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NATS Completes Follow-on, TBSI Goes into the Market
Following successful follow-on offerings by Seaspan, Teekay LNG, and Double Hull Tankers and a placement by Pacific Basin, Nordic American Tankers has seen it fit to raise equity to repay borrowings in the immediate future and for expansion in the longer- term, per its business model. NAT has sold 4,000,000 common shares in the offering and underwriters’ have exercised their option for a 310,000 share over-allotment, raising $173 million in gross proceeds. Morgan Stanley led the offering while Dahlman Rose acted as co-manager.
Written by: carisk | Categories: Freshly Minted, The Week in Review | May 15th, 2008 | Add a Comment
The Week in Review
The week has been relatively quiet from a transaction standpoint, but sentiment by and large is upbeat. The shipping markets as a whole continue to perform above expectations, and the credit and equity markets functioning smoothly, if not lavishly.
For example, Caterpillar Financial Services this week entered into an agreement to increase Aker Philadelphia Shipyard’s credit line by $150 million. Under the agreement, Caterpillar will fund up to $80 million in construction costs for seven consecutive product tankers, valuing the full agreement at $560 million. Interest payments will be required only during the construction period, and Aker may apply the funding to up to three ships simultaneously. The deal takes care of financing for the remainder of the 12 Jones Act tankers under construction at the yard, which are to be sold to Aker American Shipping for bareboat charter to OSG America. Four these tankers have been delivered, three are currently under construction, and the remainder are to be completed by 2011. Continue Reading
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
Life is Good in Hong Kong
Life is Good in Hong Kong
Or so says the CEO of still-recently public company Pacific Basin. He sees plenty of room for growth within the Pacific area serving commodity companies, once there are reasonably priced acquisitions to be made, of course. He is also quick to point out that it is too easy to fall into the belief that the recent market strength was due to just China. This is somewhat easier for Mr. Harris to say, however, as the small size of his ships is conducive to the transport of a wide variety of commodities, and as such his company is less dependent on coal and iron ore than CMB. The size of his ships is also ideal for the multitude of new ports developing along China’s coast, as well as for making deliveries in Japan, where land transportation of goods is more difficult
However it may be, it is beginning to look like the landing in China may indeed by soft, and the dry bulk market is substantially less threatened by new deliveries in the next couple years than the container market. Even now, many shipyards would prefer not to build new dry bulk ships, as they provide substantially less room to add value than LPG, LNG or even container ships and become a drag on earnings with steel prices still near their peak. Investors should certainly take note, as the dry bulk market opens up a whole new way to play the shipping markets that might be slightly less trendy than tanker stocks and does not face the downside risk of an oncoming supply glut. U.S.-listed Excel Maritime has certainly been among one of the greatest beneficiaries this year, watching its stock price go from $4.84 at the close of last year to $23.75 at the close of this one, while DryShips hopes it, too, can profit from current interest and the under-saturation of US markets with dry bulk companies.
Or so says the CEO of still-recently public company Pacific Basin. He sees plenty of room for growth within the Pacific area serving commodity companies, once there are reasonably priced acquisitions to be made, of course. He is also quick to point out that it is too easy to fall into the belief that the recent market strength was due to just China. This is somewhat easier for Mr. Harris to say, however, as the small size of his ships is conducive to the transport of a wide variety of commodities, and as such his company is less dependent on coal and iron ore than CMB. The size of his ships is also ideal for the multitude of new ports developing along China’s coast, as well as for making deliveries in Japan, where land transportation of goods is more difficult
However it may be, it is beginning to look like the landing in China may indeed by soft, and the dry bulk market is substantially less threatened by new deliveries in the next couple years than the container market. Even now, many shipyards would prefer not to build new dry bulk ships, as they provide substantially less room to add value than LPG, LNG or even container ships and become a drag on earnings with steel prices still near their peak. Investors should certainly take note, as the dry bulk market opens up a whole new way to play the shipping markets that might be slightly less trendy than tanker stocks and does not face the downside risk of an oncoming supply glut. U.S.-listed Excel Maritime has certainly been among one of the greatest beneficiaries this year, watching its stock price go from $4.84 at the close of last year to $23.75 at the close of this one, while DryShips hopes it, too, can profit from current interest and the under-saturation of US markets with dry bulk companies.
Good Morning, Good Afternoon and Good Evening
Good Morning, Good Afternoon and Good Evening
In line with the rest of the shipping market, the dry bulk sector has surely been in quite good health this past year, but the real concern at present is what is in store for next year. In an international conference call hosted by Jean-Louis Morisot of Goldman Sachs, Pacific Basin CEO Mark Harris and Compagnie Maritime Belge (CMB) Director Ludwig Criel took the time to differentiate between expectations for the different sectors of the dry bulk market while Goldman Sachs analyst Paul Gray grounded their views by offering his expectations of the performance of the commodities that dry bulkers transport.
