URSABLOG: Market Reports

 

If I was to write a standard ship sale and purchase market report for the dry market today, God forbid, it would probably go something like this:

 

The Baltic Dry Index continues to hit historic recent highs generating lots of buying interest from players as they come back from their holidays keen to take advantage of increased freight rates and all-round optimism. Inspections of likely candidates are on the rise, and we expect to see higher levels as this enthusiasm translates into better numbers bid as buyers compete for the ships not yet sold. Buyers are buoyed by the fact that despite fears of increasing tensions, politically and economically, the market remains strong. The newbuilding orderbook is at historic lows, so the fundamentals look good, and owners who are looking to offload tonnage can do so in the knowledge that they can book a profit, especially those who bought at the right time. We expect a busy last quarter ahead.

 

Go and look at any of the market reports this week – or any other week for that matter - and you will see variations of this. It appears plausible, because on the face of it, it has the ring of truth: the BDI is looking good, the orderbook is low, the world keeps turning despite Trump, Brexit and trade wars, and people are coming back off their holidays looking for something to do. The fact that those people are mostly sale and purchase brokers trying to generate some business for a few deals that will deliver before the end of the year is besides the point.

 

Thankfully I don’t have to write stuff like this because I have the rare luxury of writing what I really think. In my experience of the last week or so - which I do not for one moment pretend to cover all markets at all times - the sale and purchase market for dry cargo bulk carriers is not firing on all cylinders.

 

The problem appears to be the freight market. My impression is that, yes, the market is on fire, but it’s a flash in the pan. Numbers for ships open, particularly in the Atlantic, are very strong, but no-one thinks it will last. So owners of vessels have less reason to press the button on disposing vessels whilst they can still earn good money from the freight market. Their price ideas have hardened, if not increased, and they feel more confident of brushing aside offers which don’t meet their expectations. Buyers on the other hand do not see why they should bid against themselves to secure tonnage when the freight market does not look great in 2020, which is when most of them will start trading in earnest once they deliver to their new owners.

 

Explanations for the current hot freight market abound. Shipyards full of ships fitting scrubbers or ballast water treatment systems do not bear much scrutiny. The large amount of ships passing their second special surveys (built 2009/2010 etc) also seems to be clutching at straws somewhat. My best explanation – that tonne-mile demand has increased as the fleet has been stretched out of position by strong seasonal demand – has good things going for it, but is hard to prove without some serious data crunching, for which I don’t have the time or tools to do. But it may also explain the reluctance of charterers to fix for much longer than six months.

 

The Freight Forward Agreement market seems to agree. From what I can gather, everything is rosy this year, next year we will, if not drive off a cliff, but at least return to earth with a bump. But what do I know? Indeed what does the FFA market know? A market that trades mainly amongst itself, whose traders appear to be dominated by the charterers themselves does not necessarily give an unbiased picture. I remain to be convinced that the numbers alone speak the truth; it is those doing the trades, and their motivations, that create the contracts. And a contract after all is just an agreement between two parties with some money attached.

 

So what is going to happen? Well nobody knows of course, but those buying and selling ships, i.e. me, should have an opinion. So here goes.

 

A buyer will invest money in a vessel in broadly two circumstances:

 

a)      they think they can make a profit because the freight market will bring them sufficient returns, or

 

b)     because they will be able to sell the vessel at a higher price at a later date.

 

Preferably both.

 

An owner will sell a ship in broadly two circumstances:

 

a)     because they have made a profit on their investment by trading her, or will do so when they sell; or

 

b)     because they cannot see a point in the future where their investment will return substantially more returns other than what selling the vessel now will bring.

 

Obviously there are many other different reasons to buy and sell, and exponentially more variations on a theme, but then we are in the areas of strategy, philosophy, psychology and even tragi-comedy. But let’s stick with the above basic summary for the minute.

 

If there are more sellers than buyers, and prices are under pressure to fall, then it appears that the majority of the market feels that the future returns will be worse than today’s. If there are more buyers than sellers, and prices are rising, then the majority of the market feels that future returns will be better than today. Please note I am not saying anything definitive about the predictive quality of these opinions, just the nature of them.

 

So at present, from my corner of the market, it appears that the majority of the people I speak to are sellers rather than buyers. The buyers that I do have are cautious and in no hurry. I am not sure if my brother and sister brokers agree with me, but I suspect they do. What does this therefore mean about the future of the dry bulk carrier market? Nothing, of course.

 

So rather than just waffle on vaguely in an enthusiastic and optimistic tone, like most market reports, let me tell you that much as I would like to buy and sell as many ships as I can, either in the near term, medium term or long term, there is no compelling reason to either buy or sell now, unless buyers and sellers have specific reasons to do so. Why? Because as an owner friend said to me over a glass of wine yesterday evening:

 

“The horizon is a little foggy.”

 

But this points back to the basic fact of shipowning life: investment is risky. Whether or not you can bear the risk is the starting point of many successful investments, not whether or not you think you will make money. This, although apparently counterintuitive, seems sensible to me, and gives me the opportunity to make my one investment recommendation of the blog:

 

If prices are subdued in the face of a rising freight market, the risk is therefore less, so, subject to everything else (type, age, size, quality and condition of the vessel) now may be a good to time to buy, especially if not many others are.

 

One of the things about market reports is that a lot of effort is put into them to get the message absolutely right. Back in the day when I was writing them, writing 200 words took longer than the blogs I write today because I wanted to fine tune the message, i.e. that now was a good time to buyandsell. This was vanity of course; no-one reads market reports in any great detail, they all say the same thing, most owners have access to many different reports and forget them almost immediately if they read them at all.

 

The same is probably true of Ursablog too, except that in writing what I really think, at greater length admittedly, I usually figure out what I think by actually writing it. So there - as they used to say on the back page of the Clarksons Shipping Intelligence Weekly - you have it. We can’t see into the future very well, so it’s a good time to invest if you can afford it. Hardly breaking news, but you read it here first.

 

Simon Ward