First International

Elephant in the room

Shipping is not a casino where the chips are ships

The market correction has begun, and it will catch out all those owners and operators who failed to see shipping as a long-term game, with transportation at its core. Time has been called for those still at the casino
When the going gets tough, observers fall into two camps. The analysts lapse into ‘told-you-so’ mode, and graph out long-term trends that reveal a market correction had been on the cards for several months.
Meanwhile, the journalists are dazzled by the numbers, comparing last done with previous record lows. The headlines are the story, and the story is changing from hour to hour.

The events of the past week will be viewed in hindsight as a milestone for the shipping industry, not so much because shipping shares plunged in the US after President Bush’s bailout was rejected, but because lingering doubts about the wisdom of carrying huge debt were confirmed. A major correction is imminent and inevitable, says banker Paul Slater. That much is clear, but he will hammer down some home truths this week at a ship finance conference in Athens.

In essence, Slater asks the question that has been missing from all the conferences over all the years of the past decade: what is shipping for? His answer – that shipping is a long-term transportation business – should be picked apart word by word.
Long-term players do what they can to cover their risk – they are unfazed by weekly market movements. They plan for the lifetime of the newbuilding and beyond. Transportation specialists keep up a constant conversation with industrial shippers: they care about the cargo, they seek ways to improve loading and discharge. Business is about much more than daily share price, dividend yield and short-term return on investment. It’s about understanding the underlying factors that drive companies forward, and avoiding those factors that only look good on paper.

Shipping is not a casino, adds Slater, although that’s precisely how the industry has been run for the past decade. Dry bulk freight rates that started to climb in early 2006 and hit dizzy peaks in mid-2008 were driven by a Chinese economy that could not possibly have continued to suck in raw materials for ever.

There had to be a correction, and ship owners who placed orders for new tonnage for delivery three years away were staking their futures on an unrealistic forecast. These owners are now looking over the precipice into a financial black hole.
Gamblers know their luck will change one day; sadly, they rarely cash in before it’s too late. Owners left holding newbuilding contracts should make sure ‘long-term transportation’ appears somewhere in the mission statement.

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