Surfing the cycles: what can history teach us about the next shipping market upturn?

With 2016 widely dismissed as one of the worst years on record for shipping, Andy Pierce asks what it will take for the good times to roll once more

“Shipping is like the weather. It’s always changing, but in the same way,” a senior banker tells TW+. 

With 22 shipping cycles, lasting an average of 10.4 years, between 1741 and 2007, predicting the periods of rain and sunshine should be relatively simple in an industry prone to repeating its mistakes.

“Fundamentally, independent shipowners do two things,” says Martin Stopford, non-executive president of Clarkson Research Services. “One is run ships, which is the boring bit; the other is take the financial risk on these massively expensive vehicles.”

While it sounds simple in practice, the reality for owners navigating their way through the cycles is often different. There is some truth to the industry folklore that cycles last seven years; however, few actually do, Stopford points out in his textbook Maritime Economics (first published in 1988 and now in its third edition).

It identified four key stages to each cycle, but factors ranging from war and global economic swings, to shipowners with cash to burn ordering counter-cyclically, can bring the whole system crashing down.

This unpredictability in effect leaves owners not playing the cycle, but in a “bun fight” battling each other, Stopford says.

In an interview with TW+, he reasons: “In the neo-classical market you are not playing the market, you are playing the other players. The whole game is a game of pass the parcel. Your aim is to sell ships to your competitor expensively and then buy them back cheaply when he goes bankrupt.”

While the cycle does not exist to make shipowners rich, it does chuck in a carrot every now and again to keep them in the game. “We just had a mega, mega carrot in the past decade. The industry has never made so much money,” Stopford says.

After the boom came the bust. Following the highest peaks in the industry’s history between 2003 and 2008, in the wake of the global financial crisis it entered one of its longest recessions — albeit one that has also seen a two-year crude tanker spike and the best very large gas carrier market ever known.

“Down cycles basically end because eventually sentiment stops people doing things that prolong them,” Stopford explains. “You need the volume of trade to grow enough to soak up the surplus and you need sentiment to be bad enough for people to stop ordering and start scrapping more ships.”

While a strong global economy is generally needed to drive the highest peaks — especially if this coincides with a period of shipyard undercapacity — an unexpected event is often a catalyst to get the market ticking, he adds.

“Information that everybody knows has little value, because everybody acts on it. Really, you have got to call the unexpected and act in a contrarian way.”

In the most recent, fairly unspectacular, tanker upcycle of 2015 and 2016, a crash in global oil prices and a spike in storage demand did the trick. Internal factors drove rates, Stopford says, but excess tonnage was not addressed.

War: What is it good for?

Over history, war and conflict have often provided a spark for the market. The end of the War of Jenkins’ Ear was the precursor for a boom starting in 1754, while the onset of the Boer War created transport demand that fuelled a spike in 1900. The same was seen for two years after the end of the First World War and the onset of Korean War in 1950. Conflicts that closed the Suez Canal in 1957 and 1967 both brought bull markets, with the first padding the pockets of Aristotle Onassis, Stopford notes.

However, the fallout from war is not always a golden ticket for the freight market. An end to the American War of Independence killed the backhaul trade to Britain, helping create a major recession between 1782 and 1791. The end of the Napoleonic Wars dented global trade, and massive shipyard capacity introduced at Hog Island, Pennsylvania, in the First World War contributed to vast overcapacity within two years of peace.

a66eb1d4868a66989a78b0ee41c6737b Professor Victor Norman says shipowners are more risk-prone when they have cash in their pockets. Photograph: Erlend Haukeland  Photo: Erlend Haukeland

More recently, one of the most famous tanker bull runs in history in the early 1970s was aided by the closure of the Trans Adriatic Pipeline and restrictions on Libyan oil shipments. However, as Maritime Economics explains, strong global trade growth was the most influential factor at that time.

Shipyard roulette

The history of the first part of the 1980s makes bleak reading. A dry cargo peak was expected as the middle of the decade neared, but was killed by excessive ordering, including an infamous 120-ship order for Sanko in 1984.

However, a steady climb in both dry and wet trades from the middle of the decade saw rates peak in 1989, at the same time as the global business cycle reached its own summit. By 1992, over-ordering had put tankers back in the pit, while more restrained bulker owners enjoyed better times and rates pushed on to peak in 1995.

