Shipowners, Capital & Long-Term Strategy

Here is a perennial question that never gets answered. When will shipowners ever practice self discipline and stop flooding the market with new vessels? The panel of shipowners at Marine Money’s Hong Kong conference provided us with some food for thought.

For the dry bulk sector, Mr. Klaus Nyborg, CEO at Pacific Basin Shipping, believes that the industry is simply too fragmented. “It is a business where there are few barriers to entry. One of the factors that I am most concerned about is the fact that many investors typically rely on the spreadsheet to decide whether it is a good or bad investment. In shipping especially the volatile dry bulk and tanker markets, the spreadsheet doesn’t work… This ‘accretive to earnings’ mindset is very dangerous.”

“We should not bank on any kind of discipline. There has never been discipline and there will never be discipline. All you have to do as a Chinese shipyard is to go to a potential buyer, offer him 5% less than his buddy next door, throw in 80% export finance and boom! There are another 6 ships,” added Mr. Philip Clausius, President & CEO at FSL Trust Management.

As for the container shipping sector, shipowners order vessels for a completely different set of reasons. “I don’t think there are too many ships. There are too many the wrong types of vessels operated by the wrong people…certain segments in the container fleet will not fulfil the full 25 years of economic life. They are too small for the major trades, too big for the smaller trades and horribly inefficient,” said Mr. Kenneth Cambie, Executive Director and CFO of Orient Overseas (International) Limited.

“Maersk has put the game changer with their 18,000 TEU vessels. By 2015, you got to have big ships that are over 10,000 TEUs to ply the Asia-Europe trade. There are very few points of differentiation in this business… and the access to debt capital is increasingly a differentiating factor and a barrier to becoming a meaningful player because of these big ships. It is going to become very clear over the next six to nine months – who is in the game and who isn’t,” he added.

“The substantial orderbook in the container shipping sector in the next three to five years will replace a part of the fleet built prior to 2000, where efficiency and economy of scale play a really important part. The Maersk’s announcement of showing 40% efficiency gains, from our own modelling, is pretty accurate. And when you are burning USD 100,000 to USD 150,000 worth of fuel a day, those are big numbers… Efficiency is an enormous driver and is one of the few areas that you can achieve competitive advantage. You will also need a low cost of capital to stay in the game,” explained further by Mr. Graham Porter, Chairman, Tiger Group Investments.

One thing can be certain. Shipowners will be placing a greater emphasis on ordering better quality ships that are more fuel efficient and the outlook for the shipbuilding sector may not be that gloomy after all.

NOL Rights Issue

With the strong support from state-owned Temasek Holdings, Neptune Oriental Lines (“NOL”) announced on Monday that its USD 985 million rights issue has been fully taken up. Looking closer at the numbers, over 97% of the total rights shares were subscribed by the existing shareholders (including Temasek), and the remaining will be allocated to shareholders who had applied for additional rights shares. The excess applications of 81 million shares represent 7.3% of the total rights issue or 2.58 times of the rights shares that were previously not taken up. NOL says preference will be given to the rounding of odd lots, and the Directors and substantial shareholders (including Temasek) will rank last in priority. The success of this massive offering will not be possible if not for Temasek’s commitment in underwriting the entire rights issue. DBS, HSBC, JP Morgan and Morgan Stanley were the lead managers of this issue.

In the latest report on NOL, J.P. Morgan says there is “limited downside to NOL” due less concerns about its balance sheet risks following its recent rights issue but there is better value in OOIL given the former’s cheaper valuations and longer term upside from its property development business in China.