Words of Wisdom

Semper aut discere, aut docere, aut scribere dulce habui.

I took pleasure in learning, or teaching, or writing something.

                                              Bede

"Focusing is about saying no."                                     Steve Jobs

"A good idea is often surprisingly simple." 
Ferdinand Alexander Porsche 

"The less confident you are, the more serious you have to act."

                                                  Tara Ploughman

"Change breaks the brittle."

                                                 Jan Houtema

"Short words are best and the old words when short are best of all."

                                                Winston Churchill

"Don't worry about what anybody else is going to do. The best way to predict the future is to invent it."

                                                   Alan Kay

"Dealing with failure is easy: Work hard to improve. Success is also easy to handle: You've solved the wrong problem. Work hard to improve."

                                                 Alan Perlis

"The imagination of nature is far, far greater than the imagination of man."

                                                 Richard Feynman

"The greatest dangers to liberty lurk in insidious encroachment by men of zeal, well-meaning but without understanding."

                                                  Brandeis

"Modern invention has been a great leveller. A machine may operate far more quickly than a political or economic measure to abolish privilege and wipe out the distinctions of class or finance."

                                                Ivor Brown, The Heart of England

"If our goal is to write poetry, the only way we are likely to be any good is to try to be as great as the best."

                                                  Donald Hall, Poetry and Ambition

"The public should always be wondering how it is possible to give so much for the money."

                                                 Henry Ford

"We act as though comfort and luxury were the chief requirements of life, when all that we need to make us happy is something to be enthusiastic about."

                                                 Einstein

"Many who burnt heretics in the ordinary way of their business were otherwise excellent people."

                                                G. M. Trevelyan, "Bias in History"

"We're even wrong about which mistakes we're making."

                                                Carl Winfeld

"The key to performance is elegance, not battalions of special cases."

                                                 Jon Bentley and Doug McIlroy

"If you analyze the function of an object, it’s form often becomes obvious."

                                                Ferdinand Alexander Porsche 

"Form has to follow function."

                                                Ferdinand Alexander Porsche 

"Your twenties are always an apprenticeship, but you don't always know what for."

                                                 Jan Houtema

"Keep away from people who try to belittle your ambitions. Small people always do that, but the really great make you feel that you, too, can become great."

                                                  Mark Twain

"The people can always be brought to the bidding of the leaders. That is easy. All you have to do is tell them they are being attacked, and denounce the pacifists for lack of patriotism, and exposing the country to greater danger."

                                                   Goering at the Nuremberg Trials

"Get the important things right."

                                                   N. P. Collingwood

"Most interesting phenomena have multiple causes."

                                                   N. P. Collingwood

"People don't change their minds. They die, and are replaced by people with different opinions."

                                                    Arturo Albergati

"The best way to do something 'lean' is to gather a tight group of people, give them very little money, and very little time."

                                                   Bob Klein, chief engineer of the F-14 program

© 2013 Basil M Karatzas & Karatzas Marine Advisors & Co.

No part of this blog can be reproduced by any means and under any circumstances, whatsoever, in whole or in part, without proper attribution or the consent of the copyright and trademark holders.

Is the crude oil tanker market dead?

The dry bulk market seems to be bouncing along, the containership market has been trading sideways, the product tanker market seems to keep attracting ever more attention on the back of the shale oil developments in the US and the bringing online of refineries in the Middle East, Indian and Asia, and the crude tanker market has been left for dead.

The truth of the market is that the dynamics of the market, whether for VLCCs, Suezmax or aframax tankers doesn't seem very inspiring. Smaller quantities of oil will have to be transported in the future with the US less dependable on imports and the Chinese positively discriminating in favor of their own-flagged or –controlled tonnage. No great surprise that asset prices for crude oil tankers have been in a free fall in the last few months, to say the least.

