Why Dry Bulk Shipping Could Look Very Different One Year From Now

Why Dry Bulk Shipping Could Look Very Different One Year From Now
Feb 17 2017, 09:08
Includes: DSX, EGLE, GNK, GOGL, NM, NMM, SALT, SB, SBLK, SFL
Summary

Dry bulk shipping has been caught in a perfect storm for the past three years.
A massive oversupply of vessels paved the way for this historic bear market.
But this situation isn't going to last forever and the first signs of recovery may be emerging.
Note: This article was originally published February 2nd on Value Investor's Edge, a Seeking Alpha subscription service.

Overview

Dry bulk shippers specialize in transporting cargos, typically commodities, such as iron ore, coal, grain and other materials around the world.

Companies with exposure to dry bulk include Diana Shipping, Inc. (NYSE:DSX), Eagle Bulk (NASDAQ:EGLE), Genco Shipping (NYSE:GNK), Golden Ocean Group Ltd. (NASDAQ:GOGL), Navios Maritime Holdings, Inc. (NYSE:NM), Navios Maritime Partners L.P. (NYSE:NMM), Scorpio Bulkers (NYSE:SALT), Safe Bulkers, Inc. (NYSE:SB), Star Bulk Carriers Corp. (NASDAQ:SBLK) and Ship Finance International Limited (NYSE:SFL).

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Background

It is widely accepted that currently the drybulk market is experiencing supply and demand disequilibrium. This was the result of too many ships being ordered prior to the 2008 crash to supply a commodity demand boom that was unsustainable in the long run. The end result was a massive amount of supply that was ordered before 2008 and being delivered as late as 2014 due to the lengthy nature of the shipbuilding process and the backlog in many shipyards that spanned several years. Thus, the available supply soon outstripped post-boom demand.

This oversupply problem has been compounded by lackluster demand growth for the dry bulk trade which eventually led to a historic lows in the leading economic indicator for the segment known as the Baltic Dry Index, or BDI.

The Baltic Dry Index, or BDI, is a composite of the Baltic Capesize, Supramax, Panamax, and Handysize indices. It is useful in determining the cost to move materials by sea.

Introduced on January 4th, 1985, at 1000 points, this economic indicator had reached a record high 11,793 on May 20th, 2008 and a record low of 290 on February 10th, 2016.

Reviewing The Cause

Knowing the root cause of this historic downturn and where we currently stand is crucial to understanding how and when it will be resolved.

As noted earlier, an oversupply of vessels has been the main culprit behind the historic downturn, and a correction on that front will be key to rebalancing toward market equilibrium.

Last year I authored an article geared towards investors unfamiliar with the shipping market called Trading And Investing In Shipping Part II: Focus On Supply Side. This article attempted to explain the reactionary nature of owners to market rates which contributes to the significant volatility in the shipping market. Of course, these orders take some time to hit the water, so conditions may be different than the period in which those orders were made.

This is exactly what happened leading up to 2008. Chinese demand for raw materials carried by dry bulk ships was nothing short of insatiable. This demand, which proved to be unsustainable in the end, created a boom for dry bulk vessels which saw rates peak in June of 2008 at $233,988. In an effort to capitalize on this environment, owners responded to this boom by ordering more ships - a lot more.

By 2009, when the boom had clearly turned to bust the orderbook for newbuilds stood at a whopping 78%.

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Source: Intermodal

Traditionally, 15% is seen as what is required to replace aging vessels coupled with historic demand growth.

As Chinese demand for raw materials returned to a more sustainable level many of these newbuilds that were contracted prior to the bust began to hit the water. This led to a massive oversupply of vessels for a market which was no longer experiencing that insatiable Chinese appetite for raw materials.

As more of those vessels hit the water competition became more fierce leading to lower rates which resulted in a record low for the BDI in February of 2016.

(click to enlarge)

BDI 10 Year Chart

Source: stockcharts.com

The Invisible Hand

This situation resulted in two important market driven trends.

First, low rates meant that almost all vessels were losing money. This led to the scrapping of older vessels. Overall, it comes out to basic loss projections. Which way would lose the least amount of money. Owners must now take into account time frames and projections. If the bearish time frame looks short, older vessels may keep sailing if a projected recovery means they can still make money over the long-run vs what they will lose in the short-run. However, if the bear market looks to be fairly long in duration, owners may not feel as confident that these older vessels will return to profitability in their remaining life. Even if they think they might get a couple years of recovery toward the end, would it be enough to ride out a 5 year bear market amid record low rates? Probably not.

Second, these reactionary owners did what was expected and cut orders for vessels due to this low rate environment leading to a shrinking orderbook. This thinning orderbook would eventually lead to a rebalancing of the supply side years down the road.

Currently, the vintage fleet (older than 15 years) surpasses the amount of newbuilds on order.

Source: Intermodal

Overall, the vintage fleet is approximately double that of the newbuilds on order.

IMO Regulations

Many astute shipping aficionados probably will note that drybulk vessels typically have a 25 year life span so the vintage fleet could have some significant time left on the water. Normally, you would be correct.

But a recent mandate out of the IMO (International Maritime Organization) will have a significant impact on the scrapping of vessels. That mandate is the Ballast Water Management Convention and it will enter into force on September 8th, 2017

So what is the BWMC and why does it matter?

Ballast water may be taken on board by ships for stability and can contain thousands of aquatic or marine microbes, plants and animals, which are then carried across the globe. Untreated ballast water released at the ship's destination could potentially introduce a new invasive marine species. Hundreds of such invasions have already taken place, sometimes with devastating consequences for the local ecosystem.

The International Convention for the Control and Management of Ships' Ballast Water and Sediments was adopted in 2004 to introduce global regulations to control the transfer of potentially invasive species. Once the treaty enters into force, ballast water will need to be treated before it is released into a new location, so that any micro-organisms or small marine species are killed off.

