The Winds that Crested a Newbuilding Wave in the Middle of a Shipping Cycle Trough
It has been
said that if you are in the shipping business, you have to be an optimist by
nature. And, optimism with the boatload we have been having over the last few
years despite a few bad days here and there …
In a chart in a previous posting, we noted that
newbuilding orders placed so far in 2013 are already more than the orders
placed in the whole calendar 2012. A proxy index for the market (BDI) in the
same graph indicates that we are not faring much better in terms of freight
level since last year. So, why the excitement?
The recent newbuilding
wave cannot be attributed to any factor alone; however, ever since post-Lehman
collapse, many factors have been simmering and eventually are finding an escape
valve in the newbuilding market.
For starters, after the
collapse, every shipowner and institutional investor worth their salt, they
have been salivating about ‘cheap ships’, ‘distressed sales’ and the great
number of vessels the bankers would be auctioning on an industrial scale. By now
everyone knows that that ‘dream boat’ of business never came to port. The banks
held onto the assets, and the ‘cheap ships’ that were sold were few and
between, especially if one focuses on good quality, market competitive tonnage.
And, the shipbuilders, who
quite a few of them were picking off the shelf designs and started
experimenting on a commercial basis (aka ‘greenfield yards’) during the bubble,
thought that if they were to manage to convince anyone to sign a new contract
in a bad market, they better had to come up with improved designs. We heard of
30% efficiencies, etc, but once all is said and done, all else being equal, on
average ‘eco designs’ are about 10% more fuel efficient than ‘average’ vessels.
Still, 10% in savings in fuel for a small handysize bulker burning about twenty
tons per diem, the savings are about $1,500 pd (nothing to
sneeze at when freight rates are below $10,000 pd), savings that nominally add
up to $14 million over the vessel’s life (nominally about 60% of a
newbuilding’s price). Just imagine what that 10% in fuel savings means for a
big vessel that consumers five times as much bunkers as our Lilliputian
‘handy’.
And, the shipbuilders
didn’t stop at the ‘eco design’. The sweetened the terms for newbuilding
contracts with back-loaded payment structures (30% on signature and 70% on
delivery, instead of a more gradual and traditional ‘progress payment’
structure of 5×20% at meeting certain construction milestones.) And, why not,
they even got their perspective governments to provide export credit to their
qualified buyers, and, in other instances, managed to pocket a few subsidies
for themselves as well. After all, they were creating jobs, and helping keep
the market oversupplied with vessels (not a goal to be ignored to countries like
China).
And then, there were the
central bankers worldwide priming the system at levels unforeseen in history,
probably for good reasons given the financial scare ensuing the Lehman
collapse, keeping interest rates at very low levels; and, more importantly,
promising to be doing so for the foreseeable future and ‘at any cost’, using
emphatic language to ensure that all got their point crystal and clear. Low
interest rates reflectively also mean that the ‘opportunity cost’ for the cash
rich buyer is small enough to be ignored, which makes the prospect of a
newbuilding even more enticing.
And, while in previous
downcycles the market was dominated by strategic players like the shipowners,
the cargo owners and the shipping banks, this time things are indeed different.
Quite a few of entrants to the market, and some of these new entrants to the
market are with deep pockets that could make even rich private shipowners look
like paupers, are institutional investors and private equity funds that have
raised or have access to multi-billion dollar pockets of money.
So, there is a market
when vessels in the secondary market should be cheap but no there is no
activity on grand scale, when the market index is less than 10% of its
peak (see graph) implying both that sooner or later has
to improve and also that till then the ‘revenue forfeited’ will be smal , when
the payment structure for newbuildings is favorable and the financing cost low,
when the Siren Song of the ‘eco designs’ promises that fuel efficient vessels
will crowd out their older siblings even in an oversupplied market when vessels
will be idling, and, finally, when in two years we will be reaching the average
shipping cycle length (two years is just about the time to get a new order
materialize in the form of a new vessel), one can only start appreciating the
newfound excitement for newbuildings!
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