New York, Pound Shop and discount charter parties

‘New York! Just how I pictured it’. These are, of course, the words of Stevie Wonder from his hit tune ‘Just Enough For The City’. And so, with the vision of Stevie to fall back on, to New York, and the manicured lawns of southern Connecticut, went the maritime conference circuit last week. It always amazes me that New Yorkers use the word ‘like’ so often, particularly as they are usually explaining something that they actually don’t like.

To the Capital Link shindig my thoughts wandered. I’m not sure if there is a collective noun for people who lose money (whether theirs or somebody else’s), so I’ve invented one. Here you found ‘a bulker’ of losers. Examples of companies that went bankrupt when the market was far higher, and yet they are still strumming the same three chords from the same Status Quo song. If you went bust when the market was three times higher and haven’t changed the tune, then, well, ummm, maybe . . . . Some shipping companies must have unbelievably good boardroom biscuits considering how often their bankers keep turning up for pointless meetings about rescue plans that are less plausible than the plot of Con Air.

The only reason that bankers show up to meetings at shipping companies.
The only reason that bankers show up to meetings at shipping companies.

I must confess that I didn’t go. I must confess further that I would rather stay in Airdrie and empty my dog’s anal glands than sit through another panel of ‘bulkers’ tipping us on when the Chinese economy will rescue their hopelessly antiquated business models. But me being me (unless when booking a table at the Harvester in Luton, where I pretend to be someone else after my lifetime ban for crashing the salad cart through the glass doors and running down the high street with it) I knew people who were there. By the way, just revisiting the Harvester for a moment, how come I was apprehended and charged with theft and criminal damage when the waitress clearly said ‘Help yourself to the salad cart’?

So back to New York and also the many cocktail parties at CMA. My spy there was a trader friend who goes by the name of Stavros McTavish. His Dad went to watch Scotland play in the 1978 World Cup in Argentina, got on the wrong flight home and ended up settling in Piraeus. Stav may be a bit slick when it comes to some of his trading manoeuvres, but he knows the difference between fillet steak and horse meat. In my eyes his opinions count. So I was delighted to hear that he ran into a mutual acquaintance of ours, a man we call ‘The Pound Shop Onassis’.

Pound Shop likes to talk about Pound Shop. Usually he does it loudly, but always he picks his audience like OJ’s lawyers pick a jury. In an ideal world he will hold court with people he pays (brokers mostly), people who know absolutely zero about shipping (private equity bods mostly) and those who haven’t realised that if you haven’t realised who is the dumbest in the room, if Pound Shop is there then it’s him (journalists mostly). But never, ever will he open the floor to questions as it would become clear that he has no practical answers.

From humble beginnings come humble intellects.
From humble beginnings come humble intellects.

Stav told me that Pound Shop had found such an audience in the corner of a drinks reception hosted by the Maritime Sanitary Towel Providers Association of America. He was braying at the assembled onlookers who wore expressions of people who were trying their mother in law’s cooking for the first time. Stav sidled up so that he could eavesdrop.

‘I tell you pal. Even by Pound Shop’s standards it was stunning. He told them that he was the only man in shipping who could correctly price risk. That’s why he was making so much money trading FFAs’ laughed an incredulous Stavros. Now I might not be totally on the pulse when it comes to who trades what, but I am very certain in the case of Pound Shop that he doesn’t trade FFAs. He’s had the opportunity at every company he’s ever worked for (and left smouldering like a tyre mountain once finally kicked out), but never pulled the trigger. I remember having dinner with a broker pal when we bumped into Pound Shop. Sweating, drunk and loud, he bellowed at his fellow diners ‘This guy is my FFA broker. What a guy!’ My mate reliably informed me when out of earshot that Pound Shop would call him at odd hours, ask some stupid questions, give him an impossible spread to trade then disappear again with nothing done. ‘Just a lonely bloke’ he concluded mournfully.

