URSABLOG: Dry Choices

Sometimes it is only in conversations that you can really clarify what you really mean, and then express what you really feel. It helps when you are having conversations with people of quality, who enter the discussions in a serious effort to draw their own conclusions and act on them. Over the last week or two I have had a few really important conversations, and these have helped me do just that. A lot of the time it helps to open yourself, and test various hypotheses, and through challenging your own assumptions, and learning new things, you can reach new conclusions on how to proceed.

Now without boring you with all the conversations that have taken place in that time, I will focus on those that relate to the dry bulk market. One of the most important questions is what is going to happen in the next few months, and when is the right time to invest and divest. The success of an investment in a large and expensive asset is mainly down to timing, especially in a brutally cyclical market that lives by the rules of perfect competition, when pricing is negotiated subject to the terms and conditions of a contract in the face of differing competition. Success in shipping, and in life, is mostly down to timing. Get it right, and things go perfectly. Get it off, or wrong, then problems ensue. And as timing is based mostly on what you think could happen, you should be prepared to change your mind quickly should the facts change.

The following are three scenarios that I have developed that can be used as models to test assumptions. The first is more or less the market consensus and it goes something like this:

After Chinese New Year, the market will improve because China will more aggressively open up their economy, and de-escalate their zero-Covid restrictions. This will lead to more imports, more vigorous domestic economic activity, and may even kickstart an improvement in the housing market. There are signs of this already, as – in the media at least – a loosening of the rules seems to be unfolding. That, combining with greater hope for a soft landing in the US and other western economies, with inflation slowing down, and the rate of increases in interest rates being scaled back, should make market conditions more favourable. So the time to invest is in the next couple of months, as prices fall a little bit further, and the future comes closer, so that when the ship delivers to new owners, the freight market is already rising to greet it.

The problem with this scenario is – as you may have already spotted – that because it is the market consensus then it is already priced in. Prices have fallen, but seem less likely to fall much further because the future is already promising. The number of offers seen recently for popular sizes and types of ship bear this out. None of the offers are surprising particularly on the upside (except perhaps for a couple of modern ECO type ships), but the volume of offers in themselves shows that there is an interest in investing in something, and sellers are more likely to hold out for more to tempt the reluctant to make the jump. The other problem with this scenario is – despite the efficient market hypothesis, or the wisdom of crowds – that it rarely works out the way it is supposed to.

The second scenario is that despite the received wisdom, the dry market does not improve after the Chinese New Year, or any time soon after that. In that event, the palpable hope that has since become established fact is proven misguided, and positive market sentiment vanishes into thin air. At this point the freight market will really collapse, and prices will fall through the floor, as the markets find out that the loosening up of Chinese Covid restrictions was cosmetic, and only for the public’s consumption and real limits on movement and activity remain in place. I suspect, for the record, that this is what is happening at the moment. There is no freedom of international travel – inbound or outbound – and whilst central guidelines may be in the process of being modified, it is the local authorities that have to carry the can if infections increase out of hand.

Even if China does properly open up, such will be the rate of infection and illness that there is a possibility that severe restrictions will have to be reimposed, if only to keep the death rate down. Viewed through the prism of CCP social control, where the Party has to prove that they are acting in the best interests of all the people, this is easily done. But against the backdrop of increasing social unrest and disgruntlement it is a very risky undertaking. Even in China – despite Xi Jinping’s exhortation of carrying on the struggle for the better of all – the peoples’ patience is growing thin, and the third term of the President and the enshrinement of Xi Jinping thought in the constitution counts for little as painful solitary life drags on.

In this second scenario, especially if the financial markets realise that the end of interest rises is still, and stubbornly, far away until inflation is brought resolutely under control, which will mean a further dampening of the service economies of the west, buyers will leave the market at exactly the same time as sellers try and cash in on rapidly fading values, which would of course drive the prices down further. This ‘catching a falling knife’ is supposedly only for the brave, who have the confidence to pull it off without lacerating their fingers in the process. This is an illusion of course, because already the prices are lower and future upswings become closer. And in general terms, there is still not a lack of cargoes to go around in most places of the world.

This is a scenario that I favour as it happens, but I admit that buying in a falling market needs a lot of nerve, if not outright bravado. But history teaches us that buying a ship at lower prices in a falling market leads to a better overall result than chasing a ship near the top of a fully confident market. On both cases of course, there are few – if any, let’s be clear – that can see into the future. If this is the case, investors should be prepared to buy the ship of their choice once prices fall to acceptable levels, but also be prepared to be both patient as prices fall further and decisive when the market shows eventual signs of improvement.

The third scenario is that actually the world has already absorbed all the shocks of the last year. The CCP in its quest for survival shows an equal inconsideration for human life as it does for human rights, and lets the die fall – and its citizens – where they may. Mr Putin still tries to wreak havoc on the citizens of Ukraine in a further attempt to convince them that they are really Russian, but Russia itself is eventually dragged to the negotiating table with or without him. The financial markets of the west will have proven that have really tamed hyperinflation, and further interest rate rises will not carry the same significance as they have done, becoming less frequent until they fade from view. The worst of the wildfire has been tamed, and the rest is just about stamping out random outbreaks. In this case, buy now. Or even yesterday.

These are all stories that could happen, and some of these may be more convincing to you – or confirm your existing bias – than others. However, one thing is clear. All of these scenario mean that those willing to buy a ship should be ready, and already be investigating appropriate market candidates properly by checking details, inspecting if not actually offering for them. For those not convinced by my scenarios, or have different ones to suggest – please feel free to share them with me – or even have enough ships to be getting on with, then better to keep a more distant watch and, yes, wait and see.

I offer these scenarios only as testing points of your own views. My preference – scenario number two – carries no real weight except that it aligns with my point of view and feelings, after discussing these varying possibilities with sensible and serious people. I can be, and indeed often am, wrong. But as John Maynard Keynes observed, he changed his mind when the facts changed, and was a very successful investor to boot. I do not have his mind, or his decisiveness, but I can only try to follow his advice and bring you the appropriate opportunities when they become available. All the scenarios contain traps if they are clung to too rigidly, but as the risk is in the timing more than anything else, then that is where the focus needs to be. Wait and see – however frustrating for the broker involved – is perhaps not so unwise after all as long as the waiting does not breed indecisiveness, or inattention to the opportunities available. As in shipping, as in life.?

Simon Ward

www.ursashipbrokers.gr