In the last month, there have been a few transactions in the crude tanker market that at the very least are noteworthy. The transactions refer to modern tonnage, newer than ten years of age maximum, vessels coming from top quality shipbuilders and also from sellers / managers / operators with solid credentials, good ‘stables’ as we say in the business.  Also, the buyers were top quality Greek owners with solid track record of picking the bottom of the market, and having made both by operating the vessels and also by playing the simple, old advice of ‘buy low, sell high.’

A couple of the noteworthy transactions: American Eagle Tankers or AET for short (a wholly-owned MISC subsidiary in Malaysia) just sold the VLCC MT „EAGLE VIENNA” built at Hyundai Samho in 2004 to Alpha Tankers (Kanellakis) in Greece for US$ 40 mil. The last comparable transaction in the VLCC market took place at the end of May 2013 for the Mitsui-built and controlled MT „KAIMON II” to interests of Altomare (Greece) at US$ 29 mil. The estimated newbuilding contract of a VLCC is about US$ 90 mil with estimated salvage value of more than US$ 20 mil, and an estimated economic life of 25 yrs.  The steep depreciation line is obvious, but the sale of the MT „EAGLE VIENNA” shows a relative improvement over the sale of the MT „KAIMON II”; also, AET did well on the trade given that their VLCC entrance was backed by multi-year COA to transport heavy oil (coiled VLs) for PDVSA from Venezuela to Singapore for power generation and they have fully recovered their investment.

Also, DSD of Norway seems to be in a divesting mode of modern, high quality aframax tankers following the charter default of Sanko Shipping: the 2010-built at Sumitomo aframax MT „STAVANGER BELL” was sold to interests of Eastern Mediterranean Maritime (East-Med controlled by Thanassis Martinos) in Greece at reportedly $31.5 million, and a couple of weeks earlier, same seller and buyers exchanged the 2004-built aframax tanker MT „STAVANGER BAY” at US$ 20 million.  EastMed has a solid reputation as a reference account of spotting market inflection points and buying opportunities. A newbuilding aframax tanker would be priced at US$ 50 million at present, so the level of the pricing and the discount thereof is apparent. Estimated scrap price at present stands at about US$ 7 million.  Of course, aframax rates are at about $13,000 pd with vessel daily operating expenses at US$ 8,000.   No much room for leverage, but definitely cash flows are positive; the vessels are very good quality and under good management, and theoretically 15+ years remaining economic life.

Strangely, neither Alpha Tankers nor EastMed have bothered with the hot product tanker market for acquisitions, and most definitely have not bothered with equally good vessels older than ten years of age.

This is a bifurcated market, but the smart money seem to show the way…

© 2013 Basil M Karatzas & Karatzas Marine Advisors & Co.

No part of this blog can be reproduced by any means and under any circumstances, whatsoever, in whole or in part, without proper attribution or the consent of the copyright and trademark holders.

China's Raw Power and Steel Strength

The capesize market has kept enjoying a robust September so far with freight rates approaching the magical level of $40,000 pd (not seeing since 2011) for a round-voyage trip between Brazil and China. Given that rates were at about $5,000 pd in early June this year, the freight increase is phenomenal and most-welcome in an otherwise uninspiring shipping market, in general.

The increase in the cape market has been triggered by China’s elevated iron ore mostly (and some coal) import activity over the same period. This time however, more of the imports (proportionally) were originating from Brazil than the previous mini-peak of the market earlier this year; Brazilian imports usually absorb three times as much capesize tonnage as Australian imports do due to distance, which explains partially the freight increase.  It is not known yet whether the increased iron ore imports are purely for inventory replenishing purposes or due to increased iron ore production, as updated, reliable statistics are not available yet.  This differentiation between end-production and stock piling in general is useful as the latter explanation equates to ‘stuffing the channel’ improvement. It is known that Chinese iron ore stockpiles have been maintained at the 20-day mark this year (about 70 million tons), while in the last few years that mark was at about 30-to-40 days of demand. Also, the price of steel plate at Chinese shores increased from about $100/ton in late May to $130/ton at present after briefly setting a recent high of about $140/ton.