Poten and Partners reported that "the prices for these systems vary depending on their type and level of sophistication, but the tanker owners that we have talked to indicate a range of $1.0 million for an MR product tanker up to $2.25 million for a VLCC (including installation) for a top of the line system."

These systems must be installed during the first dry docking following the implementation date.

Gibson Shipbrokers offered this insight: "The announcement yesterday that the Ballast Water Management Convention will finally enter into force from September 2017 will have an impact on the older ships where many may not be considered viable to retrofit in terms of costs versus age and earnings potential. In all probability, next month we will learn from the IMO the timing of the implementation of the new global sulphur cap for marine fuels. Many stakeholders believe the global maximum permissible sulphur limit on marine fuel will be 0.5% (lower limits for the ECAs) and implementation will be brought forward to 2020. Both these pieces of legislation will impact on owners in terms of the expenditure required to comply with these regulations. We believe that the impact of both directorates will enhance the prospects for increased scrapping. Once again legislation will have a huge impact of fleet numbers going forward, similar to the impact of the introduction of double hulls in the 1990's."

When this news first broke I wrote an article on the impact the BWMC would have on the tanker market, but the same holds true for almost all shipping segments. Here is a brief part of that report:

Special surveys are done at regular intervals to ensure the safe operation of vessels. However, as a ship ages, more care must be taken to ensure the integrity of a specific vessel. Remember, tankers usually have about a 20-25 year life span so as it nears the end of its life the inspection process grows more complex, expensive and time-consuming.

Source: Euronav

One of my favorite Seeking Alpha contributors, Stanislav Oleynikov, CFA, described this situation perfectly in a recent article on Nordic American Tankers, which has an aging fleet.

Mr. Oleynikov states: "When a tanker reaches 20 years, the shipowner must make significant investments to undergo the special survey required to continue using the vessel. If the market is weak and is not expected to rebound during the next year, such investment does not make sense. In 2.5 years, another significant investment will be required. That is why, it is economically better to scrap the vessel."

Costs become increasingly prohibitive, especially in a low rate environment which we are experiencing now. But adding to the decision to scrap in the short run is a bump in prices for demo candidates.

Intermodal noted in its week 36 report that "vessel demo candidates keep flooding Indian subcontinent region and prices offered across the board keep climbing at a rather impressive pace for yet another week, the demolition market is currently witnessing a rather unexpected performance compared to the one most of us expected up until very recently. Although we still think that this is not a rally that can last for too long as fundamentals have not materially changed in such a short period of time, it seems that a few things have been supporting the market lately. From one side local scrap steel prices in the Indian subcontinent seem to have brought back the appetite of breakers in the region, while at the same time it seems that part of the demand might have been in place all this time but was kept on the sidelines up until a more clear direction was taken by the market. Either or, the surge in prices is more than welcome by those owners determined to scrap and it seems that many of them are taking advantage this window of opportunity before the rally stalls."

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It stands to reason that those owners facing special surveys amid low rate environments may want to take advantage of this unexpected increase in demo prices especially as they face further costs in the form of retrofitting ships for the soon to be implemented Ballast Water Convention agreement which has now been adopted by several prominent nations.

It is noteworthy that demo rates are slightly more attractive now then when I wrote this back in September of 2016.

Source: Intermodal

While much of the very old tonnage has already been removed from the global dry bulk fleet, given the high costs of surveys, the expense of Ballast Water Management installation, and the continuing low rates we should see for a couple more years, it is likely we will see a wave of demolitions as we head toward this implementation date and beyond.

Additionally, the IMO has implemented new sulfur emissions guidelines which call for a move to 0.5% sulfur content bunker fuel from 3.5%. This goes into effect in 2020. So while this isn't an issue that must be addressed immediately it will still factor into an owners decision to scrap or spend money on a aging vessel for the BWMC.

In short, the reduction from 3.5% sulfur to 0.5% could mean significant cost increases for bunker fuel. Estimates place the potential impact anywhere from 44% to a 100% price increase.

But those estimates are based on traditional pricing. With demand side dynamics being severely altered there is the potential that refiners may face extreme difficulty in meeting the demand.

Furthermore, while major bunker centers like Singapore and Fujairah will be able to supply 0.5% sulfur fuel oil, smaller ports may not have the infrastructure and blending components which could create a shortage.

Of course, a demand shortage, whether from port availability or refining capacity, will inevitably impact prices.

Depending on the type of vessel, bunker costs compose anywhere from 40% to 70% of total 'on the water' operating expenses.

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Random Thoughts

Three more quick points.

First, we must all acknowledge the discounting nature of the stock market which often moves ahead of fundamental shifts in actual markets.

Second, we must take into consideration seasonal demand by the Chinese market which is the largest market for dry bulk vessels. Typically that market sees a soft spot right around Chinese New Year.

Source: Allied Shipping Research

Third, the futures market for dry bulk shows a recovery picking up as the year moves on as well as into 2018 and 2019.

(click to enlarge)

Source: FIS

Conclusion

Over the past years that I have been covering shipping on Seeking Alpha I have been an absolute bear with regard to the drybulk market. But my tune may be slowly changing for a variety of reasons.

The orderbook is thinning, contracting for newbuilds remains practically non-existent, and mandates are set to take hold which should accelerate scrapping. This should lead to a rebalancing of the fleet.

Though let's be honest about where we stand right now. I estimate the market is still approximately 20% oversupplied and it will take some time for that to work out. This situation isn't going to correct overnight. But the good news is that a correction appears to be on the horizon and I am able to forecast, for the first time in years, that a recovery may be setting up in the long-run.

What we need is for owners to refrain from newbuild orders and scrap vintage tonnage in advance of these mandates. The degree of both will have a direct impact on the speed and magnitude of a potential recovery.

Once again, this is a long-run outlook which will take several months or perhaps a year to begin to come to fruition.

Following Hanjin Shipping's Bankruptcy, Could This Container Shipping Company Be Next?

