In an exclusive interview
with The Shipping Herald, Michael N. Tsangaris
- Managing Director of Tsangaris Bros LTD.
- shares his views on the current state of the shipping market and its prospects. Mr. Tsangaris explains why he expects freight rates to bounce back in the 4Q of 2011 especially for the bigger bulkers, as well as why scrapping is the way forward for owners. He also gives The Shipping Herald
an analysis of the Dry Bulk sector newbuilding strategies; and reveals Tsangaris Bros' next moves in the market.
What is your view of the current state of the shipping market and its immediate prospects?
In my personal opinion, the current state of the dry cargo market, based on an objective historical assessment, can be considered as buoyant. Even if we make comparisons over the last decade, we are still well above the freight rate average for most segments of the market. It is the 3 years (2005-2008) of unprecedented increase in freight rates, abundant and cheap financing as well as the interest that the public markets showed to a previously “uneventful” industry that caused an anomaly. I also think that the events in the banking system after the summer of 2008 helped indeed shipping. They had a similar effect as an emergency stop button on a train that is acquiring more and more speed. We could all see the extreme oversupply of new tonnage being ordered but in a way, it was so easy to order it that we were all ready to forget that shipping is and will always be a cyclical industry.
Returning to the second part of your question, I can relatively safely say that after a “nasty” summer, especially for the bigger bulkers, Q4 of 2011 is going to be much better. Japan is rebuilding areas struck from the devastating earthquake, the shift from nuclear to fossil fuels is benefiting dry cargo vessels and little “bonus” events like the increase of fertilizer imports to India (due to increased tax being imposed to imports after Dec 1st) are reasons to be conservatively optimistic. Last but not least, we must add into the equation the positive side-effect Piracy has had on our industry. Much of the oversupply of tonnage has been “absorbed” by the “forced” deviation of the Gulf of Aden mainly by the dry cargo vessel’s adding tonne-miles to various trades that would alternatively be using the Suez canal.
What is the remedy to the low fare situation? What could be done about tonnage oversupply and the pressures owners are succumbing to?
One of the most intriguing aspects of our industry is its absolute cyclicality. Supply meets demand and when not in equilibrium, it eventually ends up in the industry’s favor or against it. From the ship-owners point of view, there are theoretically 3 ways to deal with this. Either a) scrapping, b) laying up or c) converting existing tonnage to another type of vessel. The least toxic remedy (and most realistic) is scrapping of the over aged vessels. Latest figures show that scrapping activity has increased over the last months as running older tonnage is not as profitable as it used to be and scrap rates are at historic high levels. Port and Government regulations are getting stricter and older ships are more scrutinized by surveyors, local authorities, cargo interests as well as Classification societies. Last but not least, we are now being introduced to vetting requirements by some charterers that only make things more difficult as well as uneconomical for older ships. Laying up does not have the same immediate effect and it is only a short term remedy with questionable results. Ship conversions were in fashion a few years ago but we all saw that they had poor results in an already saturated market. In conclusion, scrapping is the only real choice.
Do you anticipate major casualties from the current crisis or will the storm be weathered?
We do anticipate major casualties. But again, this is not something new to shipping. Many banking institutions have financed vessels at prices that are not sustainable under normal market conditions. Only recently we have seen reports of financed vessels that could face compulsory auction in the months ahead, as accounting practices increase the pressure on lenders to end payment deferrals granted to owners after the financial crisis of September 2008. Especially vessels that are financed by European institutions (Basel II rules).
There is a sentiment amongst some analysts that we could see rates returning to healthier levels before the year is out. Is that possible?
As I replied in your first question, it is possible and already we see a gradual improvement in freight rates. “I can relatively safely say that after a “nasty” summer, especially for the bigger bulkers, Q4 of 2011 is going to be much better. Let’s also not forget that although China has slowed down it is still pulling ahead the global economy and remains the major driver for shipping.
MV "TANTA T."
How do you see newbuilding strategies shaping in this market?
I can only comment for the dry sector and for the first time after many years, we are seeing a huge decline in ordering new-builds. Financing has become more difficult to obtain and the costs involved only make owners more prudent with their ordering. Long have gone the massive orders we faced over the last 4-5 years, and many smaller yards especially in China and Koreahave now shut down. What makes it very interesting is that we are seeing many new designs being introduced. Ships are increasingly focusing on specialized trades, for example there is the trend of developing more “ice classed” tonnage in line with new trading routes. Also, questionable new “super Eco” designs are the “flavor of the month”, along with the very interesting idea of the Post-Panamax that still has not found its place in the market as it has not adapted well, yet.
