BMTI – Trend Experts for Shipping

The market situation in the Black Sea and the Azov Sea has seen little changes for the coasters during the last days, BMTI was told by an owner active in the region. Grain cargoes are abundant in the area and are concluded from Azov ports in a range of US$ 19-22/mt when heading to Marmara Sea. Same shipments and loading area can be fixed at around the mid US$ 30s/mt when the destination is in the eastern Med and in the mid/high US$ 30s/mt when going to the Italian Adriatic. The earnings of standard sea/river vessels of 5,000 dwt are hovering around US$ 2,800 daily lower year-on-year and some US$ 2,000 lower when compared with the average of the last five years. In view of the approaching winter season barge transport of sulphur on Volga-Don canal is expected to increase before the freeze begins. The river typically closes on 1 November. Sulphur prices for Q4-2019 from Azov to North Africa will range in the mid-to-high US$ 60s/mt CFR. Spot freight rates from Black Sea to Morocco are talked currently at about US$ 21/mt for sulphur shipments of 25-30,000mt which is around the same level seen during the last two weeks. In contrast stems of 10-15,000mt of urea loading in Yuzhnyy and redelivery Turkey are concluded in a range of US$ 12-14/mt which is a drop of US$ 1 week-on-week. Some 3,000mt of minerals saw a spot freight rate of some US$ 14/mt from Marmara to EC Greece and rebars loading in EC Greece and heading to Constanta can fetch about US$ 11/mt on tonnage of 5,000 dwt

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European wheat prices have remained relatively flat in the past week, even having gained some sentimental support from indications that Morocco will begin its importing season in October. Morocco said it plans to reduce its customs duty on soft wheat imports to 35% from a previous 135% starting on 1 October, which analysts say strongly indicates plans to begin grain imports in Q4, especially as Morocco’s own domestic grain output has fallen sharply short of expectations. French wheat exports are especially enthusiastic about the prospect of new Moroccan import demand. German producers were less opti­mistic as Baltic-sourced wheat exports are tradi­tionally rare to secure trade into North African mar­kets. French milling wheat for December is steady at about EUR 171.5/mt on Euronext trading in Paris, remaining under the recent one-month high of EUR 172/mt reached a week before. German bread wheat (12% protein) for September ex-Hamburg is trading at EUR 2.5/mt below the French wheat contract.

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Capesize cargo has predictably dried up in both bas­ins, particularly in the Pacific, where a recent re­stocking drive into the Far East had fuelled some astronomical increases, in some cases to nine-year highs. Rates have been falling in response, but not as rapidly as might be expected, although day-on-day declines of US$ 800-900 on the front haul run (to settle in the high US$ 50,000s) is also rather dra­matic. It is anyone’s guess when the slide will stop. With South America no longer the powerhouse it was last week, Atlantic Panamax rates have levelled out in the US$ 18-19,000 range on TARV basis. On the other hand, ECSA export demand is still rather vibrant and arguably still the most relevant source of new cargo demand in either basin, hence the domi­nance of ECSA deals on Kamsarmaxes to NoPac on round voyage basis. As such, 2LL can even secure upwards of US$ 21,000 DOP on Continental deli­very, which isn’t too shabby considering such rates were looking fairly exotic just a few months ago.

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Powering through their recent hardships, the same ones that have affected the dry bulk market at large, Clipper Bulk of Denmark has announced the recent purchase of three Handysize vessels of about 32,000 dwt each. Full delivery of the “Clipper Apollonia”, “Clipper Aegina” and “Clipper Alexandria” is expec­ted within the coming few months, announced the company in a statement. Clipper has emerged from a major restructuring operation that involved losing nearly 30% of its onshore staff as well as acquiring new capital at the same time to shore up its precari­ous financial standing. The restructuring process also saw Clipper sell off a number of its own bulk carrier vessels. This new acquisition will bring Clipper’s fleet to around 85 Handysize and Supramax vessels.

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European wheat prices appear to be firming on the back of a softer euro and renewed optimism for the EU wheat crop. Paris prices rose by EUR 0.5/mt at the end of last week to EUR 173.25/mt for Decem­ber milling wheat contracts after reaching a contract low at the start of the week some EUR 3/mt lower. The euro, however, has been falling since the start of August, making euro-denominated wheat more at­tractive for dollar buyers on the global marketplace. Analysts including Strategie Grains have responded to the turnaround by upgrading their export fore­casts for EU soft wheat in the present season. Fresh optimism about the German wheat harvest, albeit delayed by recent rainfall, has driven new sales in the domestic market with some traders claiming that as much as 0.25 Mt has already been purchased from this season’s new German crop. More than 90% of the current German wheat crop has already been harvested, making sales activity less vulnerable to shifting weather conditions going forward.