A recession initiated by the Asian financial crisis in 1997 was short, and a combination of Asian economies recovering and high tanker scrapping drove a stronger market before the dot.com crash caused the music to stop again in 2001.

The late 1990s saw some shipowners roll the dice and win with potentially the most profitable asset play ever seen. In a weak market and amid bearish sentiment, panamax bulkers were ordered “dirt cheap” for reasons many analysts failed to understand and arrived in an awful market around 2001.

“It looked like a disaster, yet those ships were potentially the most profitable ships ever because by 2007 you could sell the eight-year-old ship for about $80m, having paid $18m for it, and probably made another $50m or $60m trading it in the market,” Stopford recalls.

On an average $18m ship, he says it was possible to turn $3.5m of personal capital invested into something like $120m — real cash. “That is unique in the world economy,” Stopford says.

The Chinese economy powered a boom from 2003 until late 2008. However, attempts to repeat the dry cargo coup failed in 2013 when the cash-rich owners, and a wave of private equity and capital markets money, piled in with newbuilding orders, hunting a dry bulk recovery that never came.

“In 2013, any public investor who looked at the past 10 years’ financials saw this amazing story where you became a money machine,” Stopford says.

This period confirms research by Bergen’s Professor Victor Norman that shipowners are more risk-prone when they have cash in their pockets. “At the time I thought that was rather obvious, but looking back, this is rather a valuable insight,” Stopford says. “If you give people a lot of money, they will spend it. We are animals, really.”

Escape from oversupply?

Riaz Khan, the long-time head of research at DVB and now chief executive of Tavlon Commercial Enterprise, says that nine years after the financial crisis, many markets remain oversupplied.

“The huge debt overhang has shown its ugly side vis-a-vis the banks, but, frankly speaking, there is still a long way to go. The reason is that banks with billions under scrutiny are continuing to re-bundle and refinance the same assets,” he says.

“The principles in shipping are the same as in economics. There are multiple links in the chain, with the main theme in pricing being: shortages make for boom times; however, excessive supply brings that boom to bust.”

Economic engine?

Khan believes it will be a long time before rates fly again, and if and when the upturn does come, it is likely to be short. “Does one really expect another China, with all the elements that contributed to the boom? Highly unlikely,” he says. “India? Yes, possible, but the country is protectionist and it will not be done with the same unified central strategy as was carried out by China.”

That boom was not alone in being influenced by global economics. Stopford’s book identified peaks at the start and end of the 1880s linked to major trade growth, as were the upturns of 1897, 1911 and the post-war spike of 1950, for example.

Potentially a new economic upturn awaits following the election of Donald Trump, who may have arrived at an opportune time, with the US economy still recovering from recession. “Maybe after a rather dodgy period we will find the industry picks up and we all zip along,” Stopford suggests.

On the other hand, global crises also tend to happen about every seven years. The last landmark — the onset of the financial crash — was almost 10 years ago. “On that basis, we should be looking for another crisis in the next couple of years,” he counters.

“When you are speeding down a hill in a car with no brakes, you never know if you will get round the bend at the bottom by pulling on the handbrake,” Stopford concludes. “It depends how you drive the car. If you are good, maybe you do.”

'You might as well make volatility your friend'

0fbe8e3eaa30eb74a35245fffd066b05  Photo:  

Despite spending his career studying shipping statistics, Martin Stopford admits the best shipowners are quicker off the mark than analysts when it comes to spotting a boom.

“The good owners have a nose for what

is going on and they are not too academic about it. There are many things that can give you a better market and they have a little mental machine that says this is going to work out,” Stopford says. “Although it doesn’t always.”

Here, some leading names share their secrets with TW+.

John Hadjipateras

Chief executive, Dorian LPG

“You can’t eliminate volatility in shipping, you might as well make it your friend. With a strong balance sheet you can take advantage of cycles. My philosophy is to try to make investment decisions based on market judgments — not outside pressures or fads.

Hadjipateras has these guidelines.

“Can we afford to be wrong? No matter how good the deal, there’s a chance things don’t go as hoped for. If it turns out to be a loser, then be sure the loss can be absorbed.

“Is there a long-term trend we must respect — eg, sail versus steam, containers versus bulk, renewables versus fossil fuels?

