When the financial crisis broke, no industry was worse affected than shipping. In the six months after Lehman’s demise, world trade collapsed further and faster than it did even in the 1930s. The daily cost of chartering a mid-sized bulk carrier — one that could navigate the Panama Canal — plunged to barely $2000, at which level none covered their costs.
Worse, this collapse came at a time when the world’s shipyards were about to deliver one of the biggest increases in capacity the industry had seen — the result of ship owners round the world being seduced into expansion after 10 years of easy bank credit and booming trade. The resulting bust took down a lot of them and severely damaged the banks — mainly German but also including Royal Bank of Scotland — that had supported them.
It has been a painful six years but if you want a sign that things are indeed getting better, take a look at the shipping industry today. The clue to what is going on lies partly in the bulk carrier freight rates, which are back up around $10,000 a day — a rate at which they can make a small amount of money —but more interestingly in the growth of speculative vehicles that allow people, or more often financial institutions and hedge funds, to become ship owners.
It has, of course, been possible to speculate on shipping freight rates for many years using the Baltic International Freight Futures Exchange (Biffex) index which, while by no means perfect, did reflect the ups and downs of rates. But now the smart money has spotted a further opportunity, which is to finance and own the ships itself .
It is another example of mobile capital flooding into the gap created by the withdrawal of the banks — many of whom have still fully to work through their last generation of bad shipping loans. As investing institutions become frustrated with the poor returns and excessive volatility of their conventional bond and equity investments, shipping to some seems to offer an interesting alternative.
As with many investments, it is all about the timing. Supply and demand have come back towards balance as record tonnages of older, less efficient tonnage were scrapped in 2012-13. The next few years will see a generational change in the efficiency of new ships coming off the slipways. Thanks to better engines and better propellers, they will offer at least a 10% improvement in fuel efficiency — this at a time when fuel costs are about $30,000 a day for a mid-sized ship.
This should coincide with a continuing recovery in world trade, which should push up freight rates. In turn, the value of ships moves with the amount they can earn, and thus the increase in rates will gradually fuel a gain in capital values.
The sector is also giving rise to a new generation of adviser-cum-fund manager. Traditionally, the shipping sector has been peopled by experts who understood the shipping and freight rates but had little idea how to package this as an investment with a controlled level of risk and a targeted rate of return. Mostly, they operated as departments within the big commodity traders such as Cargill, the agricultural products giant.
Increasingly, however, firms such as Global Maritime Investments see the opportunities in offering such a service. In the past, their core business has been making money for their investors by arbitraging freight rates. Now with the cycle turning, they sense the time has come to take more risk and try to own some of the ships themselves.
Backed by a large North American institution, GMI has already begun to assemble a fleet of ships — currently mainly on lease. But the next step will be to form financial partnerships on a private-equity style model where capital will be raised from investors and used to build and own ships. These will then operate through a period of rising rates with the hope that they will be sold towards the end of the decade and capital returned to the investor. Rates of return of 20% are talked about.
Time will tell. What is interesting, however, is what this says about the way the financial world is changing. Time was when shipping finance came exclusively from banks or governments, but not any more. Today, mobile international capital has rediscovered its sense of adventure and is flooding in to fill the gaps left by the retreating banks.