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Export-Import Banks in Action
Export finance continues to be a major source of financing for the shipowners and the momentum appears to be gaining pace. According to local reports, the Export-Import Bank of Thailand (“EXIM Thailand”) has announced plans to lend at least THB 18 billion (USD 563 million) to local shipping companies in their acquisition of new tonnage. The government hopes that the latest measures will help to expand the Thai fleet and reduce reliance on foreign carriers, and in turn generate more foreign exchange earnings for the country.
EXIM Thailand has the ability to offer direct loans or arrange syndication deals with its financial partners for the domestic shipping companies and is looking at extending loans of up to THB 18 million over the next three years. In January 2010, Precious Shipping secured a credit facility granted by EXIM Thailand and other lenders including Bank of Tokyo Mitsubishi UFJ, Bank of Ayudhya, Kasikornbank and Thanachart Bank for the acquisition of bulk carriers. Continue Reading
The World Tilts East
Dealogic issued the full year league tables for 2009 this week and there were few surprises. Volumes were down as one would have expected and there was a certain Asian flavor to the leaders.
Perennial leaders DnB NOR and Nordea were supplanted by Mitsubishi UFJ Financial Group, which took the number one spot in both the Bookrunner and Mandated Lead Arranger tables. This strong showing was based upon their strong relationship with NYK Lines, for whom they were the sole arranger on two deals totaling $2.5 billion and their lead position on the largest deal of the year, AP Moller-Maersk’s $6.5 billion transaction. Don’t cry for the Norwegians. DnB NOR held its own, finishing in 2nd place in both league tables. Their finish was largely determined by transaction size as the number of transactions were comparable. Nordea slipped to 5th in the bookrunner table but finished third behind DnB in the all-important MLA table.
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Written by: carisk | Categories: Freshly Minted, The Week in Review | January 14th, 2010 | Add a Comment
David Scott’s Nine Bear Points for Shipping
David Scott’s Nine Bear Points for Shipping
A scathingly bearish report on the prospects for the shipping industry was issued this week by David Scott of Thailand’s Cha-am Advisors. Cha-am Advisors, possibly named after the resort area on the Gulf of Thailand, appears to be something of a newcomer to shipping, with David Scott openly admitting “I know almost nothing about shipping.”
This has both its advantages and its drawbacks, with Mr. Scott able to recognize macroeconomic trends that may not strike many shippers as important, as well as being less subject to the psychological phenomenon of cognitive dissonance – something that subliminally moves people’s views to be more positive on an industry in which they have a vested interest. On the other hand, we found that support for those of Mr. Scott’s arguments that were shipping-specific to overall be thin.
Exchange Rates, Gold Prices, and Freight Indices
David Scott’s argument centered around nine bearish points, as shown in Box 1, and revolved around the inherent inverse correlation between the strength of the dollar and shipping freight rates. He found that freight rates and the price of shipping company shares follow gold prices, with a one-year delay, as well as the Hang Seng index and the NASDAQ, while shipping freight rates reverse correlate with the US dollar. The Cha-am report argued that the dollar exchange rate “is a main driver of the monetary environment in a large and fast growing part of the world…(which) are huge sources of marginal demand for both commodities and for gold.” As a result, low US interest rates, a growing US current account deficit, and a weak dollar have “amplified the liquidity cycles across many markets but especially those markets for Physical Assets such as commodities and ships.” Mr. Scott used Irving Fisher’s equation Money * Velocity = Price * Output, then applied this principle more specifically to shipping with the equations shown in. Box 2.
The argument continues that the FED tightens monetary policy to combat inflationary pressure from rising import prices, as we have seen through the steady increase of the federal funds rate in the US throughout 2004. The effects of these actions then take about a year to hit the “early cycle” industries, or ones that perform better when the dollar is allowed to depreciate in response to deflationary pressure. As you may have guessed, shipping, along with a majority of commodities, is classified as an “early cycle” industry.
“Messed-up” Pricing Signals & Industry Distortion
At this point in his argument, Mr. Scott takes the time to acknowledge “we would have had a shipping bull market with or without the FED right now. The supply/demand situation was favorable with years of underinvestment and strong global growth.” Though it seems that this statement runs in some ways counter to his Bear Point #1 (see Box 1). Showing a graph in freight rates, which could well have been a graph of US-listed tanker stocks, he points to the unforeseen November jump and says that it is all about MONEY. A normal crest would have been more representative of good fundamentals rather than the ridiculously bull market.