Following Hanjin Shipping's Bankruptcy, Could This Container Shipping Company Be Next? https://seekingalpha.com/article/4013800?source=ansh $DCIX

James Caitlin
Oct 21 2016, 09:55
About: DCIX
Summary

The container shipping market has gone from bad to worse.
Charter rates have dropped significantly and things are not projected to get better anytime soon.
Owners are scrambling to find employment for their vessels to cover OPEX and financing, but for some, employment cannot be found.
Note: This article was originally published October 18th on Value Investor's Edge, a Seeking Alpha subscription service.

Overview

Diana Containerships (NASDAQ:DCIX) is a small company with 13 boxships that range in size from about 3,400 teu to 6,500 teu. In these days of ultra large liners, which have significant cost advantages based on economies of scale and following the opening of the new locks for the Panama Canal able to accommodate up to 14,000 teu, the small sizes are not in high demand.

I began writing about the upcoming market turmoil facing the container shipping industry back on June 3rd of 2015. In my article entitled Another Oversupply Problem In Shipping Developing I noted that the orderbook for large vessels was a growing concern.

In my conclusion I wrote that "if you find yourself invested in one of the companies that utilizes containerships it would be wise to check in frequently to see how the orderbook is progressing which could have a major impact on rates going forward."

This was followed up with several other articles which continued to outline the increasingly bearish outlook for the segment.

In October of 2015 I released Container Shipping Market Macro Outlook which confirmed "we are seeing a growing lack of demand coupled with a capacity overhang which is contributing to declining rates and increasing idle containership capacity."

In January of this year we saw the Container Shipping Market Macro Outlook For 2016 which noted that "TEU availability hitting the water as a result of this increased carrying capacity is unprecedented."

Finally, in my latest installment entitled Dramatic Slowing Of Global Trade To Impact An Already Struggling Container Shipping Segment I reported: "With approximately 3.5 million TEU's on order and set to hit the water in the coming years, competition will only become more fierce."

I have said many times before that shipping companies do not exist in a vacuum. They are subject to the macro environment in which they operate. The degree of which depends on their charter structure. Spot or short term charters are subjected to cyclical nature of this industry far more than owners with long term time charters.

While Diana Containerships operates on time charters, they are short term and therefore impacted significantly by the market at large. In fact, out of US listed companies they have the most exposure to market mood swings, and this latest temper tantrum is a doozy.

One quick look at the chart since the release of the first article detailing my concerns tells the whole story.

Source: Ycharts

The approximately 85% decline is a direct result of these market headwinds, and I fear that things may get far worse before they get any better.

Currently

Many companies that operate in this segment have fairly long term charters with staggered expirations that will mitigate some of the damage. However, Diana Containerships isn't so lucky. They have seen or will see very shortly all of their charters expire during this highly depressed period.

Those that are sailing are doing so at rates which are less than desirable to say the least. But, some are not sailing at all. In fact, their latest employment bar chart tells a of a dire situation.

(click to enlarge)

Source: Diana Containerships

Here we can see most of the charter rates are well below what they listed as daily operating expenses of $6,893, in the latest 6-K. But at first glance we see some exceptional rates specifically for the YM Los Angeles at $21,000, the New Jersey at $21,000, the Pucon at $17,000, and finally the Pamina at $15,325.

But here's the catch, three of those rates aren't in existence any longer and the remaining one is set to expire on October 19th.

In the updated fleet bar chart shown above which was current as of October 11th, one has to look at the fine print to see what is really happening with these vessels.

The Pucon has been laid up in Malaysia since July 27th 2016. Apparently Diana Containerships feels that since it has not negotiated a new charter they can leave up the previous charter numbers with just an asterisk denoting that this isn't the actual situation.

It goes on. While not one of the high priced legacy charters the Great has been on lay-up in Malaysia since September 27th.

Finally, with little fanfare they laid up Pamina on October 10th followed by the New Jersey on October 11th, both in Malaysia. As noted above these were some of the high price legacy charters.

It is likely that these admissions by way of fine print were the catalyst for the 10% slide in stock price (at the time of writing) since October 11th.

These four lay-ups represent approximately 30% of their overall fleet.

But let's now recall that the Los Angeles, their last high priced legacy charter is set to expire this month. Could this vessel also be headed for lay-up?

The current macro conditions suggest that even if it is able to find employment it will be at a mere fraction of what the vessel once commanded.

Fleet Age

Let's also remember that the fleet, which averages close to ten years in age faces stiff competition from much younger vessels. In fact, this competition has led to an increasingly disturbing trend for Diana Containerships - the scrapping of vessels at a younger and younger age.

On Sept. 20, The Loadstar reported:

The 4,546 teu 2006-built Viktoria Wulff (ex-MSC Firenze) has become the youngest containership to be sold for scrap as Panamax owners cut their losses and abandon employment hopes in a hopelessly depressed market.

This news comes on the heels of another early demolition, which at the time set a record at 13 years of age.

On Sept. 8, The Loadstar reported:

The 2003-built 4,646 teu Seaspan Excellence (was sold for scrap) for a sum reported by vesselsvalue.com as $280 LDT [light displacement tonne, the measure used by scrap buyers], equating to a total demolition value of $5.96m.

The deal gives a useful snapshot of the container chartering market - Seaspan bought the vessel from MOL in March 2013 for $17.2m, only to be forced to sell it for scrap for $11.25m less than it paid for it just three and half years later, and at least a decade before the end of its operating lifetime.

Adding to this trend, on October 18th, just hours after this article was originally published on Value Investor's Edge, Splash 24/7 reported:

Belgium's Bocimar has turned bearish about prospects for panamax container vessels, becoming the latest owner to scrap (two-twin 4,800 teu) 12-year-old boxships.

The fact that all these ships are of the Panamax class is noteworthy. Operators are seeking to capitalize on the efficiency of larger box ships through the expanded Panama Canal which can accommodate vessels known as Post-Panamax.

