Should dry bulk owners who opted for exhaust gas scrubbers be happy about earning premiums in a low, coronavirus-stricken market?

Or should they rue the decision to take millions of desperately needed dollars off their suddenly strained balance sheets?

Those were the questions tackled by a panel of dry bulk owners — during an online conference hosted by Clarkson Platou Securities on Wednesday — courtesy of provocative comments from Diana Shipping chief strategy officer Ioannis Zafirakis.

Of the assembled public executives, Zafirakis was the guest who arrived and put his fingers in the punchbowl of relative optimism over the sector's potential to come back from its current lows.

Fire starter

The scrubber issue was just one part of his pessimistic view.

“Just to put a spark on the fire, we have not wasted any money on scrubbers,” Zafirakis said of Diana’s fleet of 42 bulkers.

“I’m afraid the money spent on scrubbers is going to be needed now. We have preserved cash. We have stopped buying back shares. We think we can sustain a bad environment for two years easily. We are happy.”

Not surprisingly, Zafirakis was quickly engaged by executives of two companies who have invested in scrubbers, which under IMO 2020 sulphur cap regulations allow vessels to keep burning lower-priced high-sulphur fuel oil (HSFO).

Herman Billung, senior vice president of Star Bulk Carriers, and Eagle Bulk Shipping chief executive Gary Vogel both touted the operating advantages of scrubber use even as spreads against complaint fuels have shrunk from $300 per tonne earlier this year to $80 or so at present.

Even with the lower $80 spread, Billung said Star Bulk is saving $16m per quarter in fuel costs, or $64m per year — but this is not even taking into account contract hedges it has arranged that were fixed with much higher spreads.

“Even in this low environment, we are building cash on the scrubbers — for us, it’s a cash positive,” Billung said.

Star Bulk is the sector’s largest scrubber adopter, with the devices installed on more than 100 bulkers.

Omar Nokta, Clarksons Platou Securites' head of US securities, hosted Wednesday's bulker party. Photo: Joe Brady

Eagle Bulk also has embraced the technology, with installations completed on 41 units.

“It won’t surprise you that I’d echo what Herman said about scrubber benefits — it’s significant cash flow” Vogel said.

“We’ve hedged about 25% of our fuel spread at $230 this year and $150 for next year. I wish we were losing money on the hedges, I admit.”

But Zafirakis would not let that sit.

He called the tales of operating premiums “a bit misleading".

It does not take into account what was spent on scrubbers to begin with, which can be $2m to $4m for each installation.

“If you had $300m on your balance sheet but now you’re up only $60m, you’re in a much worse position than you were previously because you spent hundreds of millions of dollars on scrubbers,” he said.

Rebound hopes

The scrubber debate was just one instance in which Zafirakis took a darker view of market prospects than Clarksons analysts Omar Nokta and Frode Morkedal, or the other company executives.

Most had expressed hopes for a rebound after the second quarter, based on a variety of factors including the return of world economies from the coronavirus lockdown, increased iron-ore production from Brazil and government stimulus packages, starting with China but extending to other governments.

For many years, Diana's management has been known for taking a sober — some would say bearish — view of the dry bulk market when others were optimistic, and traditionally locks up most of its fleet on time-charter coverage.

Zafirakis kept that tradition alive.

“I have a different view than what I’ve heard until now,” he said.

“It’s one thing to hope for something to happen. The actual fact usually is different. We’re in completely uncharted territory. We’ve never seen so many links in the chain broken at the same time.

“All the important economies in the world are having a big problem. No one really knows what is going to happen. The only thing companies can try to do is be better than the others and try to survive as long as possible.

Spoiling the party

“The only thing we should be talking about is playing defence. I’m sorry that I’m spoiling the party, but this is our opinion.”

Scorpio Bulkers president Robert Bugbee did his best to put a positive spin on Zafirakis’ pessimism, arguing that the market will benefit if all owners take a similar stance.

“I don’t think Ioannis is spoiling the party at all — I think he’s helping to make the party," Bugbee said.

“The more owners covet their cash, the more it keeps a check on the supply side and creates a great market for the future. Obviously the short term is going to be tough. But what he said is bullish itself for the future.”

Bulker owners are likely to experience a cash burn for the remainder of 2020 based on the fallout from the Covid-19 pandemic, according to a Clarksons Platou research note published on Monday.

But Oslo-based equity analyst Morkedal said during Wednesday’s conference that owners are much better capitalised and prepared for a downturn than in 2016, when several listed companies resorted to emergency equity issues to stave off bankruptcy.

Average loan-to-value levels of dry owners under Clarksons Platou coverage is 60%, Morkedal said, adding: “It all seems like a fairly OK runway.”

Henriette van Niekerk, Clarksons Platou's global head of research, said the firm had a fairly pessimistic view of dry bulk’s prospects for 2020 well before the spread of Covid-19.

But she added that the sector could outperform those expectations in the second and third quarters based on factors including vessel supply, despite the Covid-19 factor.