The Cha-am report goes on to discuss a lending story that may sound eerily familiar to some, where a “messed-up pricing signal distorts the whole industry.” The bigger players sell older vessels and buy new ships while smaller players borrow more money to buy ships that would essentially be scrapping candidates in another market, only to run into a down market with massive loans where, particularly the owners of highly-priced older vessels “cannot afford to scrap them; cannot afford to run them; cannot afford them lying around doing nothing.” Mr. Scott does not have kind words for their lenders.
Will China Re-live Japan’s Shipping Experience from the turn of the 20th Century?
From this, Mr. Scott launches into a brief overview of why the supply side of the shipping market equations will rise much more rapidly then predicted, due largely to innovation that would lead to making VLCC building quicker and easier and largely on intervention by the Chinese government because “China’s strategic interest is in commodity deflation and by extension in low freight rates…To achieve deflationary result in the shipping business the most obvious lever to pull is build more ships.” Mr. Scott compared China to Japan at the turn of the twentieth century, who formed and heavily subsidized NYK Lines in order “to push transaction costs down and open up access to regional markets.”
Mr. Scott closes his article with two final points: that the chances of a hard landing in China are rising and that insiders continue to sell, largely in the form of raising money through IPOs.
All this essentially summarizes what we take to be the report’s cohesive argument. As you can see, he has taken advantage of his outsider perspective to identify some outside macroeconomic and historical factors that affect or may affect the trajectory of shipping freight rates. However, we are of the opinion that Mr. Scott, in trying to argue so many aspects of the story of an industry outside of his expertise, perhaps stretched himself a little too thinly.
For example, a comparison he makes between the shipping “bubble” and the tech “bubble” of 2000 misses the point that the internet created a whole new industry that people were only beginning to understand, while the shipping industry has existed for thousands of years and its greater exposure to the international capital markets was in many ways long overdue. He also takes the inverse correlation of freight rates and the US dollar to mean causation. While it suggests that the two are related, it does not necessarily follow that freight rates are doomed to fall ever lower for every penny the US dollar appreciates. Neither is the appreciation of the US dollar a given; Greenspan has stated he is not averse to monetary loosening, and a falling dollar, as a method to help alleviate affects of current austere federal budget proposals. Additionally, we do not dare to speculate on the effect of a floating yuan, but this too would surely impact the currency picture, for better or for worse.
More on the shipping front, the Cha-am report calls “the biggest signal of excess in this shipping bull market” the premium of secondhand vessel prices to newbuildings, commenting in particular that 5-year-old panamax prices were at a 20% premium to newbuildings. We checked with our sources to verify that the panamaxes in question were, indeed, bulkers, and as such have a longer life, as opposed to tankers, where 5-year-old vessels were being purchased at prices comparable to newbuildings. We feel that while dramatic, the statement was out of context as the newbuildings in question were ones not available for two or more years, while the used ships could immediately be put to work on contracts made in what was openly acknowledged to be a market high point guaranteeing a certain level of earnings to begin almost immediately.
“A Bear Market for One is a Bear Market for All”
Mr. Scott asserted that shipping is an analogue, so that “a bear market for one is a bear market for all” (Box #1, Bear Point #6). He used this to counter an assertion that “containers will be the place to be because of supply/demand which look more favourable than other segments.” Undoubtedly this made him concerned that orderbooks in the container sector have reached 50% of the current fleet, causing him to conclude “if this has the best fundamentals I wonder what other segments look like!” Meanwhile, we understand from a public statement by Mark Harris at Pacific Basin that global orderbooks through 2008 for dry bulk handymax, panamax, and capesize carriers stand at a more modest 20%. McQuilling expects tanker growth to be even lower, with a net fall in the global VLCC fleet between 2006-2010.
Mr. Scott also claims that, due largely to its similarity to Japan at the turn of the 20th century, China will flood the shipbuilding market with “no-cost” producers. Now this certainly seems within the realm of possibility. However, to support his point, the analyst notes “I couldn’t find much about China’s plans for its shipping companies except that it planned t o consolidate the 6,000 existing players into bigger groups.” In the place of this information, he presents an article on the performance of China State Shipbuilding Corp. over the past year. The company has increased its output by a stunning 65% in the past year, but this does little to say whether or not it is representative of the broader Chinese shipping market, or that it is out of pace with Chinese growth in other industries. Finally, in Bear Point #8, Mr. Scott asserts that the chances of a hard landing in China are rising. He supports this point with the simply analogy of a VLCC, which is supposed to represent the Chinese economy, approaching Pusan at increasing speed that is unable to stop. This analogy could well be applicable. But we have read detailed reports to the contrary, and so are, strangely enough, not wholly convinced.