While some of Diana Containerships' vessels are of the Post-Panamax class they are just barely large enough to be considered as such. Their largest ships, at around 6,500 teu, will find difficulty competing with newer vessels approximately 120% larger that can also navigate the new locks.

Finally, on October 17th, The Journal Of Commerce noted:

The value of second-hand Panamax container ships has plunged by as much as 45 percent in a month.

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Looking Ahead

Six more charters are scheduled to expire before the year is out. This is not the time you want to be negotiating charter rates for older vessels of a smaller class. Even if employment is found they will be lucky to cover operating expenses, which does not include financing costs.

In Q2, they reported losses of $8 million. Though Q3 still benefited from the charters of the New Jersey and the Los Angeles that will vanish in Q4. They will now be left to the mercy of this increasingly difficult market and the market is looking anything but merciful.

In the latest 6-K they reported only $18,790,000 of cash and equivalents. Following the recent debt amendments in September, which bought a little time, but "prohibits the incurrence of additional indebtedness" the repayment schedule is concerning. The table below shows the before and after for debt maturity in millions of US dollars.

2016 Remaining

20172018201920202021Total
Existing Loan7.215.415.415.415.467.8136.5
Amended Loan7.64.112.219.819.873136.5
Source: Diana Containerships

The macro outlook for the container shipping segment isn't going to correct anytime soon. It is woefully oversupplied and rates will remain depressed for quite a while as a result. Some analysts are projecting weakness through 2018 at the minimum.

Banks are increasingly leery of supporting shipping companies, institutions have been fleeing the space in droves, and prospects for dilution to raise capital seem very tough at these levels, especially given the bearish outlook.

Additionally, asset values have been dropping as buyers for second-hand tonnage are scarce. Let's not forget that Hanjin's vessels will already be crowding the second hand space further making it anything but a seller's market.

Conclusion

The writing has been on the wall for quite some time that troubles were ahead for those in the container shipping market. Diana Containerships is one of the victims of this recent market turmoil and it looks like the negative impacts are now being felt in a big way.

Mounting losses, dwindling cash reserves, an aging fleet which is less desirable for employment while dropping in value, an inability to incur additional debt, principal repayments over the duration of this downturn, and finally increasing lay-ups all could lead one to believe that as this macro environment worsens bankruptcy could become an increasingly likely possibility going forward.

Triple Merger Of Japan's 3 Container Shippers Highlight Industry Turmoil

Triple Merger Of Japan's 3 Container Shippers Highlight Industry Turmoil https://seekingalpha.com/article/4018784?source=ansh $NPNYY, $MSLOF, $KAIKY, $YANG

James Caitlin
Nov 3 2016, 10:09
Includes: NPNYY, MSLOF, KAIKY, YANG
Summary

Nippon Yusen KK, Mitsui O.S.K. Lines Ltd. and Kawasaki Kisen Kaisha Ltd. announced a new JV that will combine their container shipping operations.
The new company would become the world's sixth largest box carrier controlling 7% of the global container shipping fleet with a combined 1.4 million TEU's.
The three firms said they would invest ¥300bn ($2.85bn) in the venture, which is expected to deliver savings of ‎¥110bn ($1bn) annually.
Note: This article was originally published November 1st on Value Investor's Edge, a Seeking Alpha subscription service.

Overview

Still in the early stages of a massive downturn in the container shipping segment, three Japanese companies have announced their intention to combine liner operations in an effort to improve operational efficiency and capitalize on the scale of their fleet.

This follows the Hanjin Shipping Bankruptcy which at the time was the 7th largest container shipping operator in the world and now holds the title for the largest container shipping failure in history.

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The root cause for this downturn in the container shipping segment, and ultimately Hanjin's demise, can be traced to an oversupply of available vessels coupled with anemic global trade growth.

(click to enlarge)

Source: NYK Press Release

The combination has sent charter rates to low levels which are often below basic operating costs and far less than what is needed to break even when taking into account financing costs for these vessels.

(click to enlarge)

Source: NYK Press Release

Owners are understandably concerned as they continue to burn cash while these vessels depreciate in value. Some of this depreciation is tied to the lifespan of the vessels while part of it can also be traced to falling vessels values which often have a direct correlation to current charter rates.

The Agreement

In the NYK press release, the companies acknowledged this move is an effort to combat "an environment that is adverse to container line profitability." Furthermore, they noted that "under these circumstances, three companies have now decided to integrate their respective container shipping on an equal footing to ensure future stable, efficient and competitive business operations."

The combined entity will be formed by July 1st and operational by April 2018. It will have 256 vessels, including the chartered in fleet, becoming the second largest carrier in Asia behind China Cosco Shipping Corporation.

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On a brief side note China Cosco Shipping Corporation was created in January of 2016 following the merger of former state-controlled rivals COSCO and China Shipping Group, but more on that later.

The term 'chartered in' refers to vessels leased from a different party which are then leased out to others. This strategy ideally would allow the middle-man to capture the difference between a lower initial lease rate and the following charters thus increasing profitability. During times of high rates this strategy can produce some attractive returns, however, during these depressed periods it can have a negative impact on the bottom line.

According to Vessels Value, the premier maritime valuation institution, the directly owned fleet excluding the chartered in fleet actually numbers 134 vessels with approximately 1.05 million TEU's with a combined value of just over $6 billion.

(click to enlarge)

Source: Vessels Value

Nippon Yusen (OTCPK:NPNYY) will own 38 percent of the JV while Kawasaki Kisen Kaisha (OTCPK:KAIKY) and Mitsui OSK (OTC:MSLOF) will each hold 31 percent. Currently these companies serve 84, 67, and 92 different countries around the world, respectively.

Therefore, this merger will not only face scrutiny from Japanese authorities, as it combines the three major liner fleets in Japan, but also from governments around the world which will likely include China, the USA, and the European Union.

