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Bulking down and seeking a niche

Dry bulk shipping remains under pressure, with many firms seeking new survival strategies as the shadow of consolidation looms large.

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Bain Capital has taken control of troubled Italian family-run Giuseppe Bottiglieri Shipping
Bain Capital has taken control of troubled Italian family-run Giuseppe Bottiglieri Shipping

Even though prospects in many sectors of the dry bulk shipping industry have improved this year and 2018 appears promising in most analysts’ forecasts, operating pressures remain intense and fiscal returns inadequate. Consequently, the pressures for some sort of consolidation in the industry are expected to continue.

 

This year has seen a significant improvement in the fortunes of companies engaged in the dry bulk shipping industry, with the number of fixtures well up on 2016 levels, and daily charter rates, especially for Capesize and Panamax tonnage, substantially higher.

 

Even owners of Handymax/Supramax/Ultramax tonnage have shared in the recovery as the trade in various minor bulks has also improved. Since the late summer, daily charter rates have attained some of their highest prices in more than four years, rising from US$6,000/ US$9,000 a day to US10,000/ US$13,000 a day in November.

 

Strong index

The London-based Baltic Exchange Dry Index has climbed to very strong levels this year, and was trading at over 1,600 points in late November. In early July, the index stood at just over 800 points.

Principally, it has been the import of iron ore and both coking and thermal coal into China that has been behind the rebound in freight rates. This year has seen the country’s government clamp down on its most polluting industries, and mines extracting poor quality coal and minerals have either been shut down or forced to cut their outputs.

This has resulted in steel mills, other manufacturers and energy companies having to source higher-quality commodities from overseas suppliers. With many of these suppliers located in South America (mainly Brazil) and Australia, excess tonnage has been soaked up, as the shipping distances involved in moving the products is large. Daily freight rates also rose sharply.

According to Chinese Government information, in the first nine months of 2017, China imported 29 Mt and over 55 Mt more coal and iron ore, respectively, than in the corresponding period of 2016. In September alone, China imported 100 Mt of iron ore, an all-time monthly record.

Elsewhere, the January/end September period witnessed sizeable rises in the volume of coal exports to countries including Japan, Egypt, South Korea and China.

Overcapacity

Nonetheless, an overhang of supply still exists across the sectors, and, with growth in dry bulk shipping capacity of at least 3% expected this year, that will not disappear any time soon. Moreover, the contracting of new tonnage has picked up this year, following the low point reached in 2016, with interest in larger Panamax and Capesize sectors particularly strong.

Consequently, the improvement this year can, at best, be described as fragile and, for many carriers, the fundamental risks and challenges associated with overcapacity still persist. On that basis, further casualties to those of Daiichi Chuo Kisen, Shagang Shipping, Daebo Shipping, Copenship and Winland Ocean Shipping, which have occurred in the past two to three years, cannot be ruled out.

Moreover, changes to accounting practices mean that owners’ exposure to long term leases will have to be accounted for on balance sheets from 2019, a move that analysts and brokers think will lead to less activity on this front and to fewer pure owners trading in the market. In turn, that will mean more short-term charter and spot market activity.

Cost pressures also continue to affect owners, while the September 2017 implementation of the Ballast Water Management Convention (BWMC), and, from January 2020, the need to meet the new 0.5% sulphur cap for fuel, are hugely expensive and will stretch many carriers’ balance sheets further. In the case of the BWMC, all ships must comply with the convention after undergoing their next special survey. Owners with ships over 15 years of age may opt to scrap them because of the higher costs associated in operating them.

These various issues and challenges suggest that structural change in the industry is needed if owners/operators of bulk carriers are to secure sustainable profitability in the future and have the necessary capital to invest. Several analysts believe that some sort of consolidation will help, and that, over the next two/three years, a series of mega carriers could emerge. However, there will still be room for niche operators.

Peter Sand, chief shipping analyst at BIMCO, the world’s largest shipping association, said: “We certainly see consolidation happening in all sectors. With dry bulk shipping’s customers getting bigger and bigger by the day, those parts of the industry that serve these clients will have to step up. However, we are not going to see the dry bulk sector consolidated to the extent that we see in the liner business, and it is important to note that there will still be room for smaller independent owners.”

He added: “As long as we do not have more than five owners controlling more than 100 owned ships in their fleet, consolidation in this sector still has a long way to go. It is more about owners’ reaping improved economies of scale, and, for this reason, we expect Panamaxes and Capesizes to perform best.”

Sand does not think consolidation will be the panacea for profitability and healthier levels of performance in the industry, stressing that the sector was just too fragmented, and only strong demand would be the answer to success.

To illustrate his point, Sand alluded to this year’s strengthening demand from China for dry bulk shipping space. “We have seen owners/investors stop demolishing excess capacity, and no longer seeking to postpone and/or delay deliveries of new tonnage, as they did a few years ago,” he said. “In fact, the fleet has increased more than BIMCO anticipated a year ago, and under a more tepid demand side
growth scenario.”

Fleet profiles

Where the analyst does see further change taking place is in the fleet profiles of owners and operators. He elaborated: “You do not see many [owners/operators] going for all sizes of ship these days. On the contrary, the focus is on either smaller (Handysize, Handymax, Supramax and Ultramax classes) or larger Panamax and Capesizes, and this will continue.”

