based on relatives and close friends rather than professionals and corporate management with business plans, human resources and merit systems. Of course this is not that family shipping does not work well and is very profitable. Generally Greeks are not investors in human resources. This includes crewing where often they prefer low cost rather than quality. Training beyond statutory obligations has come late in Greece. There is insufficient concept of continuing education. Port captains, especially of the older generation, often have limited education and mainly practical experience. Companies are often groping for standards on these matters. Of course, there are exceptions, but as a rule Greek management spends little money on people and human resources management is not widely applied. Proof on a national level is the millions of Euro transfer money the Greek government has put into asphalt and concrete public works, whilst leaving the public educational system in a poor state spending less than any other EU 15 country in this area and tolerating very low standards. So Greek Owners may be investing a lot in expensive hardware. It remains to be seen whether they will spend on the people and training.

I wish my fellow Greek compatriots the best in these ice trades. Generally we could achieve much more meaninful economic development in Greece by investing seriously in people. This includes the maritime sector for better trained crews, etc. Scandinavian Owners are generally well ahead of us on these matters both in the office and at sea. This is a fact with the much higher labour productivity due a first class educational system. I also experienced this in France when I was working in Monte Carlo. I suppose that I am especially sensitive to this due my experience in parcel chemicals trades and the transport of hazardous cargo where high operating standards are a critical part of the business.

With the Euro currency, administrative expenses have reached very high levels in Greece so labor productivity is going to be a major issue in the future.