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The chartering manager works out
where the vessel needs to bunker, the
volume and cost and prices it into the $/
tonne rate accordingly. However once
committed (charter agreed), there is a
period before execution where there is
exposure, although this can be hedged
by the use of derivatives at a price
70
.
Consequently, it is important to be aware
of who is responsible for these items and
how they affect the bottom line.
CURRENCY RISK
Virtually all trade and transactions in
shipping are carried out in US Dollars.
This presents a currency risk for non
USD operators and investors who
may be disadvantaged by currency
movements, although under the
right circumstances, other currencies
may become cheaper to acquire with
USD, making the currency fluctuation
advantageous. One option to mitigate
a negative outcome here is to employ
hedging strategies.
DEPRECIATING ASSET
According to the Hedge Fund Journal,
“Ships are depreciating assets with a
non-linear profile determined by market
activity”
2
. Dry Bulk carriers typically
have a useful life of twenty five years
and therefore theoretically, vessel values
decrease steadily over time, although
in times of low vessel supply and high
commodity movement demand, such
depreciation can slow, stop or even
reverse; in June 2007, the average price
of a five year old Handymax was $46.5
million. In July it was up to $48.5 million
and by December 2007 reached $64.5
million. Whilst newbuild prices were
appreciating at the same time, because
of the immediate availability of second
hand ships to meet immediate demand,
in June 2007, the average price for these
five-year-old second hand vessels was
$5.5 million higher than a newbuild
of the same class and in December
of the same year, it was $19 million
higher. The reputation and competency
of the shipbuilder is also important
in determining second hand values
and future maintenance costs, so the
builder, vessel selection and the timing
of acquisition are crucial in controlling
the loss of value of the asset over time.
OBSOLESCENCE
New innovations and developments
require regular upgrades of machinery
to stay efficient, to meet timelines,
standards and remain profitable. This
could have the effect of speeding up
vessel depreciation. The Scorpio Bulkers
2014 Annual Report recognised this
issue, stating that, “the charter hire
rates and the value and operational
life of a vessel are determined by a
number of factors including the vessel’s
efficiency, operational flexibility and
physical life. If new Dry Bulk carriers
are built that are more efficient or more
flexible or have longer physical lives than
our vessels, competition from these
more technologically advanced vessels
could adversely affect the amount of
charter hire payments we receive for our
vessels once their initial charters expire
and the resale value of our vessels could
significantly decrease.”
LABOUR CONSIDERATIONS
Intercargo has voiced concerns about
the numbers of seafarers to meet
the future needs of an expanding
bulk carrier fleet and where these
professionals might be sourced
from. This is a medium to long-term
consideration as the current rate of
expansion is slow, but in addition the
adequacy of the existing training regime
for the modern safety conscious bulk
carrier sector is under review
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.
UNCERTAINTY OF SCRAP
VALUES
The principal markets for recycling are
India, Bangladesh, Pakistan, China and,
to a lesser extent, Turkey. Ship recycling
offers a possibility to reuse significant
parts and equipment of the ship and
those parts and equipment have a
value. At the end of their working lives,
or sooner in times of very low charter
rates making running of the vessel not
commercially viable, ships can be sold
for scrap. The scrap price for vessels,
like any other commodity, fluctuates
with demand and supply and this can
provide a ship owner with a safety net
to exit the market. The higher the scrap
value, the better the safety net and
the more limited any loss will be, but
currently, low scrap prices and subdued
demand for steel have forced ship
owners to wait until the scrap market
improves.
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LIQUIDITY
The liquidity available for any
investment depends partly on the type
of investment vehicle used, but in an
EIS, for example, generally investors are
locked in until exit at three to five years
after entry with no interim returns as
the assets grow (EIS tax benefits tend to
enforce this). If investee companies are
quoted, liquidity is much more readily
available, although the underlying
asset of the vessel is unlikely to be sold
instantly in any circumstances. Having
said that, the Dry Bulk carrier market
is relatively liquid, with a number
of London based Sale & Purchase
shipbrokers, such as Clarkson Platou
plc, Braemar Shipping Services and
Howe Robinson as well as international
brokers including Copenhagen based
Maersk Broker and Oslo based
Lorentzen & Stemoco
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, providing
agency services for ship owners
wishing to expand or reduce their
fleet. Nevertheless, since there are no
guarantees of prices or sales, mitigation
against low liquidity is problematic,
although scrapping is always an option.
However, understanding the cyclical
trends of the Dry Bulk shipping industry
is really the only way to assess the
strength of buyers in the market and
this requires expertise for which most
investors will need to rely on specialist
advisors in the field. As a protection
mechanism, a well-diversified portfolio
across other shipping and non-shipping
sectors is recommended.
“Charter rates are at an all-time low but they’re not expected to stay there forever; shipping is a
highly cyclical industry”
Jim Everson, Former MD and Head of Shipping at ED&FMan Shipping Ltd