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Stock markets fell sharply this week—the second biggest drop all year—on ongoing trade war worries and news from Germany and China indicating slow­er economic growth. Bond prices rose sharply, push­ing yields to multi-year lows, analysts said. The S&P on Wall Street fell 2.93% on Wednesday, pressured by declines in the energy sector. Japan’s Nikkei ex­change dropped 1.3%, though eastern stock markets were relatively stable compared to western ones. European stock markets declined across the board after the German government reported that the Ger­man economy shrank over the second quarter of the year, the second negative quarter in a row, indicating that the eurozone’s biggest economy was in reces­sion according to the widely accepted economic definition of recession. Germany, which remains a highly export-dependent economy, has been especi­ally affected by the ongoing US-China trade war.

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Despite anticipating a correction after the run-up of mid-summer, Azov owners say they were none­theless caught off guard by the magnitude of the crash in rates seen in the past two weeks, taking an even more extreme turn in the past week, which saw rates fall by some US$ 4-5/mt week-on-week and sometimes as much as US$6/mt. Average grain rates for Azov/Marmara are reported at US$ 23/mt or some US$ 3-4/mt lower than a week before, while grain rates for 5,000mt (46′) ex-Rostov to Marmara have been trading as low as US$ 19-20/mt, repre­senting losses of US$ 6/mt in just the transition between months. The upcoming Bayram holidays in Turkey and across the Black Sea in the Muslim world is not likely to help sentiment as owners prepare for an upcoming period of bearish sentiment and rate reversals. Black Sea rates have been somewhat stead­ier by comparison with the Kherson/Marmara rates holding to mid teens of US$ 16/mt or thereabouts.

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Following last week’s description of shipping finance in eighteenth century Greece:

Shares versus Loans

The loan carried a yearly interest rate of about 30% and was to be repaid provided the vessel was not lost. The shareholders’ pay-off depended on the profit remaining after the payment of interest and other expenses. Half of the profit would go to the crew (no fixed wages were paid) and the other half to the shareholders. The shareholders’ income would thus depend on the charter rates the vessel would get. And thus their participation was riskier than a straightforward loan, whose return would be independent of the charter rates. Some investors, usually the wealthier ones, were willing to undertake these risks to their entirety while others wanted to reduce it. Thus, if an investor entered 50% of his funds in the vessel and the rest in a loan, he was better off in case the return on the vessel was below 30% and worse off otherwise. This reduced the variation of the investment return. The high interest rates for the loans were due to the high dangers at sea. At the end of the eighteenth century, a ship loss in the eastern Mediterranean Sea was calculated to be about 15-20% so the average vessel age was in a range of 5-7 years.

Developing Situation

The situation changed with the increased investment required for a steamer ship. The necessary capital could no longer be raised nearby and the merchants resorted to the London capital market or other financial centres. In the beginning of the steamship era, the captains did not have a controlling interest but as their know-how for running steamships increased, several captains bought out the other partners and became controlling owners. This structure of a shipping firm is the norm in contemporary shipping where every vessel is a separate company with a leading partner, several other partners and considerable bank financing. Of course, shipping loans today are not written off in case the ship is lost, and the development of the specialized insurance market has fundamentally changed the nature of risk into a financial factor rather than a physical one.

But in general, it can be stated that from the beginning of financing on all parties involved (merchant-owners, investors, accountants and notaries) indirectly show an understanding of the risk return tradeoffs and try, through several financing alternatives, to apportion the risks in an equitable way

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Although centuries of merchant shipping have passed, the kind of financing of ships in general has been the same throughout the years. There exist two possibilities: (1) a merchant has enough capital to buy and maintain a ship or (2) a ship is financed through the sale of shares and borrowing to a number of investors willing to participate in the enterprise. Since early times, for this kind of financing it was normal that only a certain amount of money truly existed as cash, with other parts of the money being ‘on the books’ or in bonds or loans (promises). The merchant normally was also the ship’s captain and responsible for the construction of the ship and the management of the whole enterprise. He sought partners and, furthermore, borrowed according to “Shipping Terms” for the sea loans or, in regular terms, in view of establishing a risk sharing mechanism. Only on rare occasions did a vessel belong to a single owner.

At the end of eighteenth century in Greece, for instance—one of the main ship-trading countries of the time—returns on the capital of the ship owner as well as the interest charged on the loans were carefully calculated. Loans were on a per-voyage basis and had a duration of a few months. These loans were subject to the “risks and dangers of the sea”, namely if the vessel was lost no claims could made against the property of the merchant shipowner. It is not known what other specific loan types were available.

The entire capital-raising procedure at the end of the eighteenth century was similar to the one that is followed today in the launching of private equity funds. The launch was carried out in a restricted time interval and the personality of the leading fund manager was instrumental in the success of the fund-raising effort. The call was addressed to the important members of the local society. Surely, the merchant circulated a financing proposal for the particular vessel in a closed circle, providing shipping and financial details, a kind of business plan that must have included some estimate of the required financing as well as a certain forecast of revenues to be expected.