Mitigating Losses

All the three Japanese companies are forecasting operating losses for this fiscal year. Combined losses are expected to total ¥84bn with Nippon Yusen expecting a loss of ¥25.5bn, Kawasaki Kisen ¥44bn, and Mitsui OSK ¥15bn.

According to the announcement the new JV will benefit "by taking advantage of scale merit and realize integration effect of approximately 110 billion Japanese Yen annually."

The effect on stocks was immediate and following the announcement Nippon Yusen closed up 6.4 percent, Mitsui OSK rose 5.6 percent and Kawasaki Kisen ended up 0.4 percent.

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2016 - The Year of Consolidation

The chart below illustrates some interesting developments in the container shipping segment and includes chartered in vessels.

(click to enlarge)

Source: NYK Press Release

Vessels Value noted that if we remove the chartered in fleet, 4 out of the top 5 companies now in existence or expected to merge will be the result of consolidation efforts.

(click to enlarge)

Source: Vessels Value

As noted earlier, China Cosco Shipping emerged in January following the merger of state-controlled rivals COSCO and China Shipping Group.

On June 10th, 2016 the CMA CGM Group assumed control of NOL, a Singapore listed company which at the time was 12 in the world for container shipping. NOL is renowned for its APL brand, present in more than 80 countries and employing around 7,000 people.

In July, Hapag-Lloyd and United Arab Shipping Company signed a merger agreement that created the world's fifth-largest container shipping line. The merged carrier has a fleet of 237 (including chartered in) vessels with a total capacity of around 1.6 million 20-foot-equivalent units, an annual transport volume of 10 million TEU's.

The merger was a result of the rapidly deteriorating market as Q1 saw Hapag-Lloyd report a 42.8 million-euro net loss against a 128.2-million-euro profit in the previous year.

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Michael Behrendt, chairman of Hapag-Lloyd's supervisory board noted that the merger will create annual synergies of "at least" $400 million and save a "significant" amount of capital expenditure for the company.

Alliances Grow Stronger

Though alliance members still compete on price and are forbidden to market services together members can cooperate operationally.

Ideally, alliances allow carriers to pool their vessels so that they can better fill their ships and gain the greater economies of scale. This pooling has become increasingly important as mega-ships have been hitting the water and their operational advantage rests on filling them to capacity.

There are currently three alliances of which 42% of the world's TEU capacity (totaling 23,859,810 TEU's) is now currently a part, according to Vessels Value.

(click to enlarge)

Source: Vessels Value

As noted earlier the increasing size of these liners has been an influential part in the formation of these alliances. Notice that the 1,350 vessels that are a part of these alliances are just 25% of the 5,355 vessels that compose the global fleet.

It is through these synergies that members hope to gain increasing operational efficiency which should help them weather the storm.

Let's Speculate

Taiwan is home to three major container shipping companies that have also been experiencing difficulty. Evergreeen Marine Corp. (OTC:EVGQF), and Yang Ming are two that have seen red emerge on their earnings reports since Q1. Evergreen is part of the Ocean Alliance but even that hasn't kept it from producing losses. Wan Hai Lines has been running a tighter ship and is still profitable, but might benefit from a merger.

One company that is in the driver's seat when it comes to acquisitions is Maersk Line, which has put that strategy back on the table. Its desire to expand market share at a time when there is very little organic growth could mean that several floundering companies with younger fleets are increasingly attractive to the world's leading container shipping company. Acquisitions are perhaps the best option to continue growing as they have pledged to decrease new build orders in an effort to curtail the overcapacity in the market.

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Conclusion

The depth of this latest downturn has left many companies scrambling for solutions. Many feel the best option may be consolidation.

While the latest round of consolidation may appear on the surface to reduce domestic competition in China and now Japan, two of the largest markets for liners, they still must compete on a global scale. Therefore, rates are likely to remain depressed and shippers are right to seek solutions through other means.

Tadaaki Naito, the president of Nippon Yusen, at a joint news conference in Tokyo stated "If we don't want the number of Japanese shipping companies to be zero, we need to create one strong, splendid company."

The coming years will likely see increasing restructuring and mergers as companies seek to mitigate the damage brought on by this historic downturn, which is even eclipsing the horrific market in the 1950's and 1960's.

Weak demand and excess capacity have created this bear market and it is still in the early stages. While reducing OPEX costs through greater operational efficiency is a good start, it is by no means a cure for this situation.

The only solution will come once supply and demand begin trending toward equilibrium and this can only come about through an increase in demand for goods carried by these vessels or curtailing fleet growth through demolitions or a thinning order book.

Fortunately, it looks like a thinning order book may be set to impact this segment in a couple years as orders for new vessels have fallen drastically. This could pave the way for a rebalancing further down the road. The question now becomes when will that actually occur and who will be left standing? Those taking a proactive approach early on through restructuring or consolidation will likely have better odds.

Costamare Faces Some Difficult Decisions

Costamare Faces Some Difficult Decisions https://seekingalpha.com/article/4021025?source=ansh $CMRE, $SSW, $TEUFF

James Caitlin
Nov 8 2016, 08:51
About: CMRE • Includes: SSW, TEUFF
Summary

The expansion of the Panama Canal which can accommodate Post-Panamax vessels able to transport 14,000 teu's has left the 3,000-5,000 teu Panamax class struggling to compete.
Costamare owns 13 vessels of the Panamax class, all over 10 years of age, and all with time charters scheduled to expire through 2017.
Due to the depressed market for these specific vessels, ships as young as 10 years old are increasingly headed to the scrap yard. Is Costamare sitting on a scrap heap?
Note: This article was originally published November 4th on Value Investor's Edge, a Seeking Alpha subscription service.

Overview

In a recent article entitled Following Hanjin Shipping's Bankruptcy, Could This Container Shipping Company Be Next? I discussed the prospect that Diana Containerships may be the next victim of this extremely depressed market. That thesis largely revolved around the fleet profile which is composed largely of Panamax class container ships.

