URSABLOG: Dry Eyes

Before I go any further I need to get one thing off my chest. I am sick and tired of hearing the following words, and I will not allow them to pass my lips:

“crazy, incredible, insane, unbelievable, out of control, ridiculous” or any substitutes, synonyms or antonyms thereof.

Even though they may come to mind readily I do not recommend you succumb to the temptation of actually uttering them. They are not helpful, and will stop you seeing the market for what it is really doing.

As the freight, FFA and ship sale and purchase markets continue to improve – at least if you are an owner – language becomes all important. We need a story to make sense of what is happening, this is what human beings do, but – welcome as the money pouring into dry bulk shipping is, especially after many long hungry years – as Public Enemy would say, ‘don’t believe the hype’. And by the way, if it hasn’t happened to you before it doesn’t mean it’s unprecedented, it just hasn’t happened to you before.

It’s hard to explain to those outside our little bubble of dry bulk shipping, and even to some within it, what is going on at the moment. But imagine it like this:

A buyer goes into a shop and wants to buy a television. He looks around, discusses things with the sales person there, and goes home to think about it, having taken notes of which ones are interesting. He goes into the shop the next day, having made his decision, but is told the price has gone up. Disgusted, he leaves the shop and goes to look at the other shops in the neighbourhood, but notices that they have all put their prices up too. He goes back to the original shop to pay more, but the original shop doesn’t want to deal with him because they don’t think he is a serious buyer.

He decides to buy a radio instead, but even taking only two hours to do so some research means that they are all sold out once he has decided. He tries to place one on order, but is told that the earliest delivery is in six months times, and he has to pay up front for it now.

He is frustrated, and depressed, but still wants something to communicate with the outside world. To cut a long story short, he ends up with two walkie-talkies, with only one handset working, and pays a price four times as much than he would have paid for the television if he had agreed and paid up to start off with.

To put it in a shipping context:

-         The price for a ten year old TESS 58 supramax fresh out of drydock is now around US$ 18 mill. To buy the same ship six months ago you would have paid US$ 12 mill. This is an increase in value of 50%. The one year timecharter rate for the same ship in January was US$ 11,500 per day, it is now around US$ 25,000 per day.

-         A ten year old 33,000 dwt handysize, built in Japan, will now cost you at least US$ 13.5 mill whereas back in January you could have picked one up for less than US$ 9 mill. We can fix this ship for you, today if you like, at US$ 21,000 per day for one year, double the amounts paid in January.

And we are talking about buying a ship, not a television, or a radio. In normal times, an inspection of the ship itself is a pre-requisite. In these – let me be careful here – fast moving times, inspections are not always possible. The best available – let us remember the continuing shadow of COVID-19 falling on all of us – is an independent inspection report commissioned by the sellers and purchased by the buyers. Leaving aside the rather dubious legal position of the buyers who having seen the report accept the vessel in the condition at the time of inspection, the due diligence is less than perfect, and the ability of the buyers to claim from sellers or inspectors in the case the ship does not meet their expectations is negligible. It’s a sellers’ market certainly, with nature helping a bit too.

So it is the buyers with a bigger risk appetite – and a bigger war chest – that have a better chance of doing a deal than those who are more conservative, and more financially challenged. Those without ships at all, or who have waited and seen for too long realise that there is no end to this in sight and need to get moving as quickly as possible.

With every deal being done at higher and higher levels, there are a number of buyers who have missed out because they did not offer enough, or misread the market, or misread the times, or simply couldn’t or wouldn’t compete. These is only ever one buyer for every ship after all. And for every ‘failed’ deal there is also a frustrated broker – or two – who is determined to be more aggressive, and forthright, and determined, the next chance they get.

And, sale and purchase not being a ship supermarket, there are very few ships being openly marketed for sale with a price being quoted, and if they are, the price is normally way too high – “it’s ridiculous” – so it is rejected, until time moves on a little bit, and the buyers realise that the price now makes sense, but by then the ship has either been sold, or the price has increased further.

I have read all the above and double checked it. These are facts, and there is no need to bring in emotional adjectives, or other hyperbole to describe what rational players are doing, or not doing, at the moment. It is without hyperbole, without flowery or exaggerating language. It represents my experience of the dry bulk market and, I suspect many others too. trying to get deals done, whether buyers, sellers, or brokers at the moment. Not being able to argue with the facts, I hope you will also be unable to challenge my interpretation. Freight rates are rising quickly, the FFA market has seen strong gains in the last few days, and prices are moving upwards impressively. There is no one to blame for this, not buyers (desperate or otherwise), or sellers (greedy or otherwise), or even brokers (aggressive or otherwise). It is a market behaving rationally in response to inputs and outputs, and in the world of perfect competition, where no-one has a large enough market share to fundamentally influence the market in their favour, this is what we should expect.

I have some sympathy for those who find themselves in difficulty because of markets moving against them, or because of bad timing, or because, well shit happens. But I know from personal – and painful – experience that shit is more likely to happen if we let ourselves be carried away by emotional language, or an overconfidence in our own ‘gut feelings’. These instinctive reactions are important, certainly, but we were born with a brain that can react almost unthinkingly – and most of the time correctly – but can also analyse, coolly and unemotionally, faced with the facts before us. We need both. The market is rising, and fast, and these are not ‘normal’ times, at least until this becomes the new normal. But even if it does, this state of affairs will not last indefinitely: it may slow down, or speed up, the only thing unlikely happen is for it to stay the same. This means that decisions are difficult. This – and I understand it is cold comfort for most – is how it is, and we should be clear eyed, and dry eyed too, about the risks, the opportunities, but most importantly, the reality of the situation. After all the hype has evaporated, it is the decisions of market players that remain, and those decisions that surprise us now will become history very quickly. And at the end of the day, another one swiftly follows. 

Simon Ward

www.ursashipbrokers.gr