URSABLOG: The Next Drink

As the weather improves, and the first shock of the global and local nature of the coronavirus recedes, many of us are looking to the other side of the crisis and what the world will look like when we re-emerge, blinking, into normal life once again. How will we know when we reach the other side? Drink of course.

China is the world’s largest market for alcoholic drinks, and as bars and restaurants are being re-opened and people, albeit cautiously, are going out again. It’s not hard to imagine the tension between drinking something long and cool amongst agreeable people and trying to keep your distance from them in the meantime. Social distancing is anathema to human beings, especially here in Greece, but we have had to adapt new habits now, and it will be interesting to see how people will behave from now on.

In China however things seem to be getting back to normal pretty quickly. Bernstein, an analyst, found that from a sample of 240 restaurants across big cities including Beijing and Shanghai 90 per cent were open, up from 63 per cent three weeks ago. More tellingly the Friday and Saturday peak dinner hour of 6-7 pm was buzzing in most restaurants, with tables full, and a long line waiting. If that is replicated on this side of the world in a few weeks’ time, then the future looks better already. It will be slow and cautious improvement to be sure, but like a good night out, long and steady. Best not to peak too soon.

The future is more obscure than ever these days of course, but looking at the values of ships we can possibly be more hopeful than most. I have long been of the opinion that, in shipping at least, the ship sale and purchase market is the best guide to current sentiment about the medium and long-term future of the market. Leaving aside tankers, enjoying the side effects of a roller-coaster ride of geopolitical gamesmanship, dry bulk carrier values are showing signs of resilience despite a very poor freight market which has been bouncing along the bottom for more than a few weeks now. When will prices begin to mirror earnings?

Well, it’s hard to know where to start, but I’ll try. Many unfamiliar with the S&P market tend to assume that prices track freight rates, albeit with a time lag. Whilst there may be some truth in this, in very general terms, there are a few other points to consider too:

-         Most market sales are done, during periods of normality at least, on a willing buyer/willing seller basis, i.e. neither of the parties are under any pressure to buy or sell, and are assumed to be, as far as we can, rational actors (incidentally this is not true when there is either an abundance of money – IPOs etc – or too little – banks calling time on an unfortunate investment for example)

-         Unlike in the freight market where the whole purpose of a ship trading in the tramp markets is to be fixed on charter, ships do not have to be bought and sold, and either the buyers or sellers are free to change their minds at any time before agreement is reached and/or subjects are lifted (spare a thought for your friendly S&P broker is this regard)

-         If there is no overwhelming pressure to buy or sell, and the bid/offer gap is too wide, then nothing will get done.

There is, at the moment at least, not much stress in the ship finance world, except in isolated cases of hangovers from 2016, if not from 2008, or slow train wrecks where the causes are not particular obvious to the outsider. There are some cases of ships being ‘definite sellers’, but that just may be a marketing line.

We also have to consider the other side of the problem, the practical implications of agreeing a sale in the time of coronavirus. When an agreement is made for a ship sale, the buyers agree to buy, and the sellers agree to sell a ship on certain terms, the most important being the time and place of delivery, and the condition of the vessel on delivery. There is usually no option for the sellers or the buyers to walk away from the deal once agreement has been reached and all subjects are lifted, at least under English Law, the jurisdiction of choice for the majority of secondhand ship sales.

Under current conditions however it is extremely hard to agree to sell and buy a ship when so many things could change which are not in either of the parties’ control. Leaving aside the difficulty of crew changes and port quarantines, other issues such as physical access to banks, lawyers, consulates and classification societies may be overcome, but not in a timely fashion. Similarly, you may have noticed that courier services like DHL and UPS are running slower than usual, presumably under pressure from more important, or at least less inessential shipments like medical supplies. This all puts the time and place element at risk. Furthermore, if the vessel is, through no fault of the sellers, not in the condition that she should be, can we be sure that there are shipyards, engineers and technicians available to do the work necessary?

This is the reason why there are so few willing buyers and willing sellers are out there at present. The only way to agree a deal that protects both buyers’ and sellers’ interests would have to give both parties the ability to walk away from the deal if it is just too difficult to complete. And this therefore isn’t an agreement to sell and an agreement to buy, it is an option that both parties have on the vessel, and a free one too. Only where a deal is too good to be true to both buyers and sellers at the same time would it be worth taking the risk, but as we know, if it’s too good to be true, it usually is.

And although there are certainly buyers, and their brokers, sniffing around for cheap deals at the moment, there is no pressure for most sellers to dispose of their vessels at present, especially at low prices. Why should they? They expect a better market to come, in fact many expect that an improvement in dry bulk freight rates will be one of the lead indicators that show the worst if over and trade is improving, and economic growth will follow soon after.

My hunch is that values have not fallen so much because there have been so few deals that have been able to be done. Once the lockdown eases, and we find windows, literally in some cases, to effect inspections, deliveries and so on then more will be done. How this will affect values remains to be seen, but on the face of things not much. Why? Because the coronavirus is both cause and effect of the poor freight market: it is so much in our faces we cannot possibly say that current market conditions have nothing to do with the coronavirus. But I am sure that if the freight market was poor and there was no coronavirus, we would, paradoxically enough, be far more fearful of the future. We know why things are bad now, therefore when the virus goes away things will obviously be better. If it was just a good old fashioned freight market slump driven by oversupply and a lack of demand, we would be far less sanguine.

My feeling from my brother and sister brokers sitting on chartering desks around the world is that there is volume of business but no tightness in the market. Charterers have the upper hand in most negotiations because the sentiment is so negative. Once things get better there will be a boom in rates as the balance of sentiment, and supply, moves in the owners’ favour.

But all this is just a longer version of what we everyone knows at the moment. These are unprecedented times, and we are, to repeat a rather tedious and overused cliché, sailing in unchartered waters. In such situations it is surely right to “wait and see”, even though these are the deadliest words an S&P broker can hear. But I would rather be clear about the risks when working on a new deal than not be able to have a drink with my clients afterwards. I hope you agree.

Simon Ward

www.ursashipbrokers.com