“If it’s not a sunset industry, then does the market price reflect a near-zero expectation? We bought VLCCs in the 1980s and paid less for them than older aframaxes, as the price was at a discount to scrap. Because there were zero expectations, they were our most successful investments.

“Another strategy, which is harder to execute, is to identify momentum and try to buy on the way up. Of course buying is the easy part. Selling requires more discipline and resolve. We have to keep reminding ourselves, no one went poor booking a profit.

“‘Buy expensive sell cheap’ — the price doesn’t matter much if you’re buying or selling at the right point in the cycle.”

Harry Vafias

President and chief executive, Stealthgas

“There is no magic secret to deal with the volatility. What we do is try to buy in the bottom of the market, which is more easily said than done.

“Try to keep leverage low, so if your timing is wrong, you won’t choke on too much debt, and try to fix as much as you can on period with A1 names.”

Vafias adds: “It’s not easy to detect if an upturn is a solid rise or dead cat bounce. Some signs include: charterers taking ships on longer periods, forward FFAs [forward freight agreements] firming, reduction in demolition activity and people waiving inspections. If indeed it’s a solid rise, then the faster you buy ships, the better.

“Currently I think we see a genuine solid rise in dry values and freight rates. In containers we see the same, but there is more scepticism if it’s a real one or just a seasonal ‘bonus’.”

Trygve Munthe and Svein Moxnes Harfjeld

Co-chief executives, DHT Holdings

“Discipline. Buy when assets are cheap — don’t get carried away when the upward momentum is there and everybody is ready to throw money at you. Finance so that you have staying power. Low cash breakeven is key. If you have covered the downside, the upside tends to take care of itself in the large tanker market.

“Everybody can monitor the orderbook, but most analysts underestimate demand. We think this is a compelling time to invest, as asset prices are low, demand is strong and the order book is dwindling — and replacement needs accelerating.”

George Economou

DryShips, Cardiff Marine and TMS Tankers

“The best way to deal with the cyclical nature of shipping is to have low leverage, invest at the trough and exit before it peaks.

“Look and be comfortable with the order book (the expected supply side), take a view on the forward demand and go back to point one. The signs are then aligned and you pull the trigger.”

8eaf6f5767457e0faeec6fbc136cdb35 Aristotle Onassis in Paris, 1930s. Photo: Courtesy of the Alexander S. Onassis Public Benefit Foundation  Photo:  

PLUS POINT: Suez riches flow for Golden Greek

For Golden Greek Aristotle Onassis, shipping had lost some shine in the mid-1950s. His fabled Jiddah Agreement with Saudi Arabia had turned sour, leaving his tanker fleet in lay-up, having been shunned by oil companies. 

Ironically, this proved the perfect launch pad into the first great tanker boom. In late 1956, during the Suez crisis, Egypt blocked the canal with 46 sunken ships, sending tanker traffic around the Cape of Good Hope and rates into orbit.

Onassis stepped in from the cold and made a profit of $75m-$80m in just six months. According to Maritime Economics, by 2005 this was the equivalent of $1.5bn. Onassis’ biographer, Peter Evans, says the tycoon expected the good times to roll on, but his right-hand-man, Costa Gratsos, saw it differently. While Onassis wanted spot exposure, Gratsos secretly took on time charter cover that proved critical when the Suez crisis quickly ended and the market folded again.

PLUS POINT: Cycle check-list

While all cycles are different, and some end before they have got going, there are some common themes to the stages. This check list below may help you decide where in the cycle you are.

Trough: 

  • Clear surplus capacity
  • Freight rates at or below OPEX
  • Tight credit and negative cash flows
  • Increased demolition

Recovery: 

  • Supply and demand starting to balance
  • Sentiment swings between optimism and doubt
  • Increased liquidity raising ship prices
  • Prosperous rates

Peak:

  • Rates at between 2 and 10 times OPEX
  • High bank lending
  • International press coverage
  • Stock market listings
  • High newbuilding activity
  • Talk of a new era

Collapse: 

  • Supply exceeds demand
  • Economic shock and/or slowing trade
  • Peak newbuilding orders are arriving
  • Trading speeds are slowing
  • Limited sale & purchase activity
  • Confused sentiment

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