Interestingly Stav told me that while parting his fellow drinkers’ slicked hair in Connecticut, he regaled them with his best trades of the year. ‘I wrote them down just to make sure I didn’t get it wrong. When I got back to the office I confirmed what I suspected all along. Every trade was a loser,’ he laughed. Luckily for his employers, Pound Shop no more did those trades than I can get my dream date with Samantha Fox. However, there was something that did require closer inspection in those ill-chosen words of his.

There is more than a nagging suspicion that risk could be priced more efficiently on a structural level. Take a typical trade in the dry bulk sector. The cargo seller is a grain house for example. The ship itself is owned by somebody with a fleet of 20 vessels. The cargo buyer is also a grain house. The ship is on time charter to an operator. Now one of these participants in the chain has no assets and is very much in the cash flow management business on a limited credit line for which it pays good interest. The rest have large balance sheets, access to deep pools of cheap trade finance and assets to back it all up with. The operator is really ‘back to back’ trading between ship and cargo owner, with a time lag in payment terms.

So on which of these entities should the risk be most efficiently priced? There are only two parties to this whole shipping transaction who have to play the cash flow game. The first is the operator, who is paying up front for the time charter hire and port costs, and secondly the bunker supplier who will give payment terms to the operator based on risk profile. So it is pretty clear that the credit risk is actually placed on the riskiest part of the deal. The typical operator can find themselves sat on a pile of invoices ready to be sent out to companies with investment grade ratings. Yet the operator, the weakest link in the chain is the one being leaned on.

Spot the operator in the credit chain.
Spot the operator in the credit chain.

I called Les Miserable to see what he had to say about this. ‘Yep, it’s true. I spend more of my time here juggling cash flow than actually thinking about what’s best to trade. I know we’ll get paid, but it’s like being a hamster in a wheel’ he explained. Has he thought about other ways around this. ‘Yep. I came up with a really good way to deal with this. There must be a market for something here,’ he pondered.

He was recently in exactly the position where he was owed millions by good credits for outstanding charter parties while additionally owing millions to various bunker suppliers and owners. So he approached one of the bunker suppliers and explained the issue. He had a supramax which he’d bunkered in Europe on its way to the Plate to pick up a cargo of grain. He was then going onto Japan to deliver to a major Japanese grain house.

The bunker supplier reviewed his charter party and, having been the supplier of the bunkers for the vessel going from the Plate to Japan, he knew it was a real fixture. He agreed to lend Les 90% of the total value of the fixture (at the time probably close to $3m), keeping back the outstanding amount that was to be paid for the original bunkers. Les got the grain house who had bought the cargo to assign the earnings to the bunker supplier and the rest is history. ‘We paid off a couple of outstanding bunker payments and it allowed us to quote and get another trade with a long ballast leg which, without the up front payment, we wouldn’t have been able to do,’ he concluded. ‘You know, the longer the ballast the worse it is. Sometimes we have to leave paying business just to be prudent,’ he moaned.

A pound of tomatoes and two front haul Vale's please luv!
A pound of tomatoes and two front haul Vale’s please luv!

Thinking about this, there is the possibility to take it a step further. For example, would a charterer offer an advance payment to a well trusted operator in exchange for a discount? Would a bank or fund offer a trade discounting service for charter parties with companies who’s credits are better than the operating company that is borrowing? Could there be a pool from which operators could commit capital then use it to cash in charter parties early? Like a clearing house for charter parties in essence.

A step even further would be to create a marketplace for people to offer charter parties for discounting, on which participants could offer terms and interest rates, the best terms winning the deal. This would essentially create a ‘crowd funding’ style of platform for freight which would ease the cash flow burden of operators considerably. After all when a company with no assets and a $10m unsecured credit line is the reference point for pricing risk in a chain where they are not responsible for the main financial risks seems odd, if not just plain wrong. Will a Rio Tinto or Vale pay you? If you think ‘no’ then you are in the wrong business. So knowing that ultimately the cash to pay to transport goods comes from these entities, why are the terms based on the asset-less service provider in the middle?

