What would Onassis do?

Since the statement of 'What would X (please insert an unimpeachable authority of your choice) do?' has become a banality, the Captain could not resist the temptation but to ponder on what Onassis, a world renown shipping magnate and entrepreneurial figure par excellence would do in the present environment in shipping.

There is no question that freight rates are the lowest in the last decade, if not longer, and the dark clouds of poorly conceived and ill timed deliveries of new-built vessels compounded with a sickly world economic recovery make for a very inviting picture for investing in shipping.  The fact that shipping banks are plagued by a garden variety of banking problems of regulatorily deemed low capitalization and still high exposure to non-performing loans, whether real estate or elsewhere, and high political / sovereign / currency risk, especially in Europe, one would wonder why any reasonable investor wouldn't heavily be invested in shipping.  Something that even Onassis himself might be contemplating from a round corner in the big sky above the Scorpios Island right now.

Asset prices are as low as they have been in the last decade, at least. Ten-year old VLCC tankers trade at less than $40 million, at a time when their present salvage value is just below $ 20 million, and likely a newbuilding contract can be signed at $80 million or so. Based on a twenty-five year design life, a ten-year old vessel has fifteen years to trade.  The premium of today's market value over scrap is about $15 million, so, on a straight line, depreciation stands at one million dollars per annum, or about $3,500 per diem.  Assuming $10,000 per diem vessel operating expense, including dry-docking provision, the vessel has less than $15,000 per diem cash break-even point.  Wouldn't that low break-even be enticing enough to bring new buyers to the market?  

Of course, such game is not for everyone.  Charterers for VLCCs are very not very keen on tonnage right now, so buyers have to have deep enough pockets to add working capital to the project, as this may be required.  Additionally, a strong commercial name will be required to properly maintain, manage and assuringly trade the asset.  Any new comer will likely need to partner with an old shipping hand.  

And, of course, given that no banks today are keen to finance new clients, or even established clients, and definitely not ten-year old tankers, this is primarily a game for investors with their own equity, which in exchange, allows them to drive asset prices down.

It's tough to tell what Onassis would do under the circumstances.  There are tempting opportunities in shipping in terms of vessel pricing and vessel availability, just as when there were plenty of surplus vessels to be sold after WWII (Liberty vessels). Despite the gloomy prospects then, shipping minded and determined ship owners, including young upstarts, made out just fine.  This is what Onassis did then, but is THIS another exceptional entry point to the cycle? Sure, by the time shipping reaches the next port call, the answer will be clear...but likely by then the wind will be gone from the sails by then!

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