Overcapacity is destined to weigh down in the Baltic Dry Index and consequently freights rates that dry bulk carriers receive for transporting commodities like iron ore and coal. According to Mr. Michael Bodouroglou, Chairman and CEO of NY-listed dry
bulk shipping company Paragon Shipping, things will get worse before they get better. He said in an interview with Hellenic Shipping News that the imbalance between supply and demand will worsen over the next 18 months, unless some "dramatic rise in new order cancellations" occurs. Based on Paragon's estimates 38% of the global fleet will have to exit the market within the next two years, for the market balance to be restored and return to the 2007-mid 2008 levels.
Recently, we witnessed a new rally of the Baltic Dry Index, but in has retreated again around the 3,000 mark. Still, do you think that the worst is over for the dry bulk market?
No, I do not believe the worst is over. There is still an enormous overhang on the supply side which will further weaken the market in the months to come.
Many advocate that the biggest problem for the industry is the looming oversupply of new building vessels. Is this potential overcapacity the biggest threat for ship owners' future earnings?
Absolutely, we see China keeping up the demand side of the equation but unless we see a dramatic rise in new order cancellations the imbalance will worsen over next 18 months
What are your estimates on the rate of order cancellations?
It is extremely difficult to get some hard facts on the number of new order cancellations as the data coming out of China is not altogether reliable. What I can say is that our estimates show that approximately 38% of the world fleet will need to disappear during the next 2 years if we are to reach a demand and supply equilibrium that we experienced in 2007 and the first half of 2008.
During the past month, with the freight rate market on the rise, we saw a reverse decline of the number of ships sold for demolition. Do you think that this stance from some owners who are eager to earn that little extra from their older vessels a bit irresponsible?
I wouldn't say irresponsible they are simply "squeezing the lemon dry" before the inevitable scrapping. I do believe that if charter rates continue to fall then we will see scrapping activity increase during the coming months.
Paragon Shipping has fared rather well during this shipping crisis. Which are the company's main strategic advantages in these market conditions?
Paragon has a very visible cash flow stream during the next 2 years. We have secured 98% of our revenue days for the remainder of 2009, 84% for 2010 and 66% for 2011 at very profitable rates. This is the biggest advantage we have over our peers right now. Visible and strong cash flow will not only mean that Paragon can face any downturn in the market but our large cash balance will allow us to take advantage of opportunistic purchases that I believe will appear during the next 18 months. Cash will most certainly be the biggest asset for any drybulk operator.
What measures did the company implement in order to better weather the recession, which plagued the shipping industry?
We implemented a number of strategic objectives when Paragon was founded in 2006 and the fact that Paragon is in a strong financial position today demonstrates that these objectives can work in both good and bad markets. The implementation and combination of a flexible and successful chartering strategy, a strong and visible cash flow, modest leverage, high standards of ship maintenance and tight cost controls has allowed Paragon not only to prosper during these difficult times but has also placed the Company in an enviable position of being able to capitalize on weak asset prices, which I believe will materialize in the near future.
Moving forward, what are your estimates on the dry bulk market's potential?
As I mentioned earlier I believe that the drybulk market has not yet reached the bottom. The next 18 months will be a very testing period for our industry. But I strongly believe that when scrapping and new order cancellations begin to accelerate there will be a great potential for strong owners to renew and expand their fleets.
Do you believe that the drop of ship values present a unique investment opportunity?
Yes I do. The outlook for the demand for drybulk commodities is still strong and therefore when values do drop the financially strong companies like Paragon will be able to acquire modern vessels at attractive prices that have a great earnings potential during the next up cycle.
How should one take advantage of these opportunities in terms of financing? Do you think it's better to avoid bank financing, provided that one can secure such financing?
Bank financing is a scarce commodity at present but some banks still have an appetite, albeit at modest levels. There is nothing wrong with a reasonable amount of leverage in any stage of a company's development. We always lean to the side of caution when it comes to leverage but it is still a major part of our capital requirements. In such a capital intensive industry as ours it is and will continue to be a major part of our funding requirements.
Is Paragon actively seeking to add vessels to its fleet and if so how will you finance such deals?
I wouldn't say we are actively seeking right now as we believe there will be a weakening of values over the coming months. But we do have our eyes and ears open for opportunities. We have recently completely a round of equity raising, which means that we are ready to acquire a number of modern vessels when we feel the time is right. We intend to finance these acquisitions with a combination of cash and bank debt, but as I mentioned earlier the leverage will be modest.
Nikos Roussanoglou, Hellenic Shipping Newsο»Ώ Worldwide