By Surinder Brrar
With the key challenges to the Dry Bulk Shipping industry not easing up it now seems to me inevitable that consolidation is coming. In fact I think it is already happening, in very, very slow motion kind of way. This article uncovers my thoughts on why, what and when it will happen – I will even venture to make a wild guess on the top 3 players who will be left standing with market shares of more than approximately 20% or more each. The Dry Bulk Shipping business can usually be approximately segmented into 3 main business models- the pure owner model (such as the traditional Greek or Japanese owner), the pure operator model and the mixed owner-operator model (some with a asset heavy model and some with the asset light model).
Firstly lets look at why I believe it will happen:
The death of the pure owner model. With the changes in the lease accounting regimes in most companies coming in 2019, we will no longer see anywhere close to what we saw previously with ships being taken on long term charters. All exposure to leases more than 1 year will have to be reflected on the balance sheet. No more hiding of forward exposure, vastly reducing ‘gambling’ behaviours of shipping companies by reducing most market bets to under 1 year. This will impact, in a major way, long term exposure management. It will create huge holes in shipping company balance sheets. There would be far fewer shipping companies continuing to pretend that they are still a ‘going concern’ when it is clear that they are not. The Japanese model of ordering ahead and flipping it out for 5/7 year charters will reduce dramatically. Shipyards and local Japanese companies will find far fewer willing operators who will be able to take on long term charters to back up their loans.
Shipyards will be less able to to build for their own account in poor markets. Dry Bulk Shipping companies with weak balance sheets will be forced (and we can see this happening already) to play in the asset light business model, competing head-on with far more nimble pure operators with minimal overheads, fast decisions and with no corporate bureaucracy to manage or be managed by.
Regression to the mean. After many poor years we will eventually see shipping going back to what happens in similar transport markets which continue to under-perform. We have seen it in airline industry and we are now seeing it happen in the container shipping industry with the top 3 shipping lines slowly emerging. I think it is inevitable- and I believe the process has started already.
The financial lending landscape is changing. Interest rate hikes will eventually come, and with it higher interest costs. Companies with poor balance sheets, zombie companies kept alive by banks will reduce- especially (as I explain above) when lease obligations are laid bare in 2019. HSH Nordbank’s decision earlier this year is one possible sign of banks becoming more focused on risks (while clearing the decks for their sale).
So- what do I think will happen? Here are my thoughts:
Dry Bulk Shipping companies will narrow their focus. Companies with multiple portfolios will reduce their key activities into one or two areas and exit activities now deemed non-core. This is already happening with some companies.
Long term charters will vastly reduce. Because all leases over 12 months will soon be exposed on the balance sheet, there will be not many companies taking on long term charters, and therefore there will be a reduction in the number of pure owners left playing in this space. Operators will become more spot and short term players. They will become more nimble- they have to be, as they will be competing directly in the space occupied by so many easy start up companies with minimal exposure and minimal costs.
Some companies will start ramping up their activities. I have been watching ship numbers carefully over the years and have noticed which shipping companies in the dry bulk space that have been ramping up their activities. They have all been in the asset heavy owner-operator business model space. As the markets eventually recover the biggest gainers in terms of profit growth will be in this space- as their costs will be the lowest. Asset light players will see their costs increase in line with the market and will continue to play on the margins- perhaps even squeezed out eventually if they are not nimble enough.
When will this happen? Regretfully things happen very slowly in the Dry Bulk Shipping space. Maybe over another business cycle- I reckon it will take another market bust in the 2020’s to see more companies getting stressed and merging with similar minded companies. It could also come earlier, due to the regulatory changes (especially costs of implementation of ballast water management systems and cost challenges in meeting the new 0.5% sulphur cap for fuel as of 1st Jan 2020) further devastating already weak and exposed balance sheets. Having said this, shipping companies have (mostly) always found ways to survive. Improving markets, for example, could save many of the companies and the whole process of consolidation could move even slower for another decade.
So- who do I think will be left standing? If you study companies currently running 500+ sized dry bulk fleets, you will find one German owner, one Chinese state owned company and an American grain trader owner already there. All three are already running well above 5% of the global dry bulk fleet. Close to their heels are quite a few well managed private and public listed companies who could also be in the running. There could also be some Wan Hai or PIL like shipping models (to use the Asian container shipping industry model for inspiration) making a decent living. These are companies who stick to a few core routes, play to their strengths and remain (mostly) profitable throughout the cycles.
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Source: Surinder Brrar is the Director, Chartering Pacific of Pacific Basin Shipping. The views expressed here are entirely his own.
