The shipping cycle is at or near a bottom with increasing signs of recovery is several sectors, according to executives at the TradeWinds Shipowners Forum USA. Despite the optimism, shipowners still need to work on corporate governance and industry fragmentation to attract institutional investors back into shipping.
Jason Klopfer, chief operating office of Navig8 Products Tankers, acknowledges short-term issues of supply disruptions in Nigeria and high inventories have depressed tanker rates on top of regular seasonality. But he also cited growing Middle East production and increasing cargo activity as evidence that the rates are near a bottom.
“That is giving us underlying confidence in the market,” Klopfer said. “There are indicators that the market will grow tighter.”
Bob Burke, chief executive of Ridgebury Tankers, says the turmoil in rates has impacted tanker values, but he says underlying fundamentals still favour the tanker markets.
“The Atlantic Basin is in a bit of turmoil,” Burke said. “But the supply-and-demand fundamentals are not significantly different than from our thesis.”
John Wobensmith, chief executive of Genco Shipping & Trading, says the capitulation in dry bulk shipping occurred in the first quarter. But the uptick in capesize rates and ship values shows more confidence has come back into dry bulk.
“There’s no doubt we will see a softer first quarter (in 2017), but it’s not going back to what we saw in the first quarter of 2016,” Wobensmith said.
In addition to better fundamentals, shipping companies will need to take other steps to attract new investment.
Robert Bugbee, the president of two publicly traded companies, says “corporate governance is becoming front and centre” to stable, long-term investors that shipping hopes to attract. But he challenged the notion that in-house chartering and technical management – as do the Scorpio shipping companies – poses conflicts for the management of shipping companies.
“Corporate governance will increasingly matter to long-only and value funds,” Bugbee said. “It’s not a simple answer of being an all-integrated company.”
Industry fragmentation will also have to addressed in order for shipping to attract back institutional investors. But the panellists see that move largely being forced on the industry in terms of the lack of equity and debt capital available to the industry.
Genco’s Wobensmith said it will take “many years if not decades” consolidation to occur in the industry. The main reason is that larger companies will find it easier to raise new equity or debt, while smaller companies will have limited options as far as raising new capital.
Consolidation brings “advantages on the cost of capital,” Wobensmith said. “It will be forced on us by investors.”
Ridgebury’s Burke said you “almost never see mergers and acquisition in the shipping sector.” But “smaller companies are not going to have access to capital,” Burke said.
Bugbee agreed that “we need to have consolidation if we want to grow up. There’s going to be a bifurcation in lending terms for larger and smaller companies.” He noted that the market reaction for BW Gas’ takeover of Aurora LPG will be the one to watch for how consolidation plays out.