An Exceptional Year
The three seemed to be in agreement that 2004 was an exceptional year and that this exceptionality can be substantially attributed to the growth of demand for shipping finally having caught up to supply. While China’s growth has played a key role in the development of the 2004 market, Mr. Harris pointed out that China’s growth was really nothing new, and had been going on in a similar fashion for a good decade. He also commented on how shipbuilding and other “old economy” industries had fallen out of fashion during the 1990s, allowing for the unique synchronization of exceptional markets across the shipping sectors.
What about the Scrap Market?
As to the longevity of the current market, Mr. Harris and Mr. Criel discussed the global orderbooks through 2008 for the handysize, panamax and capesize fleets, all of which stand at a modest 20%. At the same time, roughly 25% of the global panamax fleet and 13% of the capesize fleet are over twenty years, while the global handysize fleet has an average age of 17 – 2/3 is over 15 and 1/4 over 25. This means there should be sufficient room for ship retirement to allow for a comfortable entrance for the ships on order. And when asked about the scrap market, the reply came from Mr. Harris that there isn’t any, as anyone whose got “two band-aids and a paperclip to rub together” will keep a ship going in this market.
Commodities and the China Factor
Mr. Criel’s thoughts about the future support the advice of Lorentzen & Stemoco analyst Nicolai Hansteen who stated in this month’s Marine Money that “whether you believe China will be able to keep up the pace of its growth or you fear that the steam has run out should decide your investment positions.” And Mr. Gray gave reason to take optimism from this advice, forecasting an acceleration in crude steel production of 3.2% p.a. and an even greater acceleration in pig iron production at 3.7% p.a., both driven by China. While Mr. Gray also thinks that both steel and iron markets are near peak, he explained his belief that he does not expect prices or demand for these commodities to “fall off a cliff,” but rather looks for gravitation to a level that is significantly higher than those to which we may historically have become accustomed. This is reasonably good news for Mr. Criel’s capesize and panamax fleet, which focuses primarily on transporting iron ore and coal aside from some involvement in grain.
In line with the rest of the shipping market, the dry bulk sector has surely been in quite good health this past year, but the real concern at present is what is in store for next year. In an international conference call hosted by Jean-Louis Morisot of Goldman Sachs, Pacific Basin CEO Mark Harris and Compagnie Maritime Belge (CMB) Director Ludwig Criel took the time to differentiate between expectations for the different sectors of the dry bulk market while Goldman Sachs analyst Paul Gray grounded their views by offering his expectations of the performance of the commodities that dry bulkers transport.
An Exceptional Year
The three seemed to be in agreement that 2004 was an exceptional year and that this exceptionality can be substantially attributed to the growth of demand for shipping finally having caught up to supply. While China’s growth has played a key role in the development of the 2004 market, Mr. Harris pointed out that China’s growth was really nothing new, and had been going on in a similar fashion for a good decade. He also commented on how shipbuilding and other “old economy” industries had fallen out of fashion during the 1990s, allowing for the unique synchronization of exceptional markets across the shipping sectors.
What about the Scrap Market?
As to the longevity of the current market, Mr. Harris and Mr. Criel discussed the global orderbooks through 2008 for the handysize, panamax and capesize fleets, all of which stand at a modest 20%. At the same time, roughly 25% of the global panamax fleet and 13% of the capesize fleet are over twenty years, while the global handysize fleet has an average age of 17 – 2/3 is over 15 and 1/4 over 25. This means there should be sufficient room for ship retirement to allow for a comfortable entrance for the ships on order. And when asked about the scrap market, the reply came from Mr. Harris that there isn’t any, as anyone whose got “two band-aids and a paperclip to rub together” will keep a ship going in this market.
Commodities and the China Factor
Mr. Criel’s thoughts about the future support the advice of Lorentzen & Stemoco analyst Nicolai Hansteen who stated in this month’s Marine Money that “whether you believe China will be able to keep up the pace of its growth or you fear that the steam has run out should decide your investment positions.” And Mr. Gray gave reason to take optimism from this advice, forecasting an acceleration in crude steel production of 3.2% p.a. and an even greater acceleration in pig iron production at 3.7% p.a., both driven by China. While Mr. Gray also thinks that both steel and iron markets are near peak, he explained his belief that he does not expect prices or demand for these commodities to “fall off a cliff,” but rather looks for gravitation to a level that is significantly higher than those to which we may historically have become accustomed. This is reasonably good news for Mr. Criel’s capesize and panamax fleet, which focuses primarily on transporting iron ore and coal aside from some involvement in grain.
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