A key part of this argument rested on the declining prospects for Panamax employment coupled with declining vessel values which left them at greater risk for early demolition.

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Before we get to how this thesis will impact Costamare (NYSE:CMRE), let's go over a few items from that article.

Review

In that article I noted some key developments:

On Sept. 20, The Loadstar reported:

The 4,546 teu 2006-built Viktoria Wulff (ex-MSC Firenze) has become the youngest containership to be sold for scrap as Panamax owners cut their losses and abandon employment hopes in a hopelessly depressed market.

This news comes on the heels of another early demolition, which at the time set a record at 13 years of age.

On Sept. 8, The Loadstar reported:

The 2003-built 4,646 teu Seaspan (NYSE:SSW) Excellence (was sold for scrap) for a sum reported by vesselsvalue.com as $280 LDT [light displacement tonne, the measure used by scrap buyers], equating to a total demolition value of $5.96m.

The deal gives a useful snapshot of the container chartering market - Seaspan bought the vessel from MOL in March 2013 for $17.2m, only to be forced to sell it for scrap for $11.25m less than it paid for it just three and half years later, and at least a decade before the end of its operating lifetime.

Adding to this trend, on October 18th, just hours after this article was originally published on Value Investor's Edge, Splash 24/7 reported:

Belgium's Bocimar has turned bearish about prospects for Panamax container vessels, becoming the latest owner to scrap (two-twin 4,800 teu) 12-year-old boxships.

Finally, on October 17th, The Journal Of Commerce noted:

The value of second-hand Panamax container ships has plunged by as much as 45 percent in a month.

In the comments section at the end of the article I speculated a bit and wrote:

Personally I think buyers will be hard to find for any vessels of the Panamax container class about 10 years old or over. In fact, I would be more apt to value them at the scrap price more than anything else at this point.

Currently

Since that time Seatrade Maritime News proclaimed "The Death Of The Panamax Containership" and noted that Box Ships (OTCQB:TEUFF) had sold the 10-year old 2006-built Box Queen for scrap.

Seatrade Maritime News reports: "According to analyst Alphaliner 101 vessels in the 3,000 to 5,099 teu class are currently idle, a growing figure that is only being tempered from even further rise by scrapping. Back in September Wirana warned that seven to eight year Panamaxes were likely to start hitting the beaches."

Now, it looks like Diana Containerships itself has succumbed to this trend. On November 3rd Diana reported that it has sold the 10 year old "Angeles" formerly the "YM Los Angeles" for scrap at a price of $6.69 million. This now holds the dubious record for the youngest scrapped container ship by a matter of months.

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It was just March 20th of 2015 when Diana Containerships announced that it had acquired this vessel for a purchase price of $21.5 million.

CMRE

Now let's turn our attention to CMRE's fleet and the challenge going forward.

The following table reflects the Costamare's employment schedule for Panamax class vessels as well as the charter expiration dates.

Source: Costamare

Notice that all of these vessels are well over 10 years of age and all have their time charters set to expire between now and the end of 2017.

The dismal outlook for a prolonged period of time could mean one of three things are going to happen with these vessels:

1) They will be employed at rates far below OPEX.

OPEX for a Panamax class vessel is typically between $6,000 and $6,500 per day. Remember, OPEX does not take into account things like financing costs.

2) They will be laid up. A warm lay-up can cost around $2,500-$2,750 per day for a Panamax vessel.

3) They will be scrapped.

Obliviously there are no good solutions for this dilemma that Costamare will find itself in as these charters expire.

They will either face losses as they attempt to hold onto these vessels in the hope that someday things will improve while recording massive impairment and depreciation charges along the way. Or they must face the music and cut them loose and salvage what the can from the demolition market.

Bigger Alliances For Bigger Ships

The chart below illustrates some interesting developments regarding M&A in the container shipping segment.

Source: NYK

Vessels Value noted that if we remove chartered in fleets, 4 out of the top 5 companies now in existence or expected to merge will be the result of consolidation efforts.

Source: Vessels Value

China Cosco Shipping emerged in January following the merger of state-controlled rivals COSCO and China Shipping Group.

On June 10th, 2016 the CMA CGM Group assumed control of NOL, a Singapore listed company which at the time was 12 in the world for container shipping. NOL is renowned for its APL brand, present in more than 80 countries and employing around 7,000 people.

In July, Hapag-Lloyd and United Arab Shipping Company signed a merger agreement that created the world's fifth-largest container shipping line. The merged carrier has a fleet of 237 (including chartered in) vessels with a total capacity of around 1.6 million 20-foot-equivalent units, an annual transport volume of 10 million teu's.

These large companies are part of a growing trend of Alliances designed to work together to ensure that the competitive advantage of mega-boxships through economies of scale is maximized.

In fact, following the latest round of consolidation 8 out of the top 10 container owners will belong to one of the top three alliances, the exceptions being Seaspan and Shoei Kisen.

Though alliance members still compete on price and are forbidden to market services together members can cooperate operationally.

Ideally, alliances allow carriers to pool their vessels so that they can better fill their ships, thus maximizing capacity and operational efficiency. This pooling has become increasingly important as mega-ships have been hitting the water and their competitive advantage over smaller vessels rests on filling them to capacity.

There are currently three alliances of which 42% of the world's TEU capacity (totaling 23,859,810 teu's) is now currently a part, according to Vessels Value.

Source: Vessels Value

The increasing size of these liners has been an influential part in the formation of these alliances. Notice that the 1,350 vessels that are a part of these alliances are just 25% of the 5,355 vessels that compose the global fleet.

It is through these synergies that members hope to gain increasing operational efficiency. This consolidation and alliance coordination comes at the expense of non-alliance members and those with smaller vessels.

