Not Logged In, Login,

Tuesday, October 23, 2018

Do today’s investors know what they are getting themselves into? Are the basic rules of financing being flouted? Is the party over? What is forecasting?

Of the 150 or so gathered this week in Amsterdam for Mare Forum's annual ship finance conference, about one third were from banks or financial organisations, between one fifth and one quarter were representing ship owners or operators. Around half were from the Netherlands. Points of view offered during the pacey one-day conference, and conclusions reached, covered a wide range of issues.


Clarkson Research's Dr Martin Stopford defined forecasting as “identifying things you can do today to prepare for an uncertain future.” He then demonstrated how it has (or has not?) changed from the days when a lamb’s liver was examined, and if it was diseased the forecast was not good. Did they pick their sheep (healthy or unhealthy) to produce the required result, or did they scare the customer so that he felt he had had a worthwhile experience? Stopford suggested how the rational approach, where deductions from given premises are made into guidance, evolved into the early computer models which predicted demand for newbuilding capacity in the 1970s (with disastrous consequences). He went on to emphasise how the emotions as well as logic are part of the decision-making process.


With Stopford covering the art of forecasting, it was left to Galbraith’s and its senior analyst Simon Chattrabhuti, to cover the more specific market forecasting. In summary he suggested that oil demand changes will be focused on China, North America, S.E. Asia and the Middle East, and pointed out that only one of these has an adequate crude oil supply, while the rest will have to increase imports.


However, he went on to say that although prospects for the products sector in a post-hurricane market are good, FSU shorthaul crude exports will dampen tonne-mile crude oil demand overall. On the supply side he estimated that 150 VLCCs would be phased out in 2010 if none are put into exempted flags and trades and extended, but added that those that are extended will the subject of a clear two-tier market between 2010 and 2015. Rates will be quite strong in 2005 and 2006, he believes, but newbuilding deliveries 2006-2009 will have a dampening effect.


On market prospects, Ragnhild Wiborg, Fund Manager and Partner with Pecunia/PEKAB, agreed with Chattrabhuti that the orderbook is very large both in absolute and historic terms – "a scary picture." Demand will be good, she suggested, with Asian growth in 2005 and 2005 above 6% a year. But all depends on the U.S. consumers, she concluded. "If they fall then so will the rest of the world – and so will shipping".


"The party’s over," volunteered Jean Richards, Executive Chairman of Quantum Shipping Services. "Now we just have to clean up the mess," she continued, referring to defaults on deals made on a high market. Litigation proliferates as a result of a booming market. Why? Because of owner and charterer default as they jump off deals to find something better or cheaper. She believes that dealmakers should have foreseen the end of the good times and warned the investors. Do investors know what they are getting themselves into? Not necessarily, she says. Can the dealmakers be made to carry the can? Regretfully no, she concludes.


Ragnhild Wiborg, Fund Manager and Partner with Pecunia/PEKAB, agreed with Richards that investors do not always realise what they are getting themselves into – "there is danger when you see investors moving into shipping without knowing much about it". She pointed to the price to net asset value ratio in the 1990s of 0.5 to 0.8 that has now increased to 1.0 to 1.5, and asked why an organisation, and those working there, are valued today but were not in the 1990s. Shipping is a service industry, she said, and those handling logistics should have a value especially if they have a proven track record of generating returns for the shareholders.


Gust Biesbroeck, Deputy Director of Global Shipping at Fortis Bank, added that today all the basic rules of financing (such as 'do not finance way beyond average asset value', and 'cashflow to work after a market correction') are being flouted. And the main suspects of rule flouting are the big core banks, he added, with the other banks following and happily joining in large syndicated loans. After a coming market correction, lower profitability will mean lower lending volumes, lower margins as well as higher capital requirements, he believes. This will lead to more proactive loan management, he suggested, with a flight to quality and with further consolidation in the banking sector.


Contact: Bill Box