In an exclusive interview with The Shipping Herald, Dr. Konstantinos Galanis, Operations & Technical Senior Manager at Seanergy Maritime Holdings Corp., provides insight on the prospects of the dry bulk market and potential recovery in 2014. Mr. Galanis also discusses Seanergy’s strategy in dealing with a difficult market and its future prospects.
Q: How do you view the current freight market and its prospects?
From a macroeconomic perspective, the consensus of major financial institutions is that we have entered a new era of currency war, since there are several countries that are trying to avoid the fate of Japan that for almost 20 years is facing zero growth and sluggish consumer prices. Similar input has been given from well-known economists, such as Bill Gross, Ariel Roubini and Robert Schiller (Nobel laureate), with respect to fears about the creation of a bubble in the global economy, due to the huge liquidity that is channeled to markets by central banks around the world, with repercussions regarding financial sector stocks and real estate in Europe, Asia and America. To the contrary, you will find many who advocate that central bank activity has facilitated the economic recovery currently seen in many parts of the world. For monetary easing to result in a â€œbubbleâ€ the money being printed should find their way to the monetary system through increased bank lending to businesses and/or consumers and mortgages. Nevertheless, we cannot forget that several predictions and forecasts have historically been either too optimistic or extremely pessimistic leading to misleading results, as none can tell the future by only reading the numbers.
The Eurozone manufacturing PMI in November came in at a 2 Â½ years high, the services PMI fell, while October retail sales fell unexpectedly compared to the previous decline. GDP grew by 0.1% in the third quarter, with the President of the European Central Bank predicting a decline of -0.4% this year, followed by growth of 1.1% in 2014 and 1.5% in 2015. In Germany, the unemployment rate rose for the fourth consecutive month in November reaching 6.9%, while the growth rate of the third quarter was 0.3%. All factors seem to confirm the fact that the Eurozone economy of â€œmany speedsâ€ remains fragile. Additionally, the chief of the Brussels based think-tank, Bruegel, warned that several European banks – including German â€“ are flirting with bankruptcy and stressed that the troubled banks should be recapitalized by creditors and that use of funds from taxation should only be made in a case of emergency, such as if the recapitalization were to increase the public debt of member states then the ESM should participate.
In the US, GDP grew by 3.6% in Q3, a faster rate compared to estimates of 3% and the highest growth rate since the 1Q of 2012. In China, the PMI manufacturing index announced by the Chinese government remained unchanged in expansion territory November, after rising to an 18 month high in October. Also, according to government figures there was a significant increase in purchases of raw materials in October. In Japan the development package of $182 trillion was approved to offset the increase in the sales tax from 5% to 8%. The package will not be financed by issuing new bonds but from the tax revenues that exceeded initial forecasts and according to the government measures will add one percentage point to GDP.
As far as the energy sector is concerned, back in 2006 business and government leaders fretted that America was running out of sources energy. By 2013, however, the United States was producing seven and a half million barrels of crude oil each day, up from five million in 2005. The country enjoyed its largest production increase in history in 2012 and could pump more than eleven million barrels a day by 2020, its highest figure ever and more than even Saudi Arabia currently produces. At these production levels, the US may not need to import any crude oil in a few years, or might only rely on allies such as Canada and Mexico, ending a 50-year addiction to oil imports. Apart from providing a cheap energy supply to domestic industry, this may facilitate the return of outsourced manufacturing, open up oil and gas export markets while providing significant relief to consumers and a boost to corporate profits and business investment.
Falling energy prices are contributing to an acceleration of the US economic recovery and facilitate the return of manufacturing, a point not lost to China. China seems to be falling behind in global manufacturing competitiveness amidst successive 15% per annum wage rises, questionable labor practices and slavish central and local government support of inefficient state-owned enterprises at the expense of the more creative and productive private sector. Furthermore, China seems to be slowly entering a later stage of economic development, which is likely to be driven more by consumer spending and services such as healthcare, as opposed to industrial manufacturing. Shipping faces disruption from this turmoil in energy markets, but any contribution to lower energy prices and economic recovery is likely to stimulate increases in seaborne trade as this has largely been the case in the past. Shipping demand will take care of itself, but tonnage supply still needs to be managed if we are to benefit.
Finally, Danish Ship Finance is more optimistic for 2013 taking into consideration the improvement in qualitative factors predicting a better shipping market for most sectors. Where we agree in particular is that the fragile outlook for the global economy dictates that the salvation of shipping should come in large part from within the industry in the form of increased restrictions on vessel supply. The more new-buildings we see the more the recovery will be delayed.
Q: What is your view of the prospects of the dry bulk sector?
Getting closer to the end of 2013, and in order to be able to discuss about the freight market we should compare the BDI today to where it was this time last year. The final quarter of 2012, the BDI had just managed to climb above 1,000 points. This level functioned as a psychological barrier for much of 2013 until June.
