Reflecting on Posidonia 2014

Photo courtesy Posidonia

In ancient Greek mythology, Posidon (or ‘Poseidon’, and known as Neptune in the Roman mythology) was a major god of the Olympian Pantheon protecting the waters, seas and oceans. Posidon lost the sponsorship of the city of Athens to goddess Athena, goddess of wisdom when she gave the city the olive tree, while Posidon bolted his trident on a rock and salt water came out.

Posidon’s name is metaphorically associated today with shipping endeavors, and a biennial conference in Greece in named in his honor. This year’s Posidonia was consummated shortly ago, and the waves caused from Posidon’s trident have yet to settle.

For once, attendance has set a new highmark and reconfirmed Posidonia as the premier event of the shipping industry, and by association, Greece as a major shipping cluster. According to reports, close to 20,000 attendees visited the Expo where 1,843 exhibitors from 93 countries presented their businesses and products. It can be said with confidence that there has been an equally impressive amount of guests who never made it to the Expo itself and preferred to limit their visit to the city’s main south and north suburbs, attending the once again generous corporate events, enjoying great food and libations or talking shop and massaging deals at the deck of a yacht or the veranda of a private bungalow at the Astir Palace complex.

The mood was noticeably optimistic with the thought that the bottom of the market is behind us, and the new debate centered on the recovery, or better, where on earth the expected recovery is!

The buoyancy and improvement of the freight markets in the second half of last year convinced many market players that the market was not dead at all, but a fundamental rally was underway.

As a reminder, last summer freight rates for capes VLCCs were well below operating expenses and well below $10,000 per day, while by the end of the year rates has bounced fivefold. If an anemic market can bounce that strongly, what else could be the cause besides a fundamental rally?

Asset prices improved by 10-50% depending on asset class from summer 2013 until spring this year and newbuilding orders were placed by the dozen, like the good old days of 2008.

The rally had been impressive and the market slowdown since Easter has not been considered menacing, just a ‘breather’ for the market. A few hopeful IPOs failed to obtain a listing in the spring as well, but that’s part of the game, no more.

However, given that BDI has dropped by about 45% since March 20th (at 1621) to date (906 at present), Posidonia’s optimism had to be qualified. Several shipowners, including high profile publicly-traded shipowners, openly admitted at panel discussions their disappointment with the freight market and confessed that they were not expecting such low rates at this time of the cycle.

As we approach summer, which seasonally is a weak freight period, it means that there may be two more months of weak earnings before the market shows any improvements and the rally since last year has not been ‘money in the bank’ in the traditional sense: the strong cash generated in last year’s rally has partially been used to make current shipping loans or was deployed as down-payment for newbuilding orders, thus, no excess cash has been preserved for a prolonged weak market. There even has been mentioning that some shipowners may be hitting the ‘panic button’ if the market ends the summer in such a malaise. But again, there has been the argument that trading patterns have been shifting and most of the trade takes place in the second half of the year in the last few years – such as Chinese re-stocking of inventories causing last year’s rally– and thus that no need to write off 2014 yet as not a good year for shipping; optimism has been strong that the second half of the year will be another strong positive surprise for owners and charters alike.

The optimism for the market could be sensed in the expectations for strong capital markets as the New York investment banking scene has been noticeable present and active at this Posidonia, with meetings on and off venue premises. Apparently expectations are high that strong freight will return soon, and given the environment of exceptionally low interest rates and $780 billion ‘dry powder’ by the institutional investors in North America, IPO hopefuls should be ready on the runway for take off. The few IPOs that failed to obtain listing in the spring are considered one-off events and not a trend.

Private equity funds have been focal during Posidonia for the deals they have done so far in the Greek market but mostly for the ‘noise’ without deals that have done. It’s always great to have a rich partner to bankroll a venture, but there has been abundant complaining that ‘funds do not get shipping’; on the other hand, curiosity has been high on whether funds are done investing in shipping and what may be the ‘next big thing’ they may be looking in shipping: a neglected sub-sector, a local market, possibly a service industry possibly? And, what about their exit strategy? The ‘Oaktrees’ of the world, with their heavy investments in shipping, will find suitable exits (just see their Ocean Bulk sale to publicly-traded Star Bulk for shares), there have been many smaller JVs with many fewer vessels that possibly will have to be sold to the secondary market at exit, and by doing so, keeping a lid on asset pricing.

Not sure whether because of perspicacity about the market or jealousness for missing setting up their own JVs with private equity investors, many shipowners are expecting a debacle to come at exiting these ventures. Which, may mean an opportunity for some…

The strange thing is that since Posidonia 2012, the BDI has been literally flat at just above 900 points, despite some volatility within this interval. However, despite the freight market moving sideways, about 3,400 vessels have been ordered since the last Posidonia, that is about FIVE vessels each single day in the last two years. Not much happened about freight as far the indices are concerned, but tonnage supply has made a great jump.

One has to be an optimistic while in shipping, whether for Posidonia or not!