Fat Zeke, the budget and egg and chips for one

A drink with the boys these days isn’t half as much fun as it used to be. After the recent UK budget the new sugar tax is going to bite pretty hard in these here parts of Scotland, particularly for my buddy Zeke, who’s favourite tipple is moonshine mixed with ginger beer. Who knew that if he’d been adding Lilt to his hooch all these years then he may have kept his teeth from falling out and his weight under 320lbs? Admittedly he wouldn’t have been able to claim all that lovely disability benefit as he can barely walk, but then again the double whammy of paying more for his mixers while getting less for his medical worries seems a bit harsh to him. Still, as he brews his own liquor in his boiler cupboard, he’s skipped paying all those dues to The Man in the end. It was a win for the little guy, although in Zeke’s case he ain’t so little.

As we got to talking in the snug at the the Drumgelloch Bar (rated no.51 out of 51 in Airdrie on TripAdvisor) one of the boys told me that a packet of smokes now costs more than £10 after the Conservative government’s latest budget. ‘Even more in London I reckon’ puffed Zeke. Now I remember times in the dry bulk markets when things were rough. I also remember getting a helicopter to pick me and a buddy up from the office to take us to a casino. Shipping has its good times too you know, but let’s briefly focus on the bad again.

‘So how bad is it down there?’ I asked Slick Ricky Pratt, the best ship broker in London that I know. ‘Oh mate’ he said, ‘It’s more than a tenner for a packet of cigs now. I tell you what, with the commission I earned on a Capesize fixture I did today, by the time I’d parked the motor at the station, bought a copy of the current bun and got a coffee I’d spent all the bro I’d earned. So once I’d paid for the train into the office I was losing money by showing up. The boss wants us to work in the dark to save on the electric bill.’ Knowing his boss I don’t doubt that to be true.

He told me that one of his mates across town at another London brokers got an email from the CEO last week asking all of the dry desk to attend a meeting. When he went the CEO asked if any of them would volunteer to work from home for the foreseeable future. When one brave soul asked why, he was told that they wanted the desks so that they could get more tanker brokers in. This is the same brokers who’s chairman once strutted along the streets of London wearing a cape while wafting an ivory tipped antique cane like a slightly camp Jack The Ripper.

A dry cargo broker in the olden days of 2008.
A dry cargo broker in the olden days of 2008.

Such tales from the City are now rife. Smart Eddy told me that he went for dinner with his biggest broker last week. It turned out to be egg and chips at a Wetherspoons for him, while his broker had a tap water with ice. Eddy ordered a pint of Stella and was told by his embarrassed broker that ‘brand beers are not allowed on expenses until the 4tcs are back over $8,000/day. Now can you still reverse the charges on pay phones? I need to call a client and I’m out of 20ps’.

All of these tales, while titillating, are not really why I am bending your ear today. It actually goes back to the UK budget: it turns out that the UK government is rubbish at forecasting its own economy. Please don’t take this as a political statement because this government is no different from any other in this respect. While it is going well they think it is because of them, but the circumstances cannot be replicated it seems, so each review seems like an exercise in pointing out how little they actually know about what happens and why.

The UK economic think tank doing the final edit of its forecast.
The UK economic think tank doing the final edit of its forecast.

I called up a very earnest young analyst who is a head global chief of worldwide research strategy (or similar) at a maritime data provider and asked him a straight forward question. ‘Do you make forecasts?’. ‘Oh yes,’ he trumpeted. ‘We have developed a model that can track and forecast freight rates in real granular detail. For instance I can give you a month by month forecast for the next five years on any single dry bulk route’. ‘How so?’ you may ask. ‘We take the bottom up approach, using all of the base case economic data available and building it into our forecasts. Then from there we take the relevant demand data to build a picture of what is happening to cargo and in what regions, helping to see a tonne mile as well as actual volume outlook’ he explained enthusiastically. ‘It’s all built by algorhythms’ he said proudly (because algorhythms are notoriously unshakably reliable right?).