Short & Sweet: Telling an Important Side of the Story
One thing David Scott and his report certainly has that this article lacks is brevity. In attempting to judiciously present his views, this article has perhaps grown a bit verbose. Clearly we think the ideas that Mr. Scott presents are important, or we would not have dedicated so much time and space to them. The link between shipping and the currency markets is one we have not heard often discussed and bears more consideration. While it is only one factor in the bigger picture, it may very well be an important, oft-neglected one.
A scathingly bearish report on the prospects for the shipping industry was issued this week by David Scott of Thailand’s Cha-am Advisors. Cha-am Advisors, possibly named after the resort area on the Gulf of Thailand, appears to be something of a newcomer to shipping, with David Scott openly admitting “I know almost nothing about shipping.”
This has both its advantages and its drawbacks, with Mr. Scott able to recognize macroeconomic trends that may not strike many shippers as important, as well as being less subject to the psychological phenomenon of cognitive dissonance – something that subliminally moves people’s views to be more positive on an industry in which they have a vested interest. On the other hand, we found that support for those of Mr. Scott’s arguments that were shipping-specific to overall be thin.
Exchange Rates, Gold Prices, and Freight Indices
David Scott’s argument centered around nine bearish points, as shown in Box 1, and revolved around the inherent inverse correlation between the strength of the dollar and shipping freight rates. He found that freight rates and the price of shipping company shares follow gold prices, with a one-year delay, as well as the Hang Seng index and the NASDAQ, while shipping freight rates reverse correlate with the US dollar. The Cha-am report argued that the dollar exchange rate “is a main driver of the monetary environment in a large and fast growing part of the world…(which) are huge sources of marginal demand for both commodities and for gold.” As a result, low US interest rates, a growing US current account deficit, and a weak dollar have “amplified the liquidity cycles across many markets but especially those markets for Physical Assets such as commodities and ships.” Mr. Scott used Irving Fisher’s equation Money * Velocity = Price * Output, then applied this principle more specifically to shipping with the equations shown in. Box 2.
The argument continues that the FED tightens monetary policy to combat inflationary pressure from rising import prices, as we have seen through the steady increase of the federal funds rate in the US throughout 2004. The effects of these actions then take about a year to hit the “early cycle” industries, or ones that perform better when the dollar is allowed to depreciate in response to deflationary pressure. As you may have guessed, shipping, along with a majority of commodities, is classified as an “early cycle” industry.
“Messed-up” Pricing Signals & Industry Distortion
At this point in his argument, Mr. Scott takes the time to acknowledge “we would have had a shipping bull market with or without the FED right now. The supply/demand situation was favorable with years of underinvestment and strong global growth.” Though it seems that this statement runs in some ways counter to his Bear Point #1 (see Box 1). Showing a graph in freight rates, which could well have been a graph of US-listed tanker stocks, he points to the unforeseen November jump and says that it is all about MONEY. A normal crest would have been more representative of good fundamentals rather than the ridiculously bull market.
The Cha-am report goes on to discuss a lending story that may sound eerily familiar to some, where a “messed-up pricing signal distorts the whole industry.” The bigger players sell older vessels and buy new ships while smaller players borrow more money to buy ships that would essentially be scrapping candidates in another market, only to run into a down market with massive loans where, particularly the owners of highly-priced older vessels “cannot afford to scrap them; cannot afford to run them; cannot afford them lying around doing nothing.” Mr. Scott does not have kind words for their lenders.
Will China Re-live Japan’s Shipping Experience from the turn of the 20th Century?
From this, Mr. Scott launches into a brief overview of why the supply side of the shipping market equations will rise much more rapidly then predicted, due largely to innovation that would lead to making VLCC building quicker and easier and largely on intervention by the Chinese government because “China’s strategic interest is in commodity deflation and by extension in low freight rates…To achieve deflationary result in the shipping business the most obvious lever to pull is build more ships.” Mr. Scott compared China to Japan at the turn of the twentieth century, who formed and heavily subsidized NYK Lines in order “to push transaction costs down and open up access to regional markets.”
