URSABLOG: Game Changing

A few years ago I got myself into trouble with the World Maritime University (WMU). It is not the first time I have upset the academic world, and it probably won’t be the last. The University of Piraeus had organised a seminar in co-operation with the WMU, and I was giving a presentation as a ‘real life shipbroker’ rather than an academic. The presentation preceding mine was a dreadnought of statistics and theory, but I had the markets on my side; after all this was in 2016, in the midst of a terrible shipping recession. My basic premise was that whilst economics can explain, in limited ways, why things have happened, there is far too much going on in the markets for the players – buyers, sellers, brokers, bankers – to look on coldly before pressing the button wisely and profitably. The proof was simple: it has yet to happen, and the probability of it ever happening is infinitesimal, because that is not how markets work.

The process of buying and selling ships is not simple, and the sale and purchase market is not a ship supermarket. All ships are different, in specification, size and condition, and annoyingly they sail from one place to another where freight market conditions can be drastically different. You cannot just walk into a shipbrokers’ office and ask to buy a ten year old Japanese built kamsarmax bulk carrier, and walk out a couple of hours later with a signed, binding Memorandum of Agreement, unless that is you are willing to pay two or three million above the market. If you are willing to do that, I will of course do my best; you can find my contact details below.

But getting the best deal for you in current market conditions means stepping off the touchline and onto the pitch, i.e. becoming a player. By the way, becoming a player means you will start affecting market conditions, however slightly, as you engage in the process. Sometimes, you will make the market by doing the best deal out there at the time, a deal that will make other players point and say: “There’s a deal that I would have/should have done!” And you remain in the spotlight as the ‘last done’ until the next deal comes along. Maybe you will catch the top or the bottom of the market, but by definition only one deal can do that, and whilst every player wants to score the winning goal, it is not the sole reason for them playing.

Market players are not disciplined robots but human beings, and psychology and sentiment have just as much part to play as GDP, FFAs and all the other dubious signposts that players use to justify their decisions. And as we are fully aware at the moment, no-one can see into the future. Ceteris paribus is not a planet that any of us live on: the air is too thin, and it’s extremely boring, but maritime economics thrives there because, from up there it can look down on history, and the why is distilled into numbers, patterns and graphs.

Every once in a while, the University of Piraeus and the Athens University of Business and Economics invite me to spend a few hours with their Master’s students. I like playing a game, or rather conducting a workshop, on shipping investment: I divide them into groups of about five or six persons, appoint a spokesperson, and give them a series of scenarios to see how they get on. It is real data, and I even give them a glimpse of the future before we set off. The point of the exercise is to show how competition, psychology, risk appetite, personality and just plain noise can drive the decision-making process. And as we know, the decisions players make affect the market. And a new bit of information about an event or a deal, even though it has already happened, will change market perceptions immediately. It’s great fun and very instructive.

This week there have been two sales of supramax bulk carriers which have done just that. First to come to my attention was the Japanese controlled Royal Epic (Built 2008, Mitsui, Japan) which was committed in the region of US$ 7.8 mill. This marks - as far as I am concerned - a drop of at least 20% since two months ago. The second was that of the smaller Taurus Two (built 2006 Dayang, China) at around US$ 4.8 mill. This is an even larger fall in value, over a shorter period.

No doubt in this weeks’ brokers market reports there will be a plethora of ‘reasons’ why these sales are aberrations: the sellers wanted to sell, they wanted delivery quickly, there was something wrong with the ships, the bank was pushing, coronavirus difficulties and so on. My investigations have revealed however that there were no special reasons for the prices being low: they were willing buyers and willing sellers, and the price and the terms were concluded in the current market conditions reflecting both the risks, appetites, liabilities and hopes of both parties. If you are one of those offering or trying to sell who say “why would you sell/buy in today’s market?” then you should probably not even be on the pitch.

For me however these sales are a welcome dose of clarity for my market, as these deals are now ‘last done’ and, rather than fumbling around blindly in the fog, we have a marker to guide us. If sellers don’t accept these prices, then they cease to be realistic sellers at least until the market changes or they find a buyer willing to agree with them. And there are now a lot of fresh buyers (if the number of purchase enquiries going around are anything to go by) looking for similar priced opportunities. The problem is that there are very few ships – if any - of a similar age and size as Royal Epic willing to take what the market will pay, at least for now. There are more ships similar to Taurus Two available for sale, but the owners will have to decide whether to follow the game or leave the pitch; certainly there are quite a few owners I know of that just don’t want to play anymore.

My favourite Hemingway business-related passage from The Sun Also Rises:

“How did you go bankrupt?” Bill asked.

“Two ways,” Mike said. “Gradually and then suddenly.”

Markets move gradually and then suddenly, usually when a new bit of information becomes apparent. All the above happened in the space of a few days and now the market feels a completely different place; it has become unblocked, at least for supramaxes.

One of the most important, and irritating, questions we can ask is why? But the question can have two different meanings:

1)     What for? (why did you buy me another drink when I didn’t ask for it?)

2)     How come? (why does alcohol make me feel more relaxed and friendly?)

What were the reasons for the owners of Royal Epic selling at such a low price?

is very different from:

How come Royal Epic was sold at such a low price?

The first question is limited and superficial and only gets half of the story. The second question captures the wider picture, and requires more context, history and understanding.

I think what brought the ire of the President of the World Maritime University down on my head was my insistence on the ‘how come?’ I was - perhaps impertinently - suggesting that numbers are not cool diamonds mined from a sacrosanct databases on planet Ceteris paribus, but have been forged in the fires of human nature, with all the usual elements of bravery, courage, intelligence, veniality, stupidity, timidity, lust, wisdom and everything else that informs our decision making process.

What the two sales this week also show me however is something else, and something very valuable: buyers and sellers have ceased to see the coronavirus as a temporary problem, but a serious world and market changing event. In both cases the sellers accepted that they had to accept what was on the table was all there was, because the future is so unpredictable that the buyers (or any other buyers for that matter) were not willing to risk paying any more. The ‘how come’ today is informed by this new environment, at least until something new comes along to change it again. Accepting this market reality is preferable to complaining about ‘what did they do that for?’ Dwelling too long on that question may prove even more harmful.

Simon Ward

www.ursashipbrokers.com