In some respects, this process is already underway, with some dry bulk shipping companies cutting back and selling tonnage, and withdrawing from their non-core activities.

At Copenhagen-based Clipper Group, management has decided to concentrate its business over three hubs – Copenhagen, Houston and Hong Kong. It means offices in Stamford (US), Brazil (Sao Paulo and Rio de Janeiro), Singapore and Beijing will be closed.

The multipurpose/bulk shipping line, which over the past year has expanded its fleet by 50% (to 150 ships), believes the move will save on administrative costs and result in significant operational efficiencies.

“We want to make communication more effective, and our response time to market changes shorter,” explained Peter Norborg, CEO of Clipper. “It is my belief that both the company and our clients will be able to feel the benefit of this change from day one.”

Meanwhile, a recent strategic review carried out by Denmark-based J Lauritzen means that it will focus on the Handysize sector in the future. It believes this class of tonnage offers the group the most attractive trading prospects.

Currently, Lauritzen Bulkers owns 10 Handysize vessels and charters in eight Supramaxes. The latter will be offloaded from the fleet once their existing charter contracts end.

“We will focus our resources on Handymaxes, where we have a proven track record and strong customer relations,” stressed Mads Peter Zacho, group CEO of J Lauritzen. “This tonnage has been more profitable for us in the past, and it plays to our strengths.”

But that does not mean a smooth ride for the operator, as Zacho does not think a significant rebalancing of the dry bulk shipping industry will take place until 2019 at the earliest. And even for this to happen, he thinks that net tonnage additions will have to remain at under 1% growth per annum, which is unlikely.

A Good buy

Elsewhere, Hamilton (Bermuda)-based GoodBulk Ltd recently agreed a deal with CarVal Investors to purchase a series of Capesize ships controlled by companies associated with the group. All of the tonnage involved (up to 13 vessels) will enter GoodBulk’s operations by the end of Q1 2018.

“We are excited to partner with CarVal Investors in this transaction, as we continue to execute our company’s strategy of building an industry-leading platform for investment in dry bulk vessels,” said John Michael Radziwill, chairman and CEO of GoodBulk.

He added: “Not only does this transaction provide GoodBulk’s shareholders with increased Capesize exposure at what we believe to be an opportune time in a recovering market, it is expected to be immediately accretive to our company’s net asset value (NAV) per share, while reducing the company’s normalised breakeven cost by ship ownership day. It will also reduce the average fleet age of our fleet by approximately 1.4 years. Furthermore, with a significant share component priced at a premium to NAV, this transaction underscores the value of the GoodBulk platform.”

The deal involves GoodBulk buying seven ships, and having options to purchase up to six more. In return, CarVal will receive 10.5M shares in GoodBulk and will see US$61M of its current borrowings refinanced under current and new GoodBulk credit facilities. It also means CarVal becoming the largest shareholder in GoodBulk, and Gregory Belonogoff, a principal of CarVal, joining the board as an independent director.

Excluding any options that might be exercised, the transaction will in crease GoodBulk’s shipping fleet to 19 units, comprising 16 Capesize, a single Panamax vessel and two Supramax ships.

GoodBulk was only established in late 2016, and its strategy is based on owning high-quality secondhand dry bulk vessels of between 50,000 dwt and 210,000 dwt. It has a listing on Norway’s OTC market, and its operational headquarters are based in Monaco.

Family business

Change is also afoot at the long-established Italian family-run bulker and tanker company Giuseppe Bottiglieri Shipping, as private equity firm Bain Capital takes control of the group. Bulk Materials International understands that, as part of a financial restructuring plan, Bain is to pump US$118M of new capital into the group. Giuseppe Bottiglieri Shipping’s existing management team is being retained to oversee operations, and it is not thought that any tonnage will be disposed of, at least in the short term.

Troubles had been apparent at the group for some time, and in the final quarter of 2016, Giuseppe Bottiglieri Shipping successfully secured a “concordato preventivo” (bankruptcy protection order), from a court in Naples. This had been extended to allow the company more time to come up with a new business plan. It is now understood that this new plan will be submitted to the Naples court on 22 December 2017, with a meeting of creditors scheduled for 7 February 2018. Giuseppe Bottiglieri Shipping owns 15 vessels comprising 11 bulkers and four tankers.

Grain chain

At New York-listed Star Bulk, securing a greater presence in the grain chain is a priority. To spearhead this development, the group has set up a new unit in Geneva called Star Logistics, with CEO Petros Pappas stressing that this was where “the centre of grain trading takes place, and Star Bulk needed to be closer to the action”.

Initially, Star Logistics will charter in ships to support its operations, but the longer-term goal is to use its own tonnage. Star Logistics’ business focuses on the Atlantic basin grain trades, with cargoes hedged as they are fixed. This allows the company to take advantage of opportunities through Forward Freight Agreements, and keeps the risk profile of the new unit low.

The future will remain challenging for the dry bulk sector with carriers defining and then specialising in the tonnage they believe will give them the best results. Consequently, outright consolidation and takeovers appear limited for the time being.

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