Financiers Hold the Throttle, and Key, to Shipping as Shipowners Lack Discipline

The 19th annual Hellenic-American and Norwegian-American Chambers of Commerce shipping conference was held yesterday at the Waldorf-Astoria hotel in New York City.

The event was co-chaired by Brian Devine, a Partner at Blank Rome LLP, Clay Maitland, a Managing Partner at International Registries, Inc., and Ole Schroder, General and Environmental Manager, Torm USA.

Jon Chappell, Managing Director at Evercore Partners kicked things off with an overview of the shipping economics currently at play.  He notes that US crude production is accelerating, however not necessarily at the expense of long-haul fixtures and that the 2013 tanker market continues to look weak due to a continued supply and demand imbalance.

He mentioned, “scrapping cannot save the day” as fleet growth is expected to remain positive until 2014 and that discipline was needed on the part of shipowners to hold back from buying ships while being tempted by some of the cheapest shipbuilding prices in recent memory.

With 34 new ships on order and wearing a tie that appeared to be on backwards, Robert Bugbee, President of Scorpio tankers made it clear that “we are a totally undisciplined group” and that it was really on the part of lenders to be selective when it comes to supplying shipowners with the funds necessary to add more tonnage to their existing fleets.

Basil Mavroleon Projects Group Manager from Charles R. Weber views today’s tanker market with cautious optimism.  In his speech he notes that the supply/demand equation is more favorable today and that the commodity demand stemming from the economic development of India, China, and Brazil “puts us in a better state than we were in the late 70’s.”

Discipline, he adds, is what will enable this industry to come out of the doldrums by 2015.

On the subject of “undisciplined” shipowners, I brought up the point about Nordic American Tankers’ (NYSE:NAT) plans to double their fleet of Suezmax tankers over the next few years.

Mr. Chappell didn’t respond directly, however he provided some insight today into the question via a note he had written up on Monday.  In the note, he raised the point that NATs’ dividend payments exceeded (negative) operating cash flow by roughly $70 million in 2012 and that they are 100% exposed to the spot charter market where they are below break-even on their current charters.  Should the spot market recover soon, NATs might be in a better growth position, Chappell notes however, negative cash flows, coupled with exposure to a tough spot charter market, and shareholder dividends may present a significant challenge for the shipowner if it wishes to buy 20 Suezmax tankers at $40+ million each.

In the VLCC market, Chappell noted that ICAP’s research has shown that slow steaming has had the virtual effect of removing 75 VLCCs (very large crude carriers) from the global supply equation.  This is interesting due to the fact that with the push of the throttle instigated by any number of events, major fluctuations can occur to the long-haul crude oil trade.

Speaking with a VLCC market insider today who was in attendance at yesterday’s event, he has a far more bearish outlook on the long-haul market.  “With lower demand from the US expected in the future, China’s interest in owning their own fleets, and India’s proximity to the Arabian Gulf, market recovery for VLCCs doesn’t look promising over the next few years.,” he notes.

For shipyards, life has become more difficult as well.

As order books for bulk carriers and containerships dwindle, specialization is becoming more and more important for yards in the Far East, as is quality of construction. Shipyards are carving out their own niches within specialty shipbuilding sectors such as offshore rigs, LNG ships, intervention rigs, FPSOs, offshore construction vessels, and others.

“Shipowners are now much more interested in what’s going on in the shipyards where their ships are being built” notes Kenneth Variede, Operations Director at DNV North America.

Although this level of personal attention is likely not something the yards are enthusiastic about, Variede notes today’s pricing power on the part of the shipowner is resulting in better ships, and higher safety standards.