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“Jumbo” Dry Bulk Fleets To Continue to Emerge in The Future As Consolidation Among Shipping Companies Will Remain

Petrofin Research’s latest annual survey of the Hellenic-owned fleet, yielded some very interesting conclusions. It appears that the Greek fleet, although maintaining an overall robust growth, took a small breather last year. It can be argued that the frenetic activity both in newbuildings and S&P transactions could not continue at the same pace. However, we can detect some key points that shaped last year.

Petrofin said in its analysis that “the dry bulk market experienced a good year, in terms of both vessel values and incomes. However, as the year came to a close, clouds formed over the longevity of the improving market, primarily related to the announced and imposed ‘Trump’s tariffs’, as well as a slow-down on the world economic growth. Therefore, dry bulk owners’ pace of ordering and S&P acquisitions declined. The tanker market fated badly last year and so did the LPG market. There was some position building by tanker players, wishing to exploit low vessel values. However, the extreme volatility of oil prices thwarted many owners from expanding, even though their appetite witnessed a change in the last month of last year, especially for product carriers.

The LNG sector represents a longer term market opportunity for Greek owners, to develop a big presence in this overall promising sector, in which only big players can effectively participate.

Two factors played a role as well in the individual decisions by owners. The first was the rising US interest rates and prospects for further rises, which have a pronounced effect on vessel breakevens. The second involves the continuous decline of bank finance, especially in the West, where the consolidation process that commenced 10 years ago, continues unabated. Banks, such as RBS, have virtually disappeared and Commertzbank, HSH, Nord LB, Unicredit and others are but shadows of their former selves. Some of the shock has been taken up by Chinese banks with Far Eastern banks accounting for an increasing market share.

With the public markets underperforming, (in terms of contribution of fresh capital $7.5 bn, representing about 1% of the value of the global fleet), access to bank finance and the public markets has been very tight and, in any case, restricted to the bigger private and public company entities. This has dampened owners’ investment interest. As recently reported in Tradewinds (09/02/2019), the total number of sale and purchase transactions and new building resales of bulkers, tankers, container ships, gas carriers and passenger ships fell by 4.6% in 2018 to 290 vessels from 304 vessels in 2017. However, the total value of the above rose from $4.6bn in 2017 to $5.5bn in 2018.

Admittedly, leasing and private funds have become the real alternatives to bank finance as appetite to lend or invest in shipping has continued and indeed has risen. However, such forms of alternative finance come at a higher cost, which the current shipping markets cannot absorb. Leasing cost has remained higher than bank finance but not prohibitively so. The effective cost of Funds is between 12 – 15% per annum, which is not compatible with the general returns of shipping other than for short-term periods.
It is believed that as the cost of finance has risen and access to public markets was limited, these factors plus the uncertain future of world trade growth turned a number of owners into adopting a ‘wait and see’ attitude.

The implications of the 2020 fuel restrictions, as well as the costs of implementing ballast water management improvements for all the fleet have resulted in higher costs for owners, as well as in the case of 2020, a heated debate into the merits of scrubbers.
Early declines in the dry bulk sector in 2019 appear to have justified Greek owners’ cautiousness. By their nature, though, Greek owners are keen to spot opportunities and remain totally committed to shipping as their sector of choice. With commitment and opportunity comes growth and we anticipate that any slowdown may well be relatively short lived, provided there is no massive shift in global trade and prohibitive sanctions that frustrate this evolutionary phase.

The recent moves towards dry bulk mergers should also be seen as part of Greek listed companies who wish to become more attractive in the equity and bonds market and thus be in a better position to grow their fleets inexpensively and safely. The consolidation trend leading to the creation of ‘jumbo’ dry bulk concerns with fleets of over 100 vessels is thus continuing and is expected to gather pace in the years to come”, Petrofin Research concluded.
Source: Petrofin Bank Research

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