Firstly I would like to apologise to my reader, after a letter flooded in to complain about the lack of activity here at Mrprospector.co.uk. Other than my general indolence, which to be fair has been the primary factor in the empty spinning space of this blog, I have actually been away on jury duty. Had I known that I would be spending two weeks of 10am-4pm with a free lunch and only having to qualify for it by being eligible to vote and being sound of mind (which seemed rather optional when I met my fellow jurors) I would have been volunteering years ago.
Case one was possibly the most optimistic of fellows. He came into the courtroom looking like an egg on legs, as wide as he was tall. His crime was simple enough. He went to a restaurant, got down at the trough and ate for all he was worth, washed it down with a few craft lagers and decided to take his chances. He made a bolt for it and ran down Dundee High Street as fast as his little wooden pegs would carry him. Sadly for the defendant he was soon caught as he had ‘done a runner’ from a Kenyan restaurant and the staff would have probably caught him over 26 miles rather than the 100 yards he managed before he had to stop to catch his breath. Guilty, your honour!
The second case was a bit more complex. It basically revolved around somebody who paid everybody late. Literally everybody. Eventually the long list of people who he owed money to got a bit cross. They hired a large person with a slim grasp on the merits of right from wrong who beat this fella to a pulp. On trial was the large person and quite a few of his cohorts who paid for his bus fare to visit the poor payer, also throwing in some pennies for some sandpaper to get the dents out of his baseball bat.
And why am I telling you this? Well, bar the interesting bits (like the description of all the upgrades he’d done on his XR3i for example – smooth work indeed), there was enough time to think about the whole concept of payment. You see, shipping and commodity trading is all about debt. Everybody is basically in debt. The miner owes his staff and the bloke who owns the land. He borrows from an off-taker for a discount. The off-taker borrows from a bank to pay for it. He then borrows from an operator to ship it. He borrows from a bank to pay for the ship he’s borrowed from a ship owner. The buyer of the commodity then borrows from a bank to pay for the goods. He borrows more to produce the goods, while offering credit to the eventual buyer of the goods. In there as well are owners and operators who borrow from a bunker supplier, who borrow from an oil supplier, who borrow from a bank. Sometimes, and it seems rarely is the case, that somebody actually has all the money required to pay for what they are doing. Bearing in mind that banks borrow from other banks to lend to all the other borrowers it looks like an awful lot of this depends on debt.
In one sense it is hard to criticise. After all, if you look at the equity, cash flow statements and balance sheets of pretty much any business in this chain then only a few actually have assets. Of those assets they are by and large effectively owned by banks to the tune of 50, 60, 70% and higher. The common financials of most of these companies are built on humongous leverage. $250m in sales, $1m profits. Cash in hand? $1m. Short term debts of $15m, short term obligations $14.9m. These figures are as common as guest on the Jeremy Kyle show.
What gets me is this. All of this just about works. There are thousands of companies across the commodity and shipping spectrum that operate on this basis. Traders, marketing companies, operators, owners, bunker suppliers, and many many more. But, and here is a but the size of Kim Kardashian’s, what happens when somebody pays late?
Before we look at the consequences, let’s look at the motivation. The oft trotted line about companies wanting to hang onto cash for as long as possible to save money and look good with their banks deserves a bit of attention. Attention in the sense that it simply doesn’t scan. How much interest do you really save over a year by paying a bit late? Well, likely you lose as many contracts will have penalty clauses. Those that don’t basically invite people to pay ‘a bit late’, but likely the contract itself factors in this cost in the price. The second motivation is that people simply cannot pay. It can be because the company is going bust. Very real, quite possible. But then there are those that are habitual late-payers.
I have sat there when people who I worked with have said (when clearly just not bothering to pay as per terms for no specific reason other than they think it somehow saves money) ‘Well it is back to back’ as some kind of magic pacifier that sends a screaming child into instant equilibrium. Universally the answer that comes back from that statement is ‘I don’t give an owl’s pellet mate. Your name is in the contract’. It is a pointless platitude that, if it means you might end up paying somebody late, you are better off not doing the business in the first place.