Conclusion

Already Costamare has taken the painful step of drastically reducing its common stock dividend from $0.29 per quarter to $0.10 per quarter. This was in conjunction three major refinancing agreements which has spread out the 2018, $380 million balloon payment over three years. So they are taking steps to mitigate the upcoming damage. Additionally, their newbuilding program is geared toward the larger end of the Post-Panamax class. That's the good news if there is any here.

But the bad news is that these upcoming expirations along with declining asset values for both the directly owned and JV fleet will impact both cash flow and NAV. It is important to note that asset value declines are not limited to the Panamax class, though that is where we seem to be witnessing the most damage. NAV and cash flow are two of the largest factors in valuing shipping companies.

As for the upcoming charter expirations, according the October 24th earnings release, all but two of the employed vessels are earning above $6250 per day. Remember, that is roughly the median OPEX across the industry for this specific class.

But some of these vessels are earning substantially more like the Oakland Express at $30,500/day, the MSC Mandraki and MSC Mykonos at $20,000/day, the MSC Ulsan at $16,500/day, and the MSC Koroni at $13,500/day. It is highly unlikely that these rates will be replicated for these vessels upon expiration. Obviously profitability will be impacted as a result.

Going forward, as these charters expire and if asset values continue to fall, as many project, Costamare and its shareholders will continue to be under pressure.

Is The EU 'Undermining' UN Efforts To Curb Maritime Pollution?

I Bold some pertinent stats below.

Is The EU 'Undermining' UN Efforts To Curb Maritime Pollution?
Jan 28 2017, 06:00

Summary

The European Parliament's Environment Committee recently decided to take regional action over ship emissions unless the United Nation's International Maritime Organization (IMO) acts first.
Shipping, which is exempt from the Paris Agreement, now accounts for around 2.2 percent of world emissions of carbon dioxide (CO2) and that share is forecast to rise dramatically.
The shipping industry, which accounts for approximately 90 percent of goods transported globally, ‎has largely rejected unilateral moves by the EU, arguing it would distort world trade.
Note: This article was originally published January 13th on Value Investor's Edge, a Seeking Alpha subscription service.

Overview

This past December, the European Parliament's Environment Committee decided to include shipping emissions in the EU's Emissions Trading System in 2023 if the UN's International Maritime Organization fails to adopt a comparable system for global shipping by 2021.

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Source: Bluebird

The EU Emissions Trading System (ETS) is a cornerstone of the EU's policy to combat climate change and its key tool for reducing greenhouse gas emissions cost-effectively. It is the world's first major carbon market and remains the biggest one.

It operates in all 28 EU countries plus Iceland, Liechtenstein and Norway and limits emissions from more than 11,000 energy intensive installations (power stations & industrial plants) and airlines operating between these countries. Overall, it covers around 45% of the EU's greenhouse gas emissions.

The ETS works on the 'cap and trade' principle.

A cap is set on the total amount of certain greenhouse gases that can be emitted by installations covered by the system. The cap is reduced over time so that total emissions fall.

Within the cap, companies receive or buy emission allowances which they can trade with one another as needed. They can also buy limited amounts of international credits from emission-saving projects around the world. The limit on the total number of allowances available ensures that they have a value.

After each year a company must surrender enough allowances to cover all its emissions, otherwise heavy fines are imposed. If a company reduces its emissions, it can keep the spare allowances to cover its future needs or else sell them to another company that is short of allowances.

Trading brings flexibility that ensures emissions are cut where it costs least to do so. A robust carbon price also promotes investment in clean, low-carbon technologies.

IMO Too Slow?

In the past year we have seen a couple major developments come out of the IMO regarding environmental protections. The first was the Ballast Water Management Convention followed by a mandate to reduce sulfur emissions. Both projects had been in the works for many, many years.

I have written about both and warned that due to the extended time it took to develop and then implement these measures the IMO could be perceived to be falling behind the curve in terms of environmental protection which is widely viewed as having greater importance now more than ever.

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Well, it appears that I wasn't the only one feeling this way and the latest action out of the EU confirms this sentiment. I have previously warned that acting too slow would lead to unilateral action on the part of individual governments which could create a fragmented playing field and potential distorting the current market.

While smaller markets, like California for example, have implemented strict guidelines surpassing the IMO's own regulations this latest move by the EU represents a major shift in the global shipping market and could impact a significant number of vessels and companies.

Those companies include but not limited to Ardmore Shipping (NYSE:ASC), Costamare Inc. (NYSE:CMRE), Capital Product Partners L.P. (NASDAQ:CPLP), Danaos Corporation (NYSE:DAC), Diana Containerships (NASDAQ:DCIX), DHT Holdings (NYSE:DHT), Dynagas LNG (NYSE:DLNG), DryShips (NASDAQ:DRYS), Diana Shipping (NYSE:DSX), Euronav (NYSE:EURN), Frontline (NYSE:FRO), Golar LNG (NASDAQ:GLNG), GasLog (NYSE:GLOG), GasLog Partners (NYSE:GLOP), Golar LNG Partners (NASDAQ:GMLP), Genco Shipping (NYSE:GNK), Gener8 Maritime (NYSE:GNRT), Golden Ocean Group (NASDAQ:GOGL), Navios Maritime Midstream Partners (NYSE:NAP), Nordic American Tankers (NYSE:NAT), Navios Maritime Holdings (NYSE:NM), Navios Maritime Partners (NYSE:NMM), Navios Maritime Acquisition (NYSE:NNA), Pyxis Tankers (NASDAQ:PXS), Scorpio Bulkers (NYSE:SALT), Safe Bulkers (NYSE:SB), Star Bulk (NASDAQ:SBLK), Ship Finance International (NYSE:SFL), Seaspan Corporation (NYSE:SSW), Scorpio Tankers (NYSE:STNG), Teekay LNG Partners (NYSE:TGP), Teekay Corporation (NYSE:TK), Teekay Tankers (NYSE:TNK) and Tsakos Energy Navigation (NYSE:TNP).

