Editorial:

Owners turn a blind eye

Earnings in the bulk trades have never been better, but many owners have turned a blind eye to what will inevitably happen – the end of the cycle. They tell us that this time it is different. New markets like China and India have entered the fray to prop up the demand side. Gone are the bad memories of average earnings of well below USD 10,000 for a modern capsize bulker as late as in the autumn of 2002 against an average of USD 61,700 now. VLCC owners, now earning well over USD 100,000 per day have all forgotten earnings below USD 15,000. The euphoria of cash flowing in this year seems to have blinded everybody.

When the market began to improve last year owners went on an unprecedented ordering spree booking all yards up well into 2008. In other words, this is the sort of perspective owners must have in order to remain optimistic about earnings four years ahead. For many it could turn out to be a costly gamble, akin to playing the lottery.

One must assume – perhaps wrongly – that owners take a view on the demand side to underpin their decisions to build new tonnage. Some owners are – admittedly – a bit more prudent in their evaluation of the prospects, but the big majority seems to conduct market assessment much the same ways as one building a ladder; it can only be extended upwards.

It has to be a gamble, and a gigantic one. Owners are investing USD 60.0 billion in two years in new tonnage. Present earnings, and even half as much, would pay for this investment over the lives of the ships, but it is unthinkable that this long period of high freight cost will not have a detrimental effect on the world economy. Owners costs are also increasing, not least running cost, and in particular bunkers, which so far this year is up close to 20 per cent. Insurance cost is up by 30 per cent for bigger bulkers and tankers and crew cost have hiked just under ten per cent. Insurance and crew cost is unlikely to fall in the years to come.

The worst-case scenario for owners is surely the increase in newbuilding prices and the outlook of less earnings to pay for it all. The downside risk is increasing all the time, while the upside is diminishing very rapidly. It all hinges on possible added demand on top of current estimates. Uncertainties surrounding the assessment of the demand side in the market are many, and some aspects are very complex, like trading patterns, economic growth etc.

One recurring aspect of the shipping cycle is finance, and here we have had a repeat performance. When the market is good, as it is at the moment, all sorts of non-shipping banks pile into the market and depress margins, which are now at resistance levels of around 60 basis points. It has been too easy to find funding and too tempting to invest in new vessels. The market could turn next year, or at least be well down on current levels, and it will be time to assess the downside risk more sensibly. Only limited available yard capacity now prevents owners from committing hara-kiri.

Petter Arentz – Editor, Norway