The recent rally in the cape market has not really spread proportionally to other asset classes in the dry bulk market, and the crude tanker market is definitely under renewed duress.  The big question then becomes whether the cape rally is sustainable and it can be an inflection point for the shipping market.

Iron ore and metallurgical coal are used for the production of steel, which to be used for infrastructure projects, construction, in heavy industries, etc In a sense, the steel industry and its health thereof is an integral parameter to the health of the of the iron ore trade (and capes.)

A recent article in Week in China, a Hong Kong-based insightful weekly publication about Chinese matters, about the steel industry got us thinking.  Here are few major points: there are about 21,000 steel mils in China according to the Research Center for Chinese Politics and Business at Indiana University, ranging from the heavyweights like the state-owned, publicly listed companies like Baoshan Iron and Steel (Baosteel) to start-up steel makers.  In 2012, about 715 million tons of steel was produced in China, and the industry overcapacity stands at about 300 million tons, for a total overall capacity of more than one billion tons per annum.  This is not a typo, Chinese steel production capacity exceeds demand by 300 million tons per annum; to put this into perspective, the whole annual European steel production stands at 150 million tons presently, so China’s spare capacity is twice Europe’s annual production.  Chinese steel mill utilization rate has remained in the 70-80% range in the recent past. [The European steel industry has tremendous overcapacity in its own right, in full disclosure, as capacity stands at 2008 levels of 200 million tons per annum].

So, how an industry with 40% overcapacity (much worse than that in shipping, actually) and a low utilization rate (again, lower than in shipping) gets to make money?  Glad that you asked!

In an article titled ‘In a precarious state,’ Week in China reports that Chinese steel firms have run a debt tab of RMB 3 trillion (US$ 490 billion).  About three-quarters of these loans are bank loans and in general have short maturities, usually less than one year, and thus they will have to be re-financed in the immediate future. Focusing on the established and most solid players, the largest 30 steel mills in China have outstanding loans of RMB 760 bln (US$ 125 bln). As we mentioned in previous posting, China’s ‘shadow banking’ is estimated at about US$ 2 trillion, so any way one slices the data, the steel industry has a significant share of it; some have argued that the steel industry may be of higher cause of concern than overstretched property developers and local government financing vehicles.  A recent study by Morgan Stanley titled ‘China Deleveraging, Can the banks tide out a financial storm’, ‘Ferrous metal smelting & pressing’ is the most underperforming industry and by far the highest risk of concern to their lenders.

Chinese steel mills, without any government subsidies, in general lose RMB 100 – 300 per ton produced (about $15 – 50 per ton.) All inclusive, the industry’s margin is as thin as 0.04%.

China’s recent ‘rebalancing efforts’ have taken into consideration ‘excess capacity’, and officially the government has ordered 1,900 companies in the steel, aluminum and concrete industries to be shut down; about seven million metric tons of steel capacity to be taken out of the market by the end of September 2013 (about 2.5% of the 300 mil ton overcapacity.)  The curbing is rather mild, and as Reuters’ article emphasizes: “Beijing's previous efforts to rein in "blind expansion" in some sectors have been thwarted by local governments that have offered cheap land, tax deductions, subsidies and loans to attract investment, the People's Daily said on Tuesday, citing a spokesman for Ministry of Industry and Information Technology.” However, one cannot ignore the writing on the wall…

Chronic overcapacity may be interpreted that if/when the Chinese economy grows again at 15%, there will be plenty of 'shovel ready' plants to rev up production, which would be an immediate blessing for the iron ore and cape markets... But again, all this overcapacity will have to be kept alive until then, either by political will or at considerable destruction of wealth...

The recent cape rally has partially attributed to Brazil’s iron ore coming back to the market after an exceptionally heavy rain season earlier in the year and port facilities becoming available again. Chinese steel mills, especially the smaller ones and the ones with their debt financing coming due immediately, kept buying iron ore despite increasing prices of the commodity in an effort to ‘keep the bicycle moving’: once they stopped buying and producing, despite the government’s edict and the bad economics of their production, banks would be much more inclined not to re-finance loans coming due…

Far from us being 'dragon slayers' (pessimists on China) and would rather side with the 'Panda lovers' camp (optimists on China); and, no-one said that Chinese local politics and statistics are always translucent and that China does not have the magic to surprise. However, it seems that the Chinese steel industry, the cornerstone of any sustainable cape recovery, may just not be the rock where great fortunes can be build upon at present.