Lately, we have noticed that the BDI is progressively escalating to higher figures compared to last year. This has been largely due to vastly increased Chinese imports of iron ore and a large bumper crop in the Americas which led to more trade in grain. Finally the index broke the psychological barrier of 2,000 units thereby increasing expectations that the worst might have passed and that in 2014 the freight market will move to better numbers in average levels and high point â€“compared to the last 2 years- but this does not mean that from times to times the market will avoid experiencing downward corrections. Once again the Capes showed better performance compared to the Panamaxes, the Supramaxes and the Handys. Nevertheless, we have to note that the Capes market appears to be exhibiting greater volatility and namely long and short term fluctuations, as opposed to the smaller tonnage vessels that have shown a steady conservative upward trend. The dry bulk market has reached multi year highs this week, as the BDI stands at the 2,300-point mark. In its latest analysis of the market, BIMCO predicted that the elevated level of Capesize Time Charter average rates will remain volatile while other dry bulk sectors will remain generally unchanged.
Although the BDI index does not offer a 100% reflection of the physical market, it provides a valuable general macroscopic view while at the same time proving that freight rates have exceeded breakeven levels. To be fair, the sudden upward change has created a lot of skepticism amongst the freight market players. Asset prices have seen gains and sellers have been shifting their views on a weekly basis. The big dilemma is whether the buyersâ€™ have missed the market bottom and pushed themselves to pay a premium for vessels or whether the ones who believe that the market will go down to the levels seen in the beginning of 2013 are likely to weigh down on prices once more.
Regarding the other usual suspect for the positive performance of the freight market, the China iron ore imports grew 18.3% compared to the previous year breaking the previous record of September. Year to date, iron ore imports to China have presented an increase of 10.9% from the same period last year. For the immediately succeeding period, it is estimated that imports will move at a higher rate due to milder winter weather as demand for iron will be reduced and it is speculated that there will be an upward trend in the prices of goods. The increase in import volumes and the price of iron ore has been driven by the fact that Chinaâ€™s iron ore inventories have reached historically low levels during the first half of the year, while favorable prices for seaborne iron ore imports led to en masse restocking.Â Furthermore, the government is expected to increase construction and infrastructure spending. Inventory stocks continued to increase for 6th consecutive week at the ports of China, reaching the highest level in about one year. As we are in a seasonally strong part of the year for bulk trades, the November and December indications that are already visible point towards more strong numbers, before we move to the seasonally weaker first quarter. So far, we have seen a muted impact on demand from the announced 3% Chinese import tax on low calorific coal that should be in place now. Indonesia is expected to be affected by this to some extent, as almost all lignite imports into China originate from Indonesia, as BIMCO states in the report. At the same time, we have seen that a pending Indonesian ban on mineral exports that was likely to have a significant, yet unpredictable effect on the market, has been delayed, as the feasibility of its implementation has come into question.
Interestingly, the estimate of Korea Investment & Securities on the return of European banks in shipping finance is that it will significantly help the Korean shipbuilding industry. Characteristically, it states that after the outbreak of the financial crisis, European banks have begun to accumulate funds and to improve their balance sheets to cope with the Basel III rules and as a result, the main ship finance banks are expected to gradually re-enter the market from next year especially after relevant stress-tests are carried out by the ECB. There are doubts about whether this will be verified, but we can agree with the assessment that the increase in prices of second-hand ships is positive for banks as it increases the value of collateral on shipping loans, which in turn results in decreasing the risk existing loan portfolio. This may indeed theoretically lead to increased new lending.
BIMCO reported that the slowing trend in fleet growth will continue into next year and has not been wiped out completely by the hefty ordering activity we have witnessed in the past two months â€“ 136 new ships with a capacity of 13.3 million DWT. Amongst them were 20 VLOCs, 16 Capesizes and 24 Handysizes. Year-to-date contracting activity stands at 63.2 million DWT, which is on course to become higher for the full year than the combined bulk carrier contracting activity during 2011-2012. For 2014, BIMCO expects that demand growth will range between 4Â½ and 6%, indicating that such strong growth will outstrip supply and bring about an improvement to market balance.
Finally, we have to admit that the big winners of this year were the investors who took the risk and invested when the market reached its lows. Also, we have to hope that 2014 will be a year with positive trend to the factors that affect shipping industry allowing more players to enter or come back. Recovery might be here but we have to be patient and pragmatists.
Q: When do you expect Seanergy to be in a position to benefit from a prospective market recovery?
Seanergy is already starting to see the market improvement affect its operation as ships coming off existing charters are entering new employment at higher daily rates. The company had not committed any of its vessels to long term contracts over the past year and is now reaping the benefits of the higher spot market. That being said, we can only hope that the increase in charter rates lasts for as long as possible, as physical constraints such as fleet positioning can generally affect whether a company is able to benefit from higher charter rates.
Q: Looking forward, what is the companyâ€™s strategy in dealing with a difficult market and economic difficulties?
The company is currently in the process of completing its financial restructuring plan that has managed to significantly reduce its indebtedness since the beginning of 2012. We continue our efforts to deliver a viable financial structure that should position our Company to benefit from the prospective market recovery. The sale, during the second quarter of 2013, of the three Handysize-owning subsidiaries that resulted in the full satisfaction of the associated loan facilities, is positive for Seanergy as the Company has currently one lender. In addition, the Company expects a non cash gain of approximately $20 million as a result of the sale of the three Handysize-owning subsidiaries, which will be reflected in the third quarter 2013 results.
We presently continue discussions with our remaining lender, aiming to reach a solution that will enable Seanergy to complete the restructuring of its outstanding debt.â€