Going for Broke

Money seems to be literally floating on the seas, and at the end of the day it’s all about how much profit you make. In today’s information age, communication between owners and brokers continues around the clock, and remains the catalyst for optimising profit. As cargo bookings, weather conditions and ETA’s are variable and everchanging, the shipping industry has become far more data driven and analyst dependant. Indeed, ship brokering has evolved massively from what it used to be

Matthew Patton (Left), Chairman of Triton Lines, Alexander Hamalton (Right), a broker for Barry Rogliano Salles (BR S) Middle East

Sit down with any shipbroker and he’ll be quick to tell you, the market is changing. No longer are brokers perceived merely as middlemen facilitating ship acquisition for their clients. Rather, with daily variables such as rising fuel costs, hourly market fluctuations, futures contracts and other speculation- driven interests, their roles have become industry specific and far more real time data-driven.

“In the old days, shipbrokers were just like middlemen, ‘Get me a ship at the cheapest price,’” says Alexander Hamalton, a broker for Barry Rogliano Salles (BRS) Middle East in Dubai. “Now it’s getting a bit more like banking where there is a lot of market research. People are interested in your views on forward freight, historical freight, how the market is going to move, etc. So you have more of an analyst role.”

Hamalton says he spends most of his time interpreting market conditions and relaying information to clients as well as shipowners. With a specific focus on oil tanker acquisition, Hamalton feels that specialising in a respective industry allows brokers to stay abreast with their ever-changing markets.

“In shipping, anything can go wrong,” says Hamalton, “hurricanes, break downs and other instabilities affect the entire market. Brokers today must always cover their clients’ interests in that respect.”

“At BRS we have a designated person only watching ships’ activity. That has become an important part of the job,” he continues. “We’re trying to prevent problems before they occur.”

From a shipowner’s perspective, the rapid flow of information has proved invaluable. According to Matthew Patton, Chairman of Triton Lines, the advent of the Internet has directly impacted the global shipping market.

“The Internet has had a significant effect on the industry since it’s made the world much more ‘flat’ as they say. Cargo owners and shippers are able to quickly advertise, communicate and book cargos because the information can be sent to hundreds if not thousands of potential clients in an instant.

This type of communication was impossible beforehand and it allows market prices to correct themselves much more quickly as cargos are fixed at a much faster rate,” says Patton.

As the Middle East region continues to escape the slump that has plagued the global ship charter market since the beginning of the year, BRS and other industry analysts do not see a change in this trend anytime soon. One contributing factor is the flexible nature of the market in the region, compared to a more structured and defined European model.

“The Middle East is more of a traders market, whereas in Europe it would be considered a systems market,” says Hamalton, comparing regional differences within brokering. “For instance, in Europe a company has a refinery which produces ‘x’ amount each month, and most of the time the product is sold in a yearly or bi-yearly contract. You just have to get the stuff moving. Here, it is far more speculative trading. A refinery pumps out a product that doesn’t necessarily have a designated destination at production, but inevitably they will still have to move the product.”

Indeed, trade lanes such as Intra-Asia and Middle East as well as Asia to South America and southern Africa routes are continuing to soak up capacity for almost all tonnage sizes.

Most brokers and industry experts agree that within the GCC there is still huge capacity and demand for commodities is growing. This has helped to keep the region’s container market afloat despite the global slump. Globally, hire rates for all ship sizes are retreating with carriers able to negotiate sizeable discounts as owners opt for lower rates rather than having their vessels unemployed.

“The one thing I think all ship-owners and brokers agree about is that the Middle East has changed drastically in the last five years, and no one expects the demand for raw materials to slow down anytime soon,” says Patton.

Carriers also are deferring charters until the last possible moment because they expect rates to fall even further during the current seasonal slack ahead of the pre-Christmas peak shipping season that gets under way towards the end of summer. However, rates of shipping containers within and out of the Middle East region have increased by an average of 60 per cent since last year due to increasing capacity and fuel prices.

