Many analysts, including BIMCO among others, have been preaching about the pending rebound of dry bulk rates during 2014 and its improved prospects going forward. Why haven't we witnessed such an improvement in the market so far in the year?
To be fair, the market this year has done better than in the year-ago period, however many people including ourselves expected a much stronger market by now and rates are still at low levels. There are many reasons why the rebound hasn’t happened yet. There was a large amount of deliveries in the first quarter (Roughly 16M DWT of capacity was delivered in 1Q14 (equating to an annualized growth of 8%)), as many owners delayed delivery of late 2013 vessels into early 2014. For the remainder of the year the deliveries will stabilize, and we expect fleet growth of 6% for the full year. There were also seems to be a slowdown out of South America both for grains and iron ore, and many owners expected a strong trade this year and ballasted their ships to South America to take advantage of a strong market, which caused oversupply in the market and depressed rates further.
Do you share the view that the coming weeks we will see a rebound of the market, on the back of higher China restocking, as a result of low iron ore prices?
Yes we do, we believe the events that have caused the weakness in the market are temporary and will eventually reverse themselves. We expect the low iron ore prices to boost imports to China, while we also expect a solid grain trade out of the US, and a continued strong grain trade out of South America as political issues in Argentina get worked out. These two factors, along with a slower delivery schedule for the rest of the year, should cause a very strong fourth quarter, and rates may even start to improve as soon as the summer.
In terms of the container market, where you are also active through Box Ships Inc., do you expect to see a rebound soon, after a dismal first quarter?
The Containership market has been in a downturn now for over five years, due to several structural changes regarding vessel size, a continued oversupply of vessels, and at the same time has seen a decline in the largest container route, China to Europe, for the past two years. That being said, we do expect the market to rebound but it is difficult to predict when it will start as there continues to be new ordering of larger vessels and it becomes more a factor of demand growth from Europe returning.
Which is your chartering strategy among this environment for both companies?
At this stage in the cycle we believe it is best to run our vessels in the spot market or on short term charters to take advantage of the rising market rates as the markets recover. We have this strategy at both companies currently.
Ship owners have been investing heavily both in newbuildings, as well as second hand vessels over the past few months. Do you think that ship prices have bottomed out?
It depends on the sector. For Containerships, prices have definitely bottomed and in todays market you can find some 10 year old vessels trading close to their scrap value, so they can’t get much lower. However, newbuilding prices have been strong and on the rise due to the increased demand for “eco” vessels, so newbuilding prices have risen significantly over the past year. In drybulk, second hand values have risen faster than rates as many people expect a recovery as we have discussed, so they are not close to the bottom and have been rising significantly over the past year.
How many ships have you added to Paragon's fleet since the start of 2013? Which segment has been the focus?
At Paragon, we have ordered four Ultramax newbuildings and three Kamsarmax newbuildings since the start of 2013. We believe Ultramaxes are versatile vessels that can go into many ports and carry many different cargo types. We also like Kamsarmaxes as they are the new Panamaxes and we expect these vessels to be the workhorses of the industry going forward. That being said, we have a balanced approach when it comes to the segments of the drybulk market and like to have a fleet with several vessels of each class so you can have a diversified fleet to mitigate risks in any one sector.
In terms of your future plans, which has been the main focal point, newbuildings or acquisitions of modern tonnage through the second hand market?
We base our acquisition strategy on where we believe we can get the best value. In early 2013 until recently, we believed that the best value was through ordering new “eco” design vessels at quality shipyards at historically low prices. At the same time, second hand values seemed to get a bit ahead of themselves, so it made the most sense to buy newbuildings. More recently, quality shipyards cannot sell you a ship with delivery any time soon, so that makes second-hand tonnage or newbuild resales a more interesting acquisition target.
Are you a "believer" of the benefits of the new generation of Eco Carriers?
I believe that every new design of vessel is an improvement on the previous designs. These new “eco” designs are definitely more fuel efficient and have some benefits, mainly because for the first time ship owners are worried about fuel consumption, so shipyards had to alter their designs with fuel savings in mind. When you build vessels to save on fuel consumption, you take away from other features. The “innovations’ the shipyards are doing now are not new, these designs are not a step change in fuel efficiency like back when the vessels switched from coal powered engines to bunker-fuel power. However, they have their benefits and given the fuel prices make a compelling argument.
Is financing availability improved, when compared to previous years, or are interest rates and costs still high?
In today’s world there is less financing to less owners at lower advance rates. This is a fact of life, but we find ourselves in the position where financing is readily available to us. It is interesting because every bank has a list of clients they want to lend to and those lists are not very long. Given this, it has caused margins on loans to fall for certain owners at a time when smaller shipowners are still paying high costs. This is causing a two tier market in the industry and is causing problems for the smaller owners.
Have you been looking to take advantage of the emergence of alternative sources of financing in shipping over the past couple of years, such as private equity funds? What's your opinion of those new investors in shipping? Do you share the view of some industry pundits that they could hurt shipping, as a result of their lack of familiarization with this particular segment?
We are always open to alternative sources of financing, and have spoken to private equity funds, but in the end believed it wasn’t for us. My opinion of private equity is that they are filling a gap in the industry that was created by the decline in bank financing, and other sources of equity that dried up during the crisis years. They see that they can make good returns and have invested. Many of them have partnered with shipping veterans to help them navigate the industry, but a few have decided to go it alone and that could hurt shipping. My biggest concern is how they will exit, because if they all decide to exit at once, it will put a tremendous strain on the industry.