14-06-2016

“Dry Bulk Shipping-What Went Wrong and The Key Learnings” Capt. S. R. Patnaik, Managing Director, International Shipping and Logistics

SRP

How long will this recession last? Is this the worst recession ever? Will shipping continue to attract investors? All of these and other vital questions were raised and answered by Capt. S.R Patnaik, Managing Director, International Shipping and Logistics, FZE in his talk on “Dry Bulk Shipping-What Went Wrong and The Key Learnings” in The India Dry Bulk Cargo Summit 2016 organized by The Shipping Tribune where he contributed as one of the respected speakers. He talked about issues of concern, the history and the cycles in The shipping industry and much more,

“All of us here I think are from the Dry Cargo Industry and we are all facing tough market conditions and most of us know the reason is the huge supply and the demand slowly coming down. But what is really intriguing to know is that the way the volatility has been especially in the BDI going from 11,700 to 90 or the Brent going 100 to 29 or the commodity prices that fluctuated so hugely. So, this is something that has been bothering me which I am really surprised to know that how we could have such huge volatility in the Shipping market or the commodity prices or the bunker prices.

But these facts are already known to us, we know what is really going wrong, there is a huge supply side growth and the demand is flat but for us in this market we need to sort of consolidate our position, plan our strategies well, learn from mistakes which many of us have committed and plan well so that we can take the next upturn and face it boldly.

Before I start, a disclaimer: I have expressed my views and opinions in this presentation which you can take reference to but don’t use it for any of your business decisions or investment decisions.

We all have similar questions running in our mind: How long will this recession last? Is this the worst recession ever? Will the recovery be long or short lived? Is this recession any different from previous ones? How much can we rely on predictions and marketing diligence? What could be the possible reasons for the current downturn? Is it China? Is it the world economy? Is it oversupply or poor demand? Will shipping continue to attract investors?

So to analyze this it is important that we see the historical perspective of Shipping, how the shipping has evolved over centuries as you know Dry Cargo Shipping is almost 300 years old and it has got a very rich past and it has withered many storms, and how different is this storm that we are currently going through from the others is what we’re going to analyze.

The Sailing Ship Era was from 1741 to 1869 which is almost 130 years, we then had The Liner & Tramp Era from 1860 to 1945 which is almost 80 years where you had the small ships, liner ships and the container ships followed by The Bulk Shipping Era, the one which is currently going on since 1945 which is almost 70 years.

We’ll focus more on the Bulk Shipping Era which was from the 1945 onwards, Shipping has been a cyclical industry throughout, what we’ll do is focus on the various cycle it has gone through and see how this cycle is so different from the previous ones.

As you can see in the graph below, there is a distinct difference between what we saw Pre 1970 and Post 1970. Pre 1970, the volatility was less, the size of ships were less, there was restricted trade, hence you see the ups and downs are not so much. Post 1970s the volatilities are quite pronounced, you can see more picks and drops, primarily because we have bigger ships which means more volatility and the volatility Post 1970 has been primarily because of economical reasons. We had the worst recession from 1982 to 1986, something similar to what we are facing now, in 1997 we had the Asian crisis, in 2001 we had the Dot Com crisis and in 2009 we had the Global crisis which we are currently facing. But if you consider Pre 1970, we are more Political, we had the Korean War, the Suez Canal Closure, the 1971 oil crisis. So, there is a distinct difference between the volatility we faced Pre 1970 and Post 1970.

However, the fact is that you have to really go back to see that 1945 to 2016, the nine cycles in the span of 70 years averaging to about 7-8 years. You can see long peaks from 1988 to 1997 and again from 2003 to 2012 of nine years, here there is a trend. Severe recessions after 1930s which again were huge recessions such as the one from 1958 to 1964 and 1982 to 1987 and from 2012 to 2016. If you see there is a trend of repetitive severe depression every 25 to 30 years and if we go by that then the market should improve by 2019 and the span of each long peak has been nine years and you have the cycle repeating every seven to eight years.

In the graph below it visible that from 1970 to 2016, the peaks have been hovering around 10,000 to 15,000 dollars for a handymax size vessel and the lows have been close to 5,000 dollars. The peak we had in 2004 to 2008 which is abnormal and we don’t know whether that will happen again or not, if we were to take that out, then you see how the pattern has been, the peaks have been generally in line and the lows have remained in the region around 5000 dollars. With what I said earlier, if the market has to recover by 2019 we shouldn’t expect a huge recovery thereafter, we should be hovering around 15,000 to 20,000 dollars and it should span for a slightly longer duration for about eight to nine years and we should not fall into the same kind of depression that we are in for at least the next 25 to 30 years, as per my readings.