The approximate number of variables in a freight forecast.
The approximate number of variables in a freight forecast.

Now I don’t know what you think, but we are now in a situation where his model in theory must be more capable of predicting the economic outlooks for individual countries themselves. He claims his output is accurate, so the components must be accurate. So he gets the economic forecasting for the UK right, right? One would assume that in his ‘bottom up’ model he pays close attention to the fortunes of the world’s fifth largest economy. So if he is so confident that one of the key foundations of his model is correct he should let the Chancellor of the Exchequer know his thoughts.

Alternatively, one might cynically put his efforts (which when back-tested look very convincing) into the category of ‘exponential guess work’. This means that by using thousands of guesses of thousands of different factors, while not realistically being able to forecast their changing relationships (even if you could truly understand their current ones), you can come up with one single figure for one single route by month for the next five years. The path to this number is so complex and circuitus that questioning any single input into it becomes entirely meaningless.  That can be deflected by the phrase ‘It was built using algorhythmns’ one assumes.

What does the future hold then? Let’s be frank here, whether you are George Osbourne, fat Zeke, Slick Ricky Pratt or Nostradamus, your guess is as good as mine. Smart Eddy put it more bluntly; ‘If oil is $38 for the balance of this year, iron ore is $50 and the meaning of life is 42, does that tell me when I can order brand lager again when my broker takes me to Wetherspoons on a jolly?’

 

 

 

 

 

Wikiships, Vim and Old Meg

My mate Les Miserable recently described me as the Julian Assange of dry bulk shipping. I assumed because of my tireless pursuit of the truth. He said no, it was because I have a personality which would be more likeable if I was locked away from the public view. That was not far from the truth this week (the locked away bit, not the personality bit) as Julian sits trapped in the Ecuadorian Embassy in London waiting to see if he can avoid a trip to America, while I sit trapped in the Premier Inn on the Forfar ring road, waiting for some UPVC windows to be fitted in my penthouse bedsit over Frank’s Chip Shop in Airdrie high street.

It gave me time to read a lot this week, passing the time between repeats of Homes Under The Hammer. While skimming the increasingly disappointing Linkedin pages I read with keen interest a post suggesting that now was the time to buy a ship. Now my Ford Capri isn’t the only thing I’ve brought with me from the 80’s. My recollection of ships making a one way voyage from the launch to the scrap beach always makes me think that when you see light at the end of the tunnel it could actually be somebody with a torch bringing you more bad news.

franks
The new windows at Prospector Towers, Airdrie.

So it seemed like a good time to go see Vim Van Vinky, a particularly smooth old friend who suns himself down in the Mediterranean. Vim picked me up from airport in cheery mood. He smiled to himself as he tapped his finger on the steering wheel of his 4×4 while Boys Boys Boys by Sabrina played on Tax Dodge FM. Life was clearly pretty good for Vim. As we swerved along the coast road I asked him what his secret to happiness was, because everybody else is about as cheery as the attendees of the ‘coffin building for pensioners’ course at Airdrie Tech.

‘In 30 years in this business I’ve never lost a buck in shipping’ he said. Well I suppose that’s true. His investors might have lost billions in that time, but he was right. He personally had got stinking rich. As we sat in a bar by the harbour looking at the yachts, him in his Ray Bans sipping a Bellini, me in my England away strip (vintage circa 1994) eating my Duty Free Toblerone for lunch, I popped the question. ‘Should I think about buying ships now?’

Vim sat back, took a deep breath and fixed me with an intense stare. ‘Well, what you need is somebody with real experience to advise you. Somebody with a track record.’ Like you Vim? ‘You could do worse! Hahahaha!’ Some have suggested that the only way to make money with Vim is to actually be Vim. But much like what Vim used to say when he sold second hand carpets in a previous life, never mind the quality, just feel the width.

