URSABLOG: Sharpening Pencils

I’ve always found it difficult to think of the new year starting in January. The commencement of the new school year always seems the most natural place to begin again. The end of the summer holidays, with lingering warm weather, always meant for me new challenges, new friends and new ideas. I must admit that my teenage years at school did not instill me with such unremitting joy when September 1st came around, but going to college was an improvement, even though it was mostly because I was getting away from home.

School has just started this year for me too. As a part-time lecturer at the Hellenic Management Centre, teaching students starting the programme for the Institute of Chartered Shipbrokers (ICS) Professional Qualification Examinations, I have the same sense of a fresh start, a clean whiteboard. The sale and purchase market seems to have the same feeling too; there is a buzz in the air.

The first couple of lectures that the students take with me are about the role of shipping in the world, how geography (in all its forms) is so crucial to shipping, in general laying down the foundations to build the theoretical understanding and practical knowledge the ICS deems necessary for candidates to become members. So over the last couple of weeks, as well as pointing out where things are in the world, I have been explaining the joys of supply and demand, derived demand, tonne-mile demand, and the importance of alcohol to the industry as a whole.

I was reading a book last weekend, a very short one, called Managing Oneself by Peter Drucker. Amongst other gems was the recommendation to ask the question “how do I best perform?” As a reader, listener, talker or writer? I thought about this, and the answer was, of course, it depends. I read a lot. I listen too, but more to theatre and films, although discussions with friends and clients does sharpen me up. I must admit I use this blog to write my way through various ideaz. I also find talking when I teach both clarifies things and gives me new ideas when I engage with students. They never continue to surprise me.

It was as I was teaching my way through the concepts of supply and demand, and then derived demand that I started thinking about demand in the sale and purchase market. If shipping is driven by derived demand, then I have always tended to believe that the sale and purchase market is further derived from that. For example, if there is demand for coal from Australia to China, the demand for newcastlemaxes to transport the coal is derived from that fundamental demand for coal. The demand from my clients to buy newcastlemaxes subject to all the above.

But of course that is not the only story. Shipowners do not buy newcastlemaxes to transport coal for philanthropic reasons only, determined to keep the power stations of China generating electricity and pollution. A shipowner buys a ship to make a profit. How much money they make is determined by:

-          how much they buy the ship for

-         what the freight market is like during their ownership

-         how they charter the ship and with whom

-         what finance they have

-         how much they sell the ship for

Throw in a few other variables, such as good or bad luck, being at the right (or wrong) place at the right (or wrong time), the price of bunkers, the cost and efficiency of the crew and management and so on ad inifinitum, the idea that just buying cheap will guarantee profits starts to lose its simplicity.

So when I see a shipping analyst using world, or even GDP, growth predictions as a guide to the future freight market I sigh. Using them as a lead indicator to convince owners to buy ships makes me despair. It was not so long ago after all when analysts were using the BDI as a lead indicator for GDP.

I was told a wonderful story by a friend over coffee this morning. He was employed for a while in a large, well known London shipbroking company, and started talking to a large, well known Greek shipowner. Like all large shipbroking companies, their employees were encouraged to use “tailored” research to discuss S&P opportunities with their clients.

“I strongly advise you” the large shipowner said, “to ignore all these reports. You would be far better off going into the garden and developing a keen sense of smell. Instinct is everything: learn to smell the market”. Wise words indeed. That particular large shipowner is in fact one of a handful that I watch: when they buy or sell, it is significant.

Demand for buying ships is down to many different factors:

-         price trends

-         freight market prospects

-         availability of finance (or otherwise)

-         the supply of ships in the market for sale

-         the number of competing buyers

-         sentiment

The last factor is the most nebulous but in my mind the most significant. At present there is positive sentiment in the market, which has its own driving forces. Some time ago Peter Stokes of Lazard identified five pre-conditions for a sustainable shipping recovery:

-         Ship prices must find a floor that properly reflects financial realities

-         Capital that was invested on unrealistic expectations must capitulate

-         Clearer picture of demand trends (particularly in China)

-         Interest rates must rise to stimulate growth

-         Commodity prices must fall to an established floor

I would argue that, with perhaps the exception of China demand trends (which as I have commented recently are not just driven by pure market forces), we can tick all the boxes. But at the risk of repeating myself further, I also remind you of the nine “Seeds of a Boom” identified by Howard Marks of Oaktree Capital:

-         A benign environment

-         A grain of truth

-         Early success

-         More money than ideas

-         Willing suspension of disbelief

-         Rejection of valuation norms

-         The pursuit of the new

-         The virtuous cycle

-         Fear of missing out

Now not all of these apply at the moment, in particular “more money than ideas”, “willing suspension of disbelief” and the “rejection of valuation norms”, but enough are relevant enough to illustrate why sentiment is positive at present, particularly FOMO, the fear of missing out. This is not a bad thing in itself of course. Instinct derives in great part from how we are feeling, and is important in the early stages of a recovery.

For the continuing health of this dry bulk market recovery, I am glad to report that people are not getting as carried away as they were ten years ago. In any case the world, even the shipping world, has not changed that much since six months ago. That is more comforting, for me at least, than depressing. The BDI stood at around 1,200 in March, today it has just burst through 1,500; we could interpret this improvement as seasonality. There are about as many ships on the water as there were then. What has changed is sentiment. The future, particularly 2018, is nearer, and it is time to get on with it.

One of the rituals that I do before the start of a new academic year is to sharpen my pencils. For some reason, I still use pencils for academic work, particularly marking. Sometimes if I really need inspiration, I will use a pencil to start the first draft by hand. Many shipping investors are sharpening their pencils too now, but I don’t see many signs of them getting too carried away. The partner of demand, i.e. supply (in terms of ships that can bought at market prices), as mentioned last week, is limited enough, but this fact in itself is not yet enough to send prices through the roof, even if they are improving.

Maybe in years to come, some academic paper will tell us the trends and patterns of numbers that led to this improvement in the market. In the meantime, we smell demand in the air. Whether we run into the garden to play or stay inside and scribble away at our homework depends on how we feel. It is a good thing that for now, at least here in Greece, the sun continues to shine. 

Simon Ward

Ursa Shipbrokers

www.ursashipbrokers.com