© 2013 Basil M Karatzas & Karatzas Marine Advisors & Co.

No part of this blog can be reproduced by any means and under any circumstances, whatsoever, in whole or in part, without proper attribution or the consent of the copyright and trademark holders.

Shipping Paranoia

In one of the best business books ever written, in our opinion, 'Only the Paranoid Survive' by the former CEO and Chairman of Intel Andy Grove, the then young executive Grove is agonizing with Gordon Moore, co-founder of Intel and brilliant engineer (of the ‘Moore’s Law’ fame in the semiconductor industry), about the price war ensued by the Japanese in the DRAM memory chip business and Intel’s precarious position.

 

Grove recalls early in the book:

“I looked out the window at the Ferris wheel of the Great America amusement park revolving in the distance, then I turned back to Gordon and I asked, “If we got kicked out and the board brought in a new CEO, what do you think he would do?” Gordon answered without hesitation, “He would get us out of memories.” I stared at him, numb, then said, “Why shouldn’t you and I walk out the door, come back and do it ourselves?”

This may seem like a casual observation, but Intel effectively invented the DRAM chips and Moore’s suggestion to get out the market was almost sacrilegious.  Intel did indeed move away from memory chips and into value-added ‘mother boards’ and laughed all the way to the bank for the next decade or so by riding the ‘Wintel’ infrastructure of the PC market. (Different times, different gadgets!)

It’s amazing how vested people become in a situation, whether job or company or industry. As long as one is on the ‘inside’, the never-ending cyclical path around the water well seems to be a purpose by itself. It takes often some stepping-back in order for one to get a better perspective of the right priorities, like Grove’s insightful question what would a new team with a clean slate and mandate do to solve a problem.  Apparently both Grove and Moore had intimate knowledge of the company, the industry and the engineering behind them and the answer become obvious instantly; a new team may have to spend time on consulting reports, take more time, do their own analysis and possibly could never see the ‘light’.

Shipping and maritime are integral industries in our every day lives, and no doubt they will remain important going forward. However, the dramatic drop in asset prices (compared to 2008 peak pricing levels) has induced a tremendous wave of newbuildings. It almost seems like a race to the shipyards (at least the ones that provide competitive pricing and lenient payment terms) to build more and more vessels in the mainstream markets; bit more fuel efficient than older vessels, bit bigger in cargo capacity within same asset class, bit better standards of workmanship than the ones from fresh yards a few short years ago.  However, in our opinion, the amount in newbuildings is not justified by the market economics and demand for cargo.

We run two basic scenarios evaluating historic returns on major asset classes in shipping: under the first, long-term scenario (TABLE 1), the vessels were bought and paid for at the beginning of 2001 and were held till present; purchase price and residual price are real (nominal) prices and freight rates have been the average freight for the whole period; operating expenses (inclusive drydock) are shown in the table herebelow for each category; also, it is assumed 60% mortgage on the vessels at 6% interest rate. The IRR is calculated for each asset class, and the returns have been ranging from single digit rates (MR tankers with 8%) to highly respectable 37% for capesize vessels. It needs to be noted that historically, 2001 has been a good year for one to enter the market and the almost twelve years of this scenario include the best shipping cycle known to man.

Under the second scenario (TABLE 2), since the beginning of 2006 till present, the same assumptions have been maintained.  Returns however under this scenario range from negative returns to barely adequate of 14% again for capesize vessels.  In 2006 asset prices had already moved significantly higher than 2001 and since then, there has been ‘the best of times and worst of times’ in terms of freight rates with extreme example in early 2008 capesize and VLCC freight rates at $150,000 pd spot market and negative freight rates in 2009 and 2010 (‘back haul’ to reposition vessels).

