Segmentation, some ships are more equal than others ($GSL, $ONAV)
Had a very interesting conversation on the risk and opportunities of investing in shipping with Sivaram from the blog Can Turtles Fly? (bought the movie to see if they can, and they they do not –tragic, funny and good movie). He makes some very interesting points on the size of the shipping bubble, the amount of debt involved, the unreal reality when markets disappear and the risks of investing only with a macro view. I think we both agreed that bottom-up analysis is crucial in a distressed environment.
There was a point specifically about Global Ship Lease GSL, one of the shipping companies that we discussed. And that is the crucial importance of doing a good segmentation in your due diligence. Sivaram very correctly points out the very different economics and future expectations of Dry Bulk, Tankers, and Containers with the last one the bleakest of them all.
However, high level segmentation can obscure details. For example, Omega Navigation (ONAV) is not just a tanker company, it is a product tanker company. In other words, it transports refined products in specialized ships that need special coating. Some of them are ice class so they can be used in the Arctic and Baltic. This sub-segment is beneficiary of the trends of mandatory transition to double hulk and environmental constrains to refinery expansion in developed countries. In turn, this leads to substantial expected growth over the next years that should rapidly absorb the small current overcapacity. You might ask why I did not buy ONAV. Well, I might but still have concerns on two charter renewals this year and the bad negotiated conditions for two other vessels. Today’s earnings confirm my skepticism.
Coming back to Global Ship Lease (GSL), its business is acquiring and chartering vessels to container shipping companies. It became public last year by a reverse merger as a spinoff from CMA CGM, the third largest container shipping company. From CMA CGM it acquired its initial fleet and contracted it back on an average term of 11 years. The container industry is in serious trouble but all news indicate that CMA CGM is the strongest player on the field.
GSL’s vessels are small to medium size and half its fleet is around 2200 TEU. Then read this
What set pulses racing was the recent fixture of the 1,793 teu geared newbuilding BF Ipanema that Maersk chartered for between 2 and 12 months at $4,200 per day. Far more interesting, from the point of view of owners, were the options attached. If taken up in July 2010, Maersk reportedly will be paying $6,500 per day for the following six months, then $8,000 per day for the second six-month period but Maersk is under no obligation to exercise the options.
However such options are no longer unusual, according to some owners and brokers, with growing evidence of a two-tier market developing that reflects massive over-investment in big ships and a relatively modest orderbook for smaller sizes.
That position is underlined by new figures from Alphaliner that put the size of the orderbook for ships of under 4,000 teu at 11.3% of the existing fleet, compared with 63% for vessels in excess of that.
Furthermore, most of the order cancellations negotiated in recent weeks because of a lack of funds have been for smaller units, the latest being a series of 2,500 teu vessels. “So if orders make a comeback, it will be first for small containerships,” Alphaliner predicts.
A growing conviction that small ships could lead the recovery is being borne out in the market, according to Carsten Rehder managing director Thomas Rehder.
Disclosure: Long GSL