Feature: The new normal: Posidonia gets back to business

Posidonia 2014 proved beyond doubt that shipping is sexy again. That is to say, that prospects are good, perhaps very good, or soon will be for earnings, risks are retreating and new opportunities blossoming like an Athens Bougainvillea.

Which is to say, in fact, that rates are good in some sectors, poor in others and under water in others. Massive oversupply – of tonnage and yard capacity – threatens to tip a fragile recovery back into downturn. Owners continue to exhibit a herd-like ordering mentality and who can blame them with so many money men offering so much cheap finance (spurred on by continued QE).

This, then, is the new normal, discussed at some length during the two weeks of networking, partying, conference and exhibition.

The Lloyd’s List Business Briefing set the tone at the Sunday midpoint, attracting a small but well-informed crowd to hear from owners and investors alike. What we heard would confuse even the most attentive analyst, so Janus-like were the opinions when laid alongside reality.

For the bulls, China Exim Bank’s Chen Bo said the bank had closed USD 3.4 billion of transactions last year and could close USD 4 billion this year on the back of what he said were still very strong national economic indicators.

Erasmus Shipinvest’s John Su was equally bullish on China demand, while admitting that yard overcapacity was still a problem. But China should not be confused with Japan – it had much further to go in terms of economic development. What owners should be aware of was commercial risk, he said: too big to fail is not a term applicable to shipping. Of the 30 ships it inspected last year, the company bought only two, such is its selectivity on counterparts.

What is less clear-cut is whether shipping’s brief love affair with private equity finance is already over. Many think so, but this could be construed as much as a risk as an opportunity he said. Chen said China Exim was concentrating on smart deals that would not fall apart when P/E exited and he would be very cautious of future co-operation with the funds.

There is little denying that private equity finance filled a funding gap, but would it create another when it withdrew? Stealth Gas boss Harry Vafias called the P/E era ‘finished’ and added that the majority are leaving disappointed having suffered falling rates following two “mini-booms” in late 2013 and early 2014.

George Economou, known for his efficient but sometimes unorthodox approach to investing, said investors of all stripes need to understand that there will be no return to the super-cycle. Six years of famine had followed and growth trends would be divergent – things might be good, but not that good again.

The Economou model – don’t treat shipping as a team game, try to set the bar high to lock in profitability and above all order early – has been somewhat shucked by the fact that many owners have been unwilling to stop ordering, worsening the fragmentation. Not everyone looks at the numbers, he said. If the newbuilding order-book is 20% of the fleet, no one should order, but they still do.

Scorpio’s Emanuele Lauro stands accused as one of those whose “reckless ordering” has wrecked the recovery. But in his own defence, he pointed out that the company was playing its own hand, not anyone else’s. Scorpio has low leverage, a good balance sheet and sees signs of recovery, he said, though he expected better from the first half of 2014.

Having placed its bets already, Lauro rejected the claim of having killed the product tanker market, pointing out that ordering had begun in 2011, with quality yard partners. Scorpio could have had more, he said, had it had chosen second tier yards. With a 150-vessel order-book everyone is surely glad they did not, but Lauro added that the company could have kept going – it had more money on offer, though “at some point you have to stop”.

The interesting, testing times start now, he said, as the ships begin to deliver. As to whether demand would hold up against this wall of new steel, Lauro pointed out that he could find analysts prepared to be both bullish and bearish on China at same time “and be credible on both”. Demand could not be controlled, the company had to manage itself properly and be prepared for a number of scenarios.

The saviour of overcapacity in 1980s was the closure of some shipyards – would the same drastic measures be needed again to rein in the supply side? Chen Bin doubted much capacity could be cut but he said Beijing had already moved to place limitations on further expansion.

Lauro wondered why equity or debt providers even prepared to consider investment at second tier yards. Economou favoured even stronger medicine: the government should restrain Chinese banks from providing refund guarantees something that might discourage the yards from chasing silly money orders.

Su was more equivocal, asking how many people should be held accountable for overcapacity when they all stood to benefit in the good times. No single stakeholder should be blamed, he said. But when owners have to contend with the rule of the market on one hand, and the process of Chinese industrialisation on the other, then it’s hard to tell which is the more manageable risk.

Vafias put his company’s success down to hard work, consistency and luck but he said he was also a “practical guy” in choosing a segment with high barriers to entry and a small order-book. The problem of absorbing the 100 Ultramax bulkers ordered between Christmas and April was someone else’s problem, he observed.

The easy availability of other people’s money was more of an issue, he said but by picking the right niches, companies are able to work where experience counts more than money.

What came through clearly from Economou and Lauro was how relevant Greece remains in terms of shipmanagement, retaining and using in-house expertise that could help generate profitable operations. Economou also quipped that he welcomed “the more regulation, the better” as it divided the committed from the opportunists.

Vafias agreed that outsourcing technical operations brought little advantage in his eyes. The bigger issue is how to manage huge investments required to comply with new regulations at a time when rates were volatile and margins thin.

Lauro’s most practical concern was more old-fashioned: finding and retaining quality crew. It was a problem that all of European shipping shared and something that should be remedied at an international policy level. Perhaps when the vagaries of the market are stripped away, the concerns are universal, or at least shared.
Source: BIMCO