Mr. Scott closes his article with two final points: that the chances of a hard landing in China are rising and that insiders continue to sell, largely in the form of raising money through IPOs.
All this essentially summarizes what we take to be the report’s cohesive argument. As you can see, he has taken advantage of his outsider perspective to identify some outside macroeconomic and historical factors that affect or may affect the trajectory of shipping freight rates. However, we are of the opinion that Mr. Scott, in trying to argue so many aspects of the story of an industry outside of his expertise, perhaps stretched himself a little too thinly.
For example, a comparison he makes between the shipping “bubble” and the tech “bubble” of 2000 misses the point that the internet created a whole new industry that people were only beginning to understand, while the shipping industry has existed for thousands of years and its greater exposure to the international capital markets was in many ways long overdue. He also takes the inverse correlation of freight rates and the US dollar to mean causation. While it suggests that the two are related, it does not necessarily follow that freight rates are doomed to fall ever lower for every penny the US dollar appreciates. Neither is the appreciation of the US dollar a given; Greenspan has stated he is not averse to monetary loosening, and a falling dollar, as a method to help alleviate affects of current austere federal budget proposals. Additionally, we do not dare to speculate on the effect of a floating yuan, but this too would surely impact the currency picture, for better or for worse.
More on the shipping front, the Cha-am report calls “the biggest signal of excess in this shipping bull market” the premium of secondhand vessel prices to newbuildings, commenting in particular that 5-year-old panamax prices were at a 20% premium to newbuildings. We checked with our sources to verify that the panamaxes in question were, indeed, bulkers, and as such have a longer life, as opposed to tankers, where 5-year-old vessels were being purchased at prices comparable to newbuildings. We feel that while dramatic, the statement was out of context as the newbuildings in question were ones not available for two or more years, while the used ships could immediately be put to work on contracts made in what was openly acknowledged to be a market high point guaranteeing a certain level of earnings to begin almost immediately.
“A Bear Market for One is a Bear Market for All”
Mr. Scott asserted that shipping is an analogue, so that “a bear market for one is a bear market for all” (Box #1, Bear Point #6). He used this to counter an assertion that “containers will be the place to be because of supply/demand which look more favourable than other segments.” Undoubtedly this made him concerned that orderbooks in the container sector have reached 50% of the current fleet, causing him to conclude “if this has the best fundamentals I wonder what other segments look like!” Meanwhile, we understand from a public statement by Mark Harris at Pacific Basin that global orderbooks through 2008 for dry bulk handymax, panamax, and capesize carriers stand at a more modest 20%. McQuilling expects tanker growth to be even lower, with a net fall in the global VLCC fleet between 2006-2010.
Mr. Scott also claims that, due largely to its similarity to Japan at the turn of the 20th century, China will flood the shipbuilding market with “no-cost” producers. Now this certainly seems within the realm of possibility. However, to support his point, the analyst notes “I couldn’t find much about China’s plans for its shipping companies except that it planned t o consolidate the 6,000 existing players into bigger groups.” In the place of this information, he presents an article on the performance of China State Shipbuilding Corp. over the past year. The company has increased its output by a stunning 65% in the past year, but this does little to say whether or not it is representative of the broader Chinese shipping market, or that it is out of pace with Chinese growth in other industries. Finally, in Bear Point #8, Mr. Scott asserts that the chances of a hard landing in China are rising. He supports this point with the simply analogy of a VLCC, which is supposed to represent the Chinese economy, approaching Pusan at increasing speed that is unable to stop. This analogy could well be applicable. But we have read detailed reports to the contrary, and so are, strangely enough, not wholly convinced.
Short & Sweet: Telling an Important Side of the Story
One thing David Scott and his report certainly has that this article lacks is brevity. In attempting to judiciously present his views, this article has perhaps grown a bit verbose. Clearly we think the ideas that Mr. Scott presents are important, or we would not have dedicated so much time and space to them. The link between shipping and the currency markets is one we have not heard often discussed and bears more consideration. While it is only one factor in the bigger picture, it may very well be an important, oft-neglected one.
Written by: carisk | Categories: Freshly Minted, Market Commentary | February 10th, 2005 | Add a Comment
The Official Guide To Marine Finance Providers
Shipping Index