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Coaster freight rates are picking up as “grain market for river tonnage is very hot”, a broker working in the area is telling BMTI, explaining “owners three weeks before were asking for about US$ 19/mt for 3,000mt of wheat for a trip from Rostov to Marmara and last week rates of US$ 25/mt to Marmara were seen”. Freight rates in a range of US$ 23-24/mt are talked for voyages with loading in the Ukraine and heading to the Eastern Med with basis 1,000 discharge. Mid-July shipments are expected to be even substantially higher with rumours around of some US$ 28-29/mt from Russian ports to Izmir, basis 1,000 discharge. According to a local charterer for voyages out of Azov to the Adriatic owners are demanding mid-low US$ 30s/mt, compared to high US$ 20s/mt during the last months.

Seagoing coaster on the other hand still have to accept lower freight rates as the market remains weaker and probably stay so until end of August. A corn shipment of 8,000mt has been concluded at a rate of around US$ 14.50/mt with delivery Constanta and destination in Greek Cyprus. From the Egyptian Med a fertilizer cargo of 3,000mt was talked in a range of US$ 21/mt for a redelivery in the upper Adriatic. Some steels of 9,000mt loading in the port of Novorossiysk saw a freight rate of about US$ 23/mt for delivery in the Egyptian Med and a voyage in the Black Sea from Odessa to Constanta was concluded at a freight rate of some US$12/mt for a shipment of 3,000mt of steel billets

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Analyst J Mintzmyer of Seeking Alpha has identified Star Bulk Carriers [SBLK] as a “dry bulk pure play” due to its current value at around US$ 8.4 being a “massive” 35% discount to its NAV (net asset value) and the company’s well-positioned, modern fleet which is set to be 100% fitted with scrubbers before the IMO 2020 regulations come into play. Mintz­myer also sees great potential in SBLK due to the current rally in Capesize rates (with day rates up to US$19,000 this week vs. US$4-7,000 three months ago) and Vale’s resuming iron ore output at its mines that were closed until recently following January’s mine disaster. The analyst has accordingly raised his fair value estimate for SBLK to US$ 14 per share. Continue reading →

Settling from last week’s minor uptick in activity and sentiment—perhaps buoyed by increasing bunker prices as well—rates for northern ships have settled back into their historical sideways motion as owners continue to keep a hard line at operating costs, which is where rates continue to hover dangerously just above. Market dynamics are undeniably poised against owners at the moment, as they have been for most of the year, with open tonnage just plentiful enough in most areas of trade to keep charterers from feeling any urgency to fix on forward positions or give premium rates unless absolutely necessary. With the onset of summer sluggishness and wide­spread holiday-taking across northern and western Europe, there is little hope for a recovery in the short term. Whether July brings a new wave of demand, inspired by a return of grain from the southern Euro­pean markets as the Black Sea harvest starts, remains yet to be seen.

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Russia said it will begin enforcing regional quotas and limiting its exports of ferrous scrap beyond the Eurasian Economic Union (EEU) starting in July and continuing for the six months thereafter. Further, starting next year, Russia says it will be handling scrap exports exclusively with an exchanged-based tender process. A bill in support of the new measures is expected to be introduced in September. The quotas will involve a series of specific coefficients to be assigned to each region in proportion to the shortage of ferrous scrap in the region. The lowest coefficient of 0.5 will be applied to Russia’s southern regions while the highest (1.5) will be set for Arkhangelsk. How this will effect scrap shipments within Europe is yet to be seen, especially for Turkey, the world’s top scrap importer. Turkey’s imports of shredded ferrous scrap, at any rate, have increased considerably in June so far with new data showing that Turkish mills bought 238,500mt of shredded scrap—comprising 15 single cargoes—since the start of June, which is more than twice the volume purchased by Turkey for the entirety of May (108,500mt). Scrap market observers speculate this increase in shredded steel imports to Turkey reflects a desire to build scrap stocks at presently favourable prices rather than in response to any growth in demand for domestic steel production.

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Increased coal movements around the Sea of Azov have helped buoy sentiment and rates to a limited degree, at the very least halting the slow decline seen in recent weeks. And amid the dominant sideways trend, there is word of some even fixing slightly higher levels over last-done as charterers prove will­ing to pay premiums for early June dates. Rising activity for scrap and coal shipments in the Black Sea and Sea of Azov comes as an encouraging trend for owners, who remain nonetheless sceptical about how much uplift this activity can or will provide. Azov to Marmara shipments continue to fix high teens of US$17-18/mt on 5,000mt (46′) grain. Coal is fixing similar rates on this run. Inter-Black Sea grain ex-Novo to Marmara are at US$ 15-16/mt.

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