He talked about supply, demand, Greek asset players, Chinese economics, interest rates, leverage, iron ore demand, the list of things that make people nod along when talking about shipping. ‘This guy really knows his stuff’ you often hear. Some 25 minutes later he had made a case using all of his experience and weighing it all up. ‘So what’s your conclusion then Vim?’ I pleaded. He held the last dregs of his bellini up to the Mediterrean sunshine, rolled the glass between finger and thumb, then slowly slid the bill across the table towards me. Without looking away from the endless blue sky he simply said ‘It looks cheap. Why not?’

Time to call Smart Eddie – the biggest frontal lobes in shipping and the mother of all sceptics. ‘Well for a start I don’t want to speak to technical managers, spend huge amounts of time and money on surveys and reports that, to put it mildly, I wouldn’t trust. I don’t want to worry about P&I Clubs, have meetings with 1001 different service providers from armed guards to caterers. So on that basis, buying a ship may very well be cheap, but the amount of management time in running the thing eats into your opportunity cost enormously. It feels like it would be better to pay all of the service providers half the money to not do it,’ he told me from a ski lift somewhere near Zermatt.

‘Put it like this. Sponsors of asset buying vehicles always tell you about the high level of experience the various technical and commercial managers have, about how they can charter out to the best in the market, get the best deals and so on. But you’ve got to remember that the only people who are guaranteed a return on the venture are the service providers and often the sponsor owns the service providers too.’ Heads I win, tails you lose.

Call this guy before you pick up the phone to somebody selling a shipping fund.
Call this guy if you want to invest.

‘So how can I avoid the traps set for me by the conventional investment vehicles?’ I asked him. ‘I’d consult a shaved chimp before any of these advisors and sponsors,’ he snapped back. ‘What if I could do all of this without ever having to listen to anybody tell me that ‘shipping is different, or a ‘people business’? The smartest brains on Wall Street have fallen for many snake oil sellers that pop up out of the woodwork with a tale of vast riches and long track records. They miss out the bit that the industry is currently bankrupt as a result of people using exactly the methodology that they themselves are peddling. Now I’ve got to go as me and a bankrupt ship owner are heliskiing and I think that the chopper is landing in a minute’ were his parting words before I heard a muffled cry over a background of whirring blades.

60% of the time it works every time.
60% of the time it works every time.

It does appeal to have a way to invest in dry bulk either through my belief in rising asset prices or rising earnings, but never have to get my hands dirty running the darned things. What if Old Meg, my trusty calculator, was telling me that today I should own an asset and sell the earnings as an arbitrage. Then tomorrow the earnings move and Old Meg tells me that I should be long the earnings and short the asset value? All you need to know is the asset value, the break even and the FFA forward curve and you have a really interesting way to get away from much of the cold stew that is currently served.

Once on a trip to New York, Vim and I were leaning up against the bar of an expensive hotel with some investor folk in tassled loafers, way past midnight, and he says ‘Well, shipping equities always trade at a discount to asset value’ They all nodded along and asked why? ‘People who invest in shipping know nothing about it,’ he declared. I thought that maybe actually they might know something and that perhaps (and I’ll whisper this) it’s the asset values that are wrong and not the investors.

Before Vim dropped me back at the airport I did have a chance to ask him ‘What about the idea of a derivative I can trade based on ship values? Then I can choose if I think capes are cheap. I can choose to buy vessel values and sell earnings.’ ‘But who’s going to do all the shipping?’ he said. ‘And how on earth am I going to make money from it if everyone knows the secrets?’ he added with a wink and a swagger before disappearing through the crowd of sunburned Glaswegians in sombreros and Rangers shirts who, like me, were headed back to Scotland in a state of befuddled confusion.