On the other hand, we are seeing the ship types being “super-sized”. New Handy-size designs are stretched to be over 36,000 dwt, Supra designs are now being renamed “ultras” and are designed to lift over 64,000 dwt and the story goes on.
Is the scrapping of older bulkers a real solution towards improving freight rates?
As mentioned in your second question, yes, I believe that scraping could be one of the few solutions that a ship-owner can take in order to improve freight rates.
How would you characterize the current market for second hand vessels?
Second hand vessels, in a nutshell, are a three tier market depending on age, each having its own clients and characteristics.
1) The over aged market for anything over 19-20 years old, relies almost solely on cash buyers, nowadays. Financing for this vintage is extremely expensive and scarce if not non-existent. Buyers of such vessel’s are either having difficulty to get finance to buy more modern tonnage so they rely on their own funds almost exclusively to purchase these types of vessels.
2) The mid-aged market, which ranges anything as old as 18-19 years to as new as 9-10 years old. This is a range that in my opinion has the most pressure in its prices because the financing is there but at lower leverage than the modern second hand tonnage. Which basically means that an owner that has his financing in line and ready could buy a much more modern ship using roughly the same capital. This will eventually press prices lower compared to modern tonnage.
3) The modern tonnage. Roughly anything between resales and 9 years of age. In the past year we have seen a lot of resales up for sale as well as modern tonnage. Resales are a big question mark as many are basically being a result of canceled orders that shipyards have undertaken to complete, many times with questionable quality (due to pure levels of control and supervision during construction).
Nevertheless, we do believe that the age profile is becoming very important to Banks as well as charterers regardless of the actual trading performance of a shipowner. Saying that, I do believe that there are some good opportunities out there and you can find quality if you search thoroughly. In the end, you can say you get “more ship” for your money in this category.
Greek Finance Minister Evangelos Venizelos has called upon ship owners to aid the government's effort to exit the debt crisis. What is your take on recent developments?
The Greek shipping community has survived and thrived for decades in an economic ecosystem without any form of protectionism of favoritism by the Greek government. Greek shipping never shied away from its obligations and always helped the country in times of need. Shipping is currently the largest contributor in our country’s GDP, even surpassing tourism for the last years. Almost 250,000 people in Greece are employed directly or indirectly by the shipping industry and with very few layoffs if any. I think that the Shipping community is eager to hear what proposals the Greek Finance Minister has in mind. Till then, I do not want to rush into assumptions.
Can you give us some insight regarding Tsangaris Bros strategy, investment plans and future moves in the market?
Tsangaris Bros is a company based on traditional shipping family ethics and values but at the same time keeping a corporate structure. This has helped us in many ways over today’s very difficult financial environment as we enjoy excellent relationships in the Banking system. In constantly evolving and harsh financial markets, we try to keep up to date with all trends.
The company’s philosophy has been consistent over the last 3 decades focusing in specialized trades. We believe in specialization as opposed to diversification. The company enjoyed over 2 decades of niche trading with a fleet of geared/grabbed Panamaxes, creating trading patterns with charterers as well as self employing the ships under our own Contracts of Affreightment. This helped building up expertise that you do not usually find in similar “small” sized companies.
Today, we can safely say we made a very smooth transition from the geared Panamaxes into the handy-size sector. The reason was that the geared Panamax was a dying breed, with its market being heavily diluted by the overwhelming order of modern Supra-max bulkers. The choice was to either go bigger in size, investing in more volatile environments like the Capesize or the Post-Panamax markets or take a left-field approach and focus on a smaller size with a much more stable market, with an age profile that is not affected as heavily as the other dry sectors.
The company fleet now comprises of 4 handy-size bulk-carriers, 3 are 1997 built and in March 2011 we had the delivery of our first new-building for over 40 years, from Zhenjiang Hongxin s/y in China. As we are in growth mode, we are aiming in building up our fleet with modern tonnage in the 28,000-38,000 dwt range. We are following closely the resale market and are also in initial discussions with a shipyard in developing a ship based on a standard design but with improvements that we believe will optimize its trading.
As mentioned earlier, we are not shy in investigating market trends such as various synergies, including private equity placements, Public offerings, co-investing as well as offering consulting, technical and commercial management to others.
We think that the company will reach critical mass at around 7-8 vessel’s of this type. Then, we can focus on developing further, some long term investment ideas we have.
Michael N. Tsagaris is Managing Director of Tsangaris Bros LTD.
Captain Nicholas Tsangaris and Captain George Tsangaris at the signing ceremony
for delivery of the MV "M.G. TSANGARIS", 24 January 1969 at Aioi, Japan (Ishikawajima Harima Industries, I.H.I.).