Shipping Cynic – If You Had $1 Billion to Invest in Shipping?

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Image (c) Shutterstock/Ufuk ZIVANA

I received an email from a friend containing the following cynical view of the shipping markets. It highlights the frustration among many older shipping industry participants regarding the flood of capital by private equity and the focus on fees by participants and service providers. It was sent to me without attribution, but I suspect it was written by someone residing in Europe, who may be a broker or old line banker. It is clear there are those within the industry crying out for a more rational approach to developments occurring the shipping markets.

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From the Desk of: A Shipping Cynic

If you had USD one billion to invest in shipping……..

….what would you do with it, Mons’? A ship owner friend asked me at lunch the other day.

I still owe him an answer and I’m still working on the tremendous challenge. I assume he primarily asked where in shipping would you put the money, which obviously make the challenge even harder. I thought that if I buy 100 old V’s at $22 mill each, scrap them at 16 mill each, the first $600 mill would be gone.

With $400 mill in my pocket I go and buy 7 five years old V’s at $60 mill a pop with a 50 percent leverage and the next $210 mill are blown. $190 left for operation won’t take me far in this market, but with 100 scrapped units I calculate the market is w80 all of a sudden and my 7 V’s will make $80,000/day (TCE). If breakeven on my investment is say 30,000/day per ship, I’ll have a profit of $50,000, but costs go up so let’s be conservative and call breakeven $40.000/day and the profit $40.000 as well.

That’s $280,000/day or about $100 mill/year, makes sense over 15 years, no?

All the above is obviously bullshit since it would be impossible to buy 100 VLCCs at $22 mill a pop without the prices will move way north (and by the way, no market is $80,000 for 15 years) so the one billion would be gone long before I could afford to buy one VLCC.

Now, you take the above theoretical brilliant calculation and go to Wall Street instead and they’ll probably give you the one billion and you’ll personally pocket $20 million in fees before you start buying old V’s and get $2.5 mill in commission on that. After that you go scrap the same ships and take another commission of about $1.5 million. You’re now personally up maybe $24 mill then the 7 five years old V’s you buy will give you some $4 mill in commission. So before your project is up and running you have pocketed about $30 mill, that’s when you start charging 1.25 on every freight that the 7 units will make.

This will work just fine until you’ll go to the next chapter which is called number 11, but with 30 to 35 million tucked away in a country with a colourful flag, a lot of fun enroute you can afford to take a few months off before launching the next project. Shipping is easy, isn’t it? The trick is to find the salesman, suit him up and take him to Wall Street for a presentation.

What I’m saying is that I don’t need one billion to become a ship owner, there are enough suckers out there that’ll make you one for free (almost free..)…What I’m also saying is that it’s close to impossible to be seeing our business as an industry any longer, to be an owner and live on the services you provide (transportation) is becoming impossible as long as the money for projects are sitting so loose and as long as yards are plentiful.

There is, however, always a ‘but’ and this is the important and crucial point, as long as there is expertise available in all different capacities of the industry, Wall Street can take over from the old and traditional owners. The way it’s going at the moment, we’ll be short of good and experienced shipping people pretty soon and the ones there are will be traded like football players, making big and more money every time the ‘window’ is open. I’m not only talking executives here, seagoing personnel is ever so important! It’s easy to order 30 ships but we must not forget that these ships will need a huge and arduous operation around them, not the least some 1200 officers and crew (vetted and approved).

The way our industry is heading at the moment is a change from craftsmanship to a financial play, a play that will monitor order books, trends, opportunities, iron ore price, yard situations and oil & gas exploration just like owners always did, but the carrot won’t be the freight rates, it’ll be fees.

We’re risking oversupply in just about any segment of the transportation market, the more ships, the bigger the entities….the bigger the fees.., as easy as that!

I actually don’t know what I’d do with a billion dollars…

Regards,

A Shipping Cynic

Jay Goodgal can be reached via email at: [email protected]