The major takeaways from this is that,

  • The shipping cycle definitely exists driven by supply and demand, the main variables being the economic conditions, trade growth, ordering and scrapping.
  • The cycles are irregular and episodic, ‘episodic’ due to wars or severe fall due to economic recession, but the cycles are there and they will continue to be there.
  • Short cycles due to political reasons and long cycles due to economic reasons, cycles due to political reasons are generally short spanned whereas if it is synchronized with economical recession it is for longer durations which we are seeing currently.
  • It is good to have short cycles, as volatility is proportional to risk. If you have volatility there is risk and risk is required for any business. Therefore, short cycles are favorable to shipping business & long cycles are detrimental.
  • Predicting cycles and timing of changes is difficult, one should never predict although I have said that we hope that the market will recover from the past analysis by 2019 it’s going to span for nine years, we can have the next recession after the next 25 to 30 years but these are just somethings that we should keep in the back of our mind while planning our strategy but one should never go by the predictions that are given. I remember in 2005-2006, a very reputed publication had predicted that China was going to grow at 14% for the next 10 years. People have gone and given these predictions to the banks hugely leveraged on the investments, ships have been ordered like nobody’s business and we have what we see today. So, banks have also not done the due diligence they are supposed to do in accepting an investment proposal. One should go by the fundamentals of shipping not purely by market reports.

Is Shipping a good business?

To me shipping is definitely a good business, it has got a glorious past of three centuries, it’s time tested, people have benefitted out of this business and it will continue to remain the cheapest mode of transportation, the demand is going to be there.

It is the lead indicator of global economy, all of us know that with the fluctuations of freight trades it tells us how the economy is going to behave, it gives you the fore warning sometimes. To me, Shipping is a perfect market, with highly international business, very competitive and compliments the global trade and global trade is linked to global economy.

Returns can be good if managed well, one should not be too nervous. I was in Greece recently, and I don’t see the kind of nervousness I see here, they’re all smiling, the shipping companies have been there for generations, they are sitting on huge cash, ready to invest, they are investing and they are quite bullish about the next upturn. So, I think one should have a lot of confidence in this business, this is a business which has been there and is time tested and will remain forever.

Shipping has to be treated as a transport business, it should not be treated as a commodity. What has happened off late as you’ve seen, the equity funds, the hedge funds, various financial institutions, they’ve gone about investing in ships in such a huge manner that they have forgotten that this is a business which is primarily a transport business. So, they cannot expect to have phenomenal returns like 20% to 30% returns, you should be happy with a return of 6% to 7% in the long run. If these fundamentals will be clear in the mind, people will like this business and will continue to remain in it.

Who should be in the Shipping business?

Shipping is a highly passionate business, it cannot be run by banks or other people who do not know the business. You should like the business to be in it, just like in other businesses, if you are in trading you should remain in trading and see how the leverage is there. But what we see is that lot of people from outside have come into Shipping as they feel it’s a huge cash cow and they can make a huge amount of money and then skip when they feel it is not paying good money.

It’s a highly techno commercial business, highly international business, you have to manage your risks well, if you manage your risks well and if you know this business well you can definitely make money out of it.

The ability to look at the business in a long term horizon, again is very important in any business, you have to remain here for cycles after cycles. As you can see companies like, SCI has been here since 1961, GESCO from 1948, APJs from 1948, NYK from 1885, but there are many companies which have just erupted for tax reasons, many companies in recent past came  up because the government came up with a tax scheme, they came up and then disappeared after five to seven years. But companies who are there for long, they definitely have taken value from this business.

You should be willing to invest and exit in the right time, timing is a very important thing. You should know when to enter and when to exit in respect to investment but many companies have seen that what they have not earned from chartering returns, they have earned much more by purely timing it well.

He also had some key messages for the investors which are summarized in the following,

  • Ship investments should not be done purely on the basis of market intelligence or forecasts.
  • Ship owners should have a diversified portfolio- Dry, Liquid, Gas, Container etc.
  • Buying & selling, taking benefit of the volatility of the market.
  • Preserve sufficient cash for the bad days.
  • Risk Management is the key to success.
  • Selection & retention of right talent ashore and on-board.

He concluded his talk with some reassurance for The Shipping Industry, “There is no real need to panic, this is like any other cycle we’ve seen in the past, invest wisely, this is the time to invest. If you decide to be in this business, be there for long, only then can you take benefit of it. Do not look at this business as a quick money spinner.”

Source: Kavita Mishra / TST Newsdesk 

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