As they say, a tide lifts all boats (and ships, it seems, if the tide is strong enough…) From 2006 – 2008, freight rates in all shipping segments were so high and exorbitantly above vessel operating expenses, that there was little value for strategizing and creating a coherent policy for some owners. Only in the last three years, when the markets are ‘back to the basics’, there is a definite need for coherent strategy for ship ownership, ship management (commercial and technical), and optimized capital structure and financial efficiency.
The limiting factor however is that shipping is a capital intense industry and fixed costs are set for many years in advance with restrained flexibility in between. Therefore, trying to implement a strategy at the bottom of the market when there are ‘legacy’ issues on the balance sheet, the option set is rather small.
There are however steps to be taken even today toward establishing a solid and viable vessel management strategy.
While everybody’s attention is fixed on WorldScale (WS) for tankers and the BDI for dry bulk vessels, few people realize that in today’s anemic freight market running vessels with lower operating expenses is much more important than the top line. A vessel that has $1,000 per diem lower operating expenses than the competitors’ vessels (because she is better maintained, has more efficient design and because of vessel management expertise), she contributes additionally about $350,000 annually to the bottom line despite the same weak freight rate for all vessels. For a freight market averaging $20,000 per diem in certain market segments, a $1,000 per diem operating savings represents a 5% incremental operating margin; when some asset classes in shipping barely break even these days, an incremental 5% profit can make the difference between survival and receivership. [By advocating lower OpEx, the Captain does not imply or endorse vessel maintenance shortcuts, etc, although it’s a sure thing than maintenance suffers in bad markets]
Another point of immediate urgency is the strengthening of the balance sheet for many ship owners. The frame for the shipping banking market has changed drastically since the financial crisis commenced with the default of Lehman Brothers, and there are no signs of any imminent (or even distant) return to the days of liquidity, excessive or not. In an environment of persistent weak freight rates, a still very strong orderbook outstanding, and a looming banking crisis, any bona fide investors in shipping opt to err on the side of the caution rather than have the advantage of the first mover. With publicly traded companies reporting more blood than that in the sea of the Faroe Islands during whaling season, and most of the shipping deals taken place early in 2011 under water (at least nominally, and thankfully only figuratively), obtaining financing to strengthen the balance sheet is much more important than waiting for the term sheet with the optimal financing cost. After all, a strong balance sheet is the best insurance to survive the cycle, and, a strong weapon to attract strong charters: charterers will think twice before chartering the vessels of financially unstable owners and jeopardize their cargo, their own business and reputation.
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