Battlefield Earth

The 2015 Paris Agreement makes no reference to emissions from international shipping, due to the global nature of the sector and the difficulty in allocating emissions from a ship to a single state.

IMO's own research found that shipping GHG emissions are up 70% since 1990 and are projected to grow by up to a further 250% by 2050. A recent European Parliament study shows shipping could be responsible for 17% of global CO2 emissions in 2050 if left unregulated.

To put it in perspective, Pulitzer Prize-winning journalist Edward Humes, author of "Door to Door" recently revealed some startling facts on a NPR interview last April. He noted that just 160 large container ships create more emissions than all the cars in the world combined.

Gas2.org expanded on those statistics:

There are more than 6000 cargo ships plying back and forth across the oceans of the world today. Do the math. Ocean shipping puts 375 times more pollutants into the atmosphere every year than all the cars in all the countries in the world combined. But you won't see those statistics reflected anywhere. The vast majority of those emissions take place on the high seas and are not included in the official emissions tally for any one nation. It is an invisible problem that is responsible for hundreds of thousands of premature deaths every year and millions of negative health outcomes worldwide.

EU Vs. UN

The inclusion of shipping in the ETS represents the most significant unilateral action taken against an industry that has largely escaped regulation in the past.

This action is the result of mounting frustration as illustrated by a comment from an EU spokesperson:

There is potential to reduce emissions from the shipping sector significantly, yet currently there are no adequate regulatory measures in place to limit or reduce them. Action is needed. More action and fewer letters.

But the IMO is less than enthusiastic about the EU attempting to take the lead on reducing global emissions.

IMO Secretary-General Lim stated:

I am concerned that a final decision to extend the EU-ETS to shipping emissions would not only be premature but would seriously impact on the work of IMO to address GHG emissions from international shipping. Inclusion of emissions from ships in the EU-ETS significantly risks undermining efforts on a global level.

The International Chamber of Shipping's (ICS), Simon Bennett believes:

The EU ETS has been an abject failure. Its unilateral application to global shipping would create market distortion while generating trade disputes with China and other Asian nations, as happened when the E.U. tried unsuccessfully to impose its ETS on international aviation.

But not all shipping bodies are crying foul. The Port of Rotterdam is the largest port in Europe in terms of annual throughput, currently handling around 30,000 seagoing vessels and 110,000 inland vessels every year.

It is important to note that shipping emissions in ports follow a highly skewed distribution pattern, with more than a third of the emissions occurring in only 50 ports. This points to the concentration of air pollution in selected environmental hotspots, among them would be the Port of Rotterdam.

The Port of Rotterdam Authority is supporting the European Parliament to put pressure on the International Maritime Organization (IMO) to produce an ambitious worldwide CO2 reduction plan for sea shipping. Given the recent plans, measures could only be expected by 2023 at the earliest. "Far too late. The plans are not challenging enough," believes President and Chief Executive Officer of the Port Authority, Allard Castelein. He added, "we are prepared to make a supportive contribution to the implementation of measures."

Those advocating swiftly addressing this issue believe that utilizing governmental bodies like the EU will ultimately put pressure on the IMO to act faster if they wish to maintain the uniform nature of shipping rules and regulations around the globe.

As Secretary Lim noted, "unilateral or regional action that conflicts with or undermines actions that have been carefully considered and deliberated by the global community at IMO threatens world-wide confidence in the consistent, uniform system of regulation developed by IMO."

Obviously if that uniformity is to be maintained the IMO will be forced to address this issue and develop an acceptable plan prior to 2021. If it fails to do so regional action may begin to alter trade flows and while the environment may benefit, some predict it may well lead to cargo being transshipped outside of Europe with direct impacts on European employment.

Already the pressure seems to be working as The Business Insider reports:

In response IMO Secretary-General Kitack Lim said tackling the issue was a matter of "urgency" and it would continue its work to find a global solution for controlling greenhouse gas emissions "by working together and not leaving anyone behind".

Conclusion

While the UN sees the latest unilateral action out of the EU as undermining the uniformity of the global rules and regulations of which shippers must abide, others see this route as a method of putting pressure on the IMO to address issues which have lingered on for far too long.

Reactions are mixed with shippers uniformly decrying this action while environmental groups and those regions strongly impacted by harmful CO2 emissions supporting the action.

This regional action represents the largest unilateral measure ever taken and it remains to be seen if it proves successful in pressuring the IMO into taking the lead. If successful the future could see more regional bodies attempting to address issues they deem important by threatening or implementing changes which threaten to derail the uniformity of shipping laws, rules, and regulations.

The IMO has often been criticized for acting to slow on issues of significant global importance. Now it appears other governmental bodies are no longer accepting this and taking the lead. If the IMO fails to address future issues in a timely manner, regional action my become more frequent and begin to erode the importance and credibility of the UN's IMO.

The IMO's track record for speedy implementation of vital environmental protection is not great. It took approximately 13 years after first recognizing the need for Ballast Water Management before actual measures were implemented. It took approximately 12 years for sulfur emissions to be curbed on a global scale after amendments were adopted in 2008. This followed the Annex VI to the International Convention for the Prevention of Pollution from Ships (MARPOL Convention) in 1997 which officially recognized the problem and the need for regulation.

The issue of CO2 emissions from maritime trade is an important one and many are not willing to wait several more years for it to be addressed.

Source:
Is The EU 'Undermining' UN Efforts To Curb Maritime Pollution? https://seekingalpha.com/article/4040332?source=ansh
$ASC, $CMRE, $CPLP, $DAC, $DCIX, $DHT, $DLNG, $DRYS, $DSX, $EURN, $FRO, $GLNG, $GLOG, $GLOP, $GMLP, $GNK, $GNRT, $GOGL, $NAP, $NAT, $NM, $NMM, $NNA, $PXS, $SALT, $SB, $SBLK, $SFL, $SSW, $STNG, $TGP, $TK, $TNK, $TNP