The form of the late-payer is well established. It starts off with ‘back to back’ chat. Then the ‘man in charge’ is travelling. Then the banks are closed today in (insert here any jurisdiction that the banks are closed that particular day). Then they have the wrong BIC code. Then they are waiting for the swift. Then they are getting married that day. Then a funeral. Then it’s a public holiday. Then how about they pay you some of it for now, until things have settled down because the finance manager has left and nobody knows how to use the invoicing system. My favourite I have heard is that it is Halloween so everybody has left early. And so on.
In a commodity trading trail everybody is working, as discussed, on massively high debt-laden turnover. The first time a ‘Halloween’ event occurs it comes down to somebody somewhere deciding that their reputation shouldn’t be damaged. They pay their bills without receiving the payments they are owed and roll out the prayer mat that things will sort themselves out eventually. It is fair to say that entire businesses are built on the concept of stringing payments out until the creditor is in a position where any payment is better than none and discounts become the norm.
As it was once described to me by an avuncular gentleman in an ill-fitting pink polo shirt (who was in the process of banking a back-hander in the form of $100,000 of ‘hotel expenses’) that contracts are ‘merely a pause in negotiations’. The more I think about it, the more it seems like paying your bills on time is missing a trick. Spend time getting to know the cash flow situation of your counterparties with the intention to rack up a bill the size of a pelican’s, then get the script ready to fend off the calls until they will be forced to take any amount you deem fit to pay them to prevent the full disaster unfolding. Sell to princes, buy from paupers.
In certain parts of the commodity trading sector it has almost become suspicious when companies pay on time. Why? Well, because everybody pays late, but if somebody pays on time then they are trying to hide a different skim which is worth more to them than fudging suppliers out of cash.
I know of a company based in Jebel Ali which is solely the vehicle through which the management of a publicly-listed company take their skim. You do a trade with the publicly-listed entity and in fact they will have an ‘exclusive agent’. You sell to the agent at $20, the publicly-listed company buys at $21. So long as you are prepared to play the game you will gain contracts galore. And people wonder why they just cannot seem to crack into certain markets despite their low cost, high quality service.
Now what of my jury service and the late-payer who eventually ended up more black and blue than a widowed bat. Well we argued about the guilt of the defendants. We all agreed that it was clear they had means, motive and opportunity. In addition there was DNA evidence, CCTV footage, text messages, and bank statements showing the bruiser had been paid. We returned a verdict of guilty of course. I am a pacifist (unless involved in a violent situation) so violence is not the answer (unless the question is ‘if you punch me in the face I’ll give you 20 quid?’). However, there is an idea that people who throw the stone in the pond by not paying on time should be made to suffer a bit. The notion that reputations can be broken by misdeeds such as the ones above are simply not true though.
We can all name blatant crooks that we have dealt with who ruin the ‘knife edge’ chain in which we operate by deliberately causing stress, passing on cost and creating bankruptcies almost as a business model. Are they guilty, but unpunished? Or are we all guilty of allowing it to happen?
I will leave you with a great story that I read today. There was a nationwide power cut across Kenya the other day. It took four hours of frantic work to get the national grid back up and running after the entire network began to trip one after another. The cause of this catastrophic event that embarrassed energy planners across the country? A monkey fell onto a generator, which unravelled the network. The pay-off is this – despite the entire black out that befell the country, the monkey was taken in by an animal sanctuary and release back into the wild totally unharmed. Ring any bells?
Every so often I read something that makes me wonder why oh why oh why anybody says it with a straight face. And why oh why oh why oh why anybody would print it for mass(ish) consumption. So I am going to start a taxation plan, which will charge a fee in bananas for those prone to spouting nonsense. