First International

Why shipping executives need a return to reality

- 19th July 2012 -

Recent statements by some of the top bosses bear little resemblance to what is actually happening in the market

WE ARE in the middle of one of the worst shipping markets in living memory and the realistic outlook is for worse to come.

So let us briefly consider a few of the most recent utterances from the heads of public shipping companies and test them against the reality of the market.

OSG chief executive Morton Arntzen led the way at Posidonia, with an extraordinary attack on his customers’ “years of subsidising the oil companies”.

It was an ill conceived statement from a company that is devoted to carrying oil and can unilaterally decide how many ships it wishes to own for this business. It made a conscious decision to keep its fleet trading in the spot markets, which was a terrible mistake that it cannot blame on the oil companies.

Mr Arntzen tried to build the largest tanker company by ship numbers and instead has succeeded in being the largest tanker company by losses (12 consecutive quarters) and has lost its shareholders 90% of their stock value, including 50% in the past 12 months.
He also stated that this was a period of golden opportunity and fortunes will be made in shipping. Not by OSG, however, as this company has no real equity value and no franchise value either.

Then Bertram Rickmers and Angeliki Frangou joined in a chorus, saying that shipowners should become shipping bankers, or ‘shankers’ as Mr Rickmers put it. They have obviously not noticed that the shipping banks have lost more billions of dollars than the shipowners and most are exiting shipping.

Ms Frangou was amazingly described as “the darling of Wall Street”, probably because of the fees they make as she regularly raises money to keep her various shipping companies afloat.

She also announced that she “doesn’t care about fuel-efficient vessels” and will only make new investments if they are economically sound. This might suggest that previous investment decisions were not economically sound, which is why her three public companies have lost an average of 40% of value in the past year.

The most extraordinary statement came from Nick Tsakos who, having announced the order of a $250m newbuilding liquefied natural gas carrier, without any employment,talked of enlarging this to a total of 10 vessels — but then told others not to order. I am sure John Angelicoussis was not listening.

Why the sudden re-emergence of LNG, with some 72 ships on order and very few with any employment contracts?

Dale Ploughman of Seanergy also begged dry cargo owners not to order any more ships while he tries to manage a fleet of overpriced vessels sold to start the company by its founding shareholder. Seanergy has lost 75% of its market value in the last year and has a balance sheet full of overvalued ships.

The man from NYK strongly disagreed with those who blamed their problems on the shipyards. “Shipowners have a responsibility to take charge of their own expansion programmes” and should not be led by shipyards.

Herbjorn Hansson, chief executive of Norwegian American Tankers and the darling of the CNBC TV network, was not quoted, but having led NAT’s share value to drop 50% in the last year, it is now borrowing to pay dividends; it is difficult to see what this company is worth.

It is a single ship-type company, having only suezmax tankers, which are especially vulnerable in today’s markets — and as it does not mark to market the ships in its balance sheet, it is difficult to find any value here.

The reality is that too many ships were ordered in the boom, with little regard for specification, little or no construction supervision and no contracted employment.

We now have the highest percentage ever of wet and dry ships trading in the spot markets, which means the sale and purchase markets establish ship values without any future charter revenues active or projected — except, of course, in Germany.

Now the industry is facing the effects of the Sanko bankruptcy, which caused widespread problems by reason of its large chartered-in fleet. The effect on the secondhand S&P markets has been a sharp decline in prices and little or no activity from buyers.
There is undoubtedly more to come, as the freight markets look to remain at levels that allow little or nothing for any debt service and the number of shipping banks actively looking at new business is virtually zero.

The US is likely to stumble into another recession whoever wins the November election and it remains to be seen which candidate offers the best plan for recovery. The US will, however, dramatically expand its own energy supplies of oil and gas, reduce its crude oil imports and become an exporter of LNG.

Europe is a complete mess, as it remains confused with the aims and objectives of the European Union and the total failure of the euro group to manage the economies of its members.

The German solution of more debt and drastic austerity programmes for the poorer euro nations will not work, as after all it would not work in Germany either.

The banks must write off the bad loans to Greece, Spain, Italy, the Irish Republic and Portugal and let them stimulate their own economic recoveries.

Banks are replaceable, but national governments are not — except through the democratic decisions of their own populations.

China caused the boom in shipping 10 years ago and is now going through its own growing pains as it slows its economy and digests what it has created under a new 10-year government that will come into power next year.

The Chinese Exim Bank was at Posidonia trying to lend $1bn to owners to order ships in Chinese yards, but with little success. The process is long and complicated and is not cheap, unless you fix the ships to Chinese charterers — but their rates are not good either, and some may well join the bankruptcy club.

Finally, the International Monetary Fund has stated that it sees much slower growth over the next few years, adding to the gloomy outlook.

Shipping must look at the roots of its markets and shrink activities to serve the reduced demand from its customers.

« back to Commentary