“What most people want to talk about is how shipping rates have changed in the last few years,” adds Patton. “Overall, rates have definitely surged in the past five years or so years. Most of this rate increase has been attributed to what some call the Chindia effect. This is really just China and India’s demands for raw materials as those developing countries continue to grow. China has definitely had a greater impact than any other nation in the last five years, but that doesn’t mean the other developing countries aren’t contributing to this growth.

With rates already starting to correct themselves, we’ll probably see some ship yard orders cancelled and scrapping will increase.”

Indeed, reports of cancelled charters and shipyard orders have been depressing market sentiment in recent weeks. Germany’s NSB, the world’s largest container ship charter owner with a fleet of 87 ships totaling 360,000 TEUs, this month cancelled a US$620 million contract for eight 4,250 TEU vessels reportedly because it could not persuade banks to finance ships that didn’t have charter contracts. Earlier, Evergreen Line pulled out of a long term charter for eight 12,400 TEU ships from Greek owner Niki Shipping.

“When rates go up the way they have, it’s typical to see a large number of new ships ordered by shipping companies worldwide,” says Patton. “I think the past five years have been no exception. In theory the rates should correct themselves as new vessels come online to meet this increased demand, however what typically
happens is an overcorrection of the market – thus begins the cycle. If an overcorrection occurs then we’ll see rates drop significantly forcing shipowners to lay up vessels and others to send their older ships to scrap. This of course will take vessels out of the market and allow the prices to stabilise.

Then eventually there will not be enough ships to meet demand and the cycle will start all over again. The game has always been the same, we just need to learn how to play it right,” he says.

With a flood of large ships of up to 12,000 TEUs about to be delivered from Asian shipyards over the next three years, charter owners globally are bracing for rates to sink even lower. However, brokers rule out a repeat of the 2001 bear market when charter owners considered a coordinated lay-up of idled ships, largely because cargo demand and ship supply are more closely aligned now, than seven years ago.

“We have a bullish outlook on the market,” says Patton. “Since many of the vessels which are currently on order are for the most part delayed in their delivery, the market hasn’t been flooded with as many ships as expected. In actuality it will take some time before many of these ships reach the market and as a result it should dampen the effect it has on rates by some degree. Another element to the stability of the market is the fact that many other nations are developing at a rapid rate and this will require further resources. Locally we’ve seen the UAE completely transform in the last five to 10 years. We’ve seen China and India grow by leaps and bounds but we believe there are other nations that are nowhere near their full potential.”

Clarkson, the London shipbroker, has forecasted world container trade to grow by 8.7 per cent this year, down from an earlier estimate of 9.7 per cent, while ship capacity should grow by 13.2 per cent. That gap will be narrowed substantially by several factors including port congestion and slow steaming. Clarkson expects trade will grow 9.6 per cent in 2009 while the world fleet will expand by 12.9 per cent. While the cargo growth on the major trade routes is slowing, Asia to Europe shipments are expected to increase 10 per cent this year compared with 20 per cent in 2007.

So the question remains, with current market conditions are long-term structured contracts more appealing or short-term flexible deals? “I believe it’s a simple commercial decision at this moment,” says Patton. “The only reason you would sign a short term contract is because you felt rates may increase and you want to be able to capitalise on that increase. If, however, you can still make a good profit at today’s rates, then we believe it’s better to sign the vessels to long term contracts of 12 months or more. Trust me when I say this, if you sign a short term contract because you think rates will go up and you turn out to be wrong – you’ll be kicking yourself for the losses you’ve incurred. When it comes to greed I’ve always believed that it’s better to be a pig instead of a hog. Pigs get fed every day, but hogs end up going to the slaughter house.”

THE RISE AND FALL

Today, the average daily charter rate for a 3,500 TEU gearless Panamax ship has fallen to US$27,000 from US$31,000 in May and US$33,000 in March, according to Clarkson, the London shipbroker.

A 2,750 TEU vessel is earning US$22,000 a day, down US$8,000 since March, and the benchmark 1,700 TEU geared ship is pocketing US$16,000 a day compared with US$18,500 six months ago. Current rates have retreated to their 2006 average and are well below earlier years – a 3,500 TEU vessel for example, earned an average of nearly US$38,500 in 2005.

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