URSABLOG: A Sentimental Education

I was talking to a broker friend of mine earlier this week, and she was not happy.

“Sellers have gone crazy!” she said. I agreed that prices were rising and suggested that sentiment was driving it. She curtly cut me off: “I don’t want to hear about sentiment anymore.” Failing to start a discussion about sentiment with her, perhaps I can share some thoughts with you.

Sentiment is hard to define, and harder to control. It is how someone feels about something and the source of that feeling can vary. It can come from some new information, an unrelated event, a conversation with someone or some money burning a hole in someone’s pocket. It has peaks and troughs, the flows can run for hours or years, it leads otherwise sensible people to do stupid things. It can hide danger, and amplify risk taking. It may come from the wisdom of crowds, or the madness of the mob. Once unleashed it is hard to control. It overshoots on the way up, and overcorrects on the way down. It makes markets, literally, an emotional rollercoaster.

A friend of mine who used to work in the research department of large London shipbroking firm told me that every day her boss told her to get a measure of the sentiment - firm, very firm, stable, soft, weak etc – from the different desks in the company. It was a helpful way for them to understand the moods of the market without actually being able to calculate the effect on the markets in terms of numbers. Novelists, poets, artists and playwrights amongst others have been trying to express, create and analyse emotions for millennia; what chance does a shipbroking company, however large, in measuring it? We can only observe the effects and act accordingly.

Imagine the following scenario. The majority of sales of ships in a certain sector and age in the dry bulk carrier market are driven by a dominant buyer who has access to investors from the capital markets. Every purchase they make is better than last done, and is substantially more than the competition is willing to pay. It may be that the price is higher because the buyers need a day or two to get the approval from their investors, and this is the premium sellers insist on to get the words ‘Subject Buyers BoD Approval’ inserted into the recap. Every deal the buyer does therefore is higher than the last, and the investors behind the deal are encouraged because they see the value of their pre-existing assets increase. Consequently their risk appetite increases, and they pay less attention to the freight market, which is not doing that much really, and more to secondhand values, which have become in turn a self-fulfilling prophecy.

Other owners of similar vessels in the market see the reported sales, and demand more for their ships. After all, the colour of the money of the dominant buyer is no different from that of more considered buyers and, after all, money talks. They increase their asking ideas. Other owners hear of this, and now consider selling their vessels which are not in the market at present, and they become available with sellers’ ideas at these new levels. This becomes the ‘market’.

Whether other buyers find these prices attractive, or even feasible, does not really matter, but when the dominant buyer enters the market again they find that they have to offer more than the ‘market’ in order to secure a vessel with their ‘Buyers’ BoD Approval’ inserted in the recap. This new level becomes the new ‘market’. It is like a positive feedback loop, where the values increase on the back of what the ‘best’ buyer is willing to pay, and how much more money they can raise from the capital markets, and what extra they have to pay for the privilege of spending it.

Is this sentiment? It’s hard to say. The money coming from outside shipping is also of the same colour as money coming from inside shipping, but is reacting to different stimuli. They see the value of their investments rising and are keen for repeat deals. It may turn out well, and the expected increase in the freight market may make all this irrelevant in a week or two’s time, if prices improve overall. It could all end up in a heap on the floor. It doesn’t really matter. It is the market reacting to varying forces at play at any particular time, sentiment included.

Sentiment is not a sweeping force that drives all before it. It has its limits. It can change people’s minds, and make people more or less impulsive, or more or less risk averse. It does change deals however, and quickly. It can nudge a cautious buyer into concluding a deal quickly, or lead another buyer to outrageously outbid another to get the ship. It does this because the ship sale and purchase market can rely only on sentiment at the time of negotiation. The freight market at the time may be a factor in influencing these emotions, but it is the freight market in one or two months’ time that will define whether the deal was a prudent one. (And before you start, the FFA market is not infallible: it represents only the opinion of the buyers and sellers of a forward derivative instrument, expressed now.) No one can see into the future. Often the reason to conclude a sale comes down to how the buyers and sellers feel about the terms, price, and each other. The contract is simply an agreement, with a price attached, of that sentiment at that time.

In any case buying a ship is serious multi-million dollar work and, contrary to many of my brother and sister brokers’ opinions,

therefore is not by any to be enterprised, nor taken in hand, unadvisedly, lightly, or wantonly, to satisfy men's carnal lusts and appetites, like brute beasts that have no understanding; but reverently, discreetly, advisedly, soberly

to rather irreverently quote the Church of England’s marriage vows. We should examine our feelings carefully, and decide whether we are buying something because we want something to happen, or because we genuinely think it will. Brokers, whose role is to close the deal, not be a moral invigilator, can nonetheless advise what they, see, hear, and think.

In early January, the scrap price for ships delivering into Bangladesh rose from US$ 420 per light displacement ton (ldt) to US$ 450, and then a couple of days later up to US$ 480 per ldt before crashing down almost as quickly back down to US$ 420 again. Sellers of further trading vessels quickly became sellers of ships for recycling, before reverting to norm within the space of ten days. Some sellers were quick enough to take advantage, most were waiting for prices to rise further and were caught out by the speed of the decline. To put this is some context, an old panamax in the Indian Ocean saw its value rise from US$ 4.2 million to US$ 4.5 million, and then US$ 4.8 mill, before falling back.

I asked some of my friends in the recycling industry why this price increase had occurred, and only in Bangladesh, after some mumbling about the demand for commodities rising, and steel demand increasing, most said it was a rise in sentiment which then evaporated. So it seems that sentiment is a word we use when things are done – in shipping and I also suspect in life – without fully understanding why. The effects were real enough however.

An old friend of mine once told me his opinion of which deals will have easy deliveries and which ones will be difficult:

“If both parties feel happy about the deal, it is likely that they have missed something, and there is trouble ahead. If one party is a lot happier than the other, there is trouble ahead, because the unhappy one will try and get their own back. If both parties feel unhappy about the deal that they have agreed, then it is likely the delivery will be trouble-free: they have both been pushed out of their comfort zones and agreed to a price and terms that they would otherwise have rather not. As such they knowingly enter into an agreement not feeling good, but knowing all too well what they have agreed. “

I think that there is a lot of wisdom in this. Sentiment or emotions are – in many stages in our lives – the only tools we can use in reaching a final decision. You will see now why I included the marriage vows. My broker friend, frustrated with sentiment, was right to be suspicious of its role, but in shipping, as in life, it is the water that we swim in, and we should learn perhaps that if we cannot swim against the tide, we should not entirely give ourselves up to it, otherwise we will indeed be swept away against our better judgement.

Simon Ward

www.ursashipbrokers.gr