We acknowledge that our scenarios are rather simplistic by presuming average rates and average financing terms and holding onto the assets, thus excluding any ‘asset play’ (capital gain from asset appreciation) when sometimes where most of the opportunity lies in a highly volatile industry like shipping.

Shipping and maritime are rather risky business and the cost of capital (discount rate) has to be rather high. The achieved historic returns really do not justify an investor being aggressive on acquisition pricing or one orderbook.

Going back to the newbuilding race, are investors are losing the trees for the forest? The vessels for the ocean? Revisiting Grove’s question, if one was not vested in a company or an asset class or the industry, what would have been the ‘right’ thing to do?

© 2013 Basil M Karatzas & Karatzas Marine Advisors & Co.

No part of this blog can be reproduced by any means and under any circumstances, whatsoever, in whole or in part, without proper attribution or the consent of the copyright and trademark holders.

The 'Cape' Debate

The Financial Times recently had a lengthy article in their ‘analysis page’ titled the ‘Clash of the Cape Crusaders.’ People in shipping may be excused for thinking that an international, mainstream business newspaper was dedicating a whole page discussing at length the ‘Cape market.’ In the case of the FT however, ‘Cape’ referred to ‘Cyclically Adjusted Price Earnings’ ratio; according to the way PE is adjusted for cyclicality, the broader US stock market can be either undervalued or overvalued. Based on the same benchmark.

Shipping’s capesize market has been experiencing a resurrection recently that has got many industry pundits wondering whether the worst is behind us or just that the recent improvement in this market is a just another ‘false positive’ sign.  Thus, shipping’s own cape debate is whether the market is overvalued or undervalued in its own small universe. Not a small question, really.

First the good news: in the first ten days of September, average capesize rates moved from about $15,000 pd to $27,00 pd (up 80%), while the Baltic Capesize Index (BCI) climbed about 1,000 points to 3,243 (up 45%) and transport cost by 31% from West Australia to Qingdao (China) at $12.1 / ton and about 18% higher on the Tubarao (Brazil) – Qingdao (China) route to $ 23.5 / ton.   Given that this time last year capes, on average, were earning less than $5,000 pd, and that it costs about $8,500 pd in daily operating expenses to run such a vessel, the present rate of $27,000 pd is a most welcome development!  In long forgotten days, such rates may have been a cause to pop a champagne bottle.

As great the improvement in rates as it has been, we all sort of have seen this story before where rates improved seasonally / temporarily and then deflated rapidly again.  However, it seems that the increase in rates this time is driven by end demand and higher production of steel bars in China, which translates into higher demand for iron ore (while quite often in the recent past, increase in freight rates was driven by pure stock piling / replenishing inventories).  Bloomberg reported that steel reinforcement-bar futures in Shanghai have climbed to $613 per ton recently, while steel output has increased to 2.12 million tons in late August.  These all despite the fact that iron pricing is up about 25% in the last three months at $138 / ton and iron ore stockpiles stand about 22% lower than the year ago.

Thus, so far, the news is fairly encouraging, which is most welcome in a market that has been brutally battered by the storms of the weakening word trade and other market dynamic considerations.

Now, the bad news: Rio Tinto has announced an earlier than expected iron ore new capacity to 290 million tons (from 230 million tons previously) on an annual basis. This would have been ‘great‘ news, if not that most of this new production and also additional production coming to market by other miners is taking place in West Australia, which is much closer to China than new production in Brazil, which would had absorbed much more tonnage for the transport of same amount of cargo.

And more bad news: while in the last three months about six capes per month were entering the market via deliveries from shipbuilders (vs more than 15 deliveries per month in 2012), still more than twice as many capes delivered this year than got scrapped (about 70 deliveries vs 30 scrapings); year-to-date, about 130 newbuildings (plus 30 more options) were ordered.  Admittedly it’s tough sourcing rumor from fact on these ‘orders’ and still to be seen how many of these newbuilding vessels will eventually ‘hit the water’, but it’s almost incomprehensible that 10% of the world cape fleet has just been contracted anew in 2013 when on average, year-to-date, average cape freight rates ($10,500 pd) remained just above operating expense levels.  The overall cape orderbook stands at about 20% of the world cape fleet (depending on assumptions), while more than 50% of the world cape fleet is newer than five years old.

Looking at the forward curve for some guidance, while the physical freight market for capes improved and the paper market (FFAs) moved along to same levels for Q4 2013, the forward curve for the next three years stands sizably lower at about $18,500 (admittedly much higher than the level of $11,500 for CAL14 in early June but nowhere close to level covering cash expenses).

The recent developments in the cape market, as welcome and encouraging as they have been, still have not changed our bearish assessment in an earlier posting on this site. It will take more than a market rally to make us reconsider. It’s not that demand is not there…

In our opinion, the shipping ‘cape debate’ is bit clearer to award than the CAPE debate on the US stock markets, in our opinion …

© 2013 Basil M Karatzas & Karatzas Marine Advisors & Co.

No part of this blog can be reproduced by any means and under any circumstances, whatsoever, in whole or in part, without proper attribution or the consent of the copyright and trademark holders.

Small details that make a big difference for FMV in shipping

While most of the ink spent on debating valuation methodology in shipping is about the (coarse and fine) differences among the three primary valuation methods (please see previous note on our blog), no much attention is paid on the finer points of the Fair Market Approach (FMV). The FMV is the method used by default in loan agreements, and it’s supposed to be the only ‘real’ valuation method, as it reflects the price the market will pay for the asset, fair and square.

The point is that what is reported in the market place and what actually took place is not necessarily true or it doesn't truly reflect reality.  Here are a few quick points to consider next time one ponders whether a new sale is above or below ‘last done’ and how the market is trending:

Finding a price of a 20 Oz. bottle of Coca Cola is very easy; one can do this by just walking in the closest convenience or grocery store and the price is posted right there for all to see.  One doesn't even have to enter into a transaction to discover the price. Probably a store close-by will have a very similar price, again posted for comparison.  An upscale store or a store in an expensive neighborhood can be expected to have a higher price, and if one can wait till the weekend to buy in bulk at Costco, the price would be meaningfully discounted. There is a great deal of market transparency, which has become even more effective in the age of the internet and smartphones; there are even apps that allow for instant price checking while shopping.  Only if the waters were so clear for price checking in shipping!  A lot of the sale & purchase deals are bilateral and they may involve a broker (or a couple of brokers), thus only a handful number of parties know the intimate details of the transaction and the pricing. Maybe the second-best buyer (and their broker) suspect the real price (i.e they know they offered $X for the vessel, and they lost, so the actual price logically has to be at least $X+1); again, this is only a suspicion and again it’s based on the assumption that buyer and seller are rational (or it was an arm’s length transaction; however, precious little prohibits from the sale taking place at $X-1, but that may be found under the ‘agency theory’.) So, two or three parties really know the fine pricing point where title of ownership took place, and these parties perhaps do not have interest to divulge the exact details to the market for many reasons, ranging from privacy to protecting a competitive advantage. Thus, what is reported in the market (usually by way of broker reports) is not necessarily accurate, for legitimate or bad reasons; our background in sale & purchase confirms such point; a great deal of the reports of deals we were involved with were misrepresented to a certain extent, once or twice misreported to the extent of ignorance.

Then, besides the price, we have to deal with the subject market itself: we all can agree that a 12 Oz. bottle of Coca Cola is a very standardized ‘commodity’ in a certain geographic market, from content, to packaging, to labeling, etc  However, what is a ship?  It’s more than a philosophical or a poetic question than ‘what’s in a name?’ Even vessels built on the same design cannot necessarily be exact copies; some got more TLC from their owners during construction in terms of attention to detail and good craftsmanship and also more attention after their delivery. We do not mean necessarily vessels built on same design from different yards, but vessels built on same design by the same yard and have subsequent hull numbering. It has been known that many young yards (some of them ‘greenfield’ yards) were building vessels fast enough to just stay afloat for the next year. Yes, there is price differentiation between vessels coming from good and bad yards, good and bad owners, etc but again, the fine detail of specification, design and maintenance of the vessel is not widely known. In a market where even the name of the manufacturer is not much of solace for quality consistency ‘that which we call a modern bulker, by any other name would rust as fast,’ if we were to take the poetic liberty to have Juliet get involved in shipping. And of course, there is the point of the owner and vessel manager, where the standards of maintenance and spare parts onboard differentiate the ‘stable’ vessels come from.  You see, certain managers take at face value the old saying that vessels are referred to as ‘she’ because like women demand constant attention; and, the more the attention they attract, the better their standing in their social circle (market place).  It’s not a 20 Oz. Coca Cola bottle situation here, comparing apples to apples.

Vessels are required to be drydocked every five or two-and-a-half years at a cost that can range in the million dollar range.  In today’s market, consideration is given on pricing for the vessel’s ‘survey position’, that is when the vessel is drydock due.  However, an owner intending to sell the vessel right after her drydock, they may opt for the ‘lipstick on a pig’ treatment rather than more fundamental maintenance; and, a serious buyer may opt for a vessel purchase pre-drydock in order to have the opportunity for a thorough preventive maintenance schedule at a much higher cost.  In short, the ‘survey position’ adjustment can be opaque (one ‘had to be there’ to know for sure) or can be completely subjective based on the buyer’s trading and maintenance standards, and optimal points of competence and convenience.

Another consideration on the fair market value goes back to the gross and net price of the vessel; there are commissions that can make a big difference on the pricing; it could be that there are several brokers involved, or that there is a hefty ‘address commission’ where effectively the buyer or the seller or both are subsidizing their in-house brokerage business by adding another commission. There is a sizeable difference on the pricing of a vessel if the commission is just the ‘standard’ 1% or 5% including ‘address commission’ but market reports refer to the ‘gross’ number.

How about the location of the delivery of the vessel to her new buyer? A vessel delivered close to a loading port when she can immediately start earning freight revenue is a much more preferable location than a delivery closer to the discharge port.  For smaller vessels in the dry bulk market, the difference between ‘loading’ and ‘discharge’ ports may be as convenient as shifting the vessel from one berth to another in the same harbor; however, for bigger vessels like supertankers or capesize vessels, the ‘loading’ and the ‘discharge’ ports can be half-a-world apart (like Middle East and US Gulf Coast for VLCCs, or Brazil and China for capesize vessels); at today’s bunker pricing, repositioning a vessel on one of these trades can be one to two million dollars; plus, their  is the operational expense to reposition the vessel to the new loading port. According to NSF template (Norwegian Sale Form), it’s the seller that determines the actual delivery location of the vessel, but within a range of ports mutually pre-agreed between seller and buyer. So, two identical vessels (with our point above notwithstanding on exact duplicates) that are sold at two different locations could be apart a few million dollars; but when vessel sales are reported, location delivery is always ignored.

There is a standard definition for fair market value about willing seller and willing buyer, etc where market comparable valuations are based; the standard valuation methodology in shipping does not require an objective, physical inspection of the vessel, and also, as an industry practice, vessels of same size and design are assumed duplicates for valuation purposes. The fair market valuation methodology has often been ‘abused’ in our opinion; here, we went tangentially about a few of the points that routinely are ignored on the pricing and determining what’s really the market price; and, we have focused here on market transparency solely, and we have not touched at all the situation when the buyer or the seller, while both ‘willing’, can exert disproportionally more pressure on the other side and command higher control of the transaction and its outcome.

We wish that shipping was as poetic as Anne Sexton’s lines:

‘Water so clear you could

read a book through it.’

Well, that will be the subject of a subsequent posting …

© 2013 Basil M Karatzas & Karatzas Marine Advisors & Co.

No part of this blog can be reproduced by any means and under any circumstances, whatsoever, in whole or in part, without proper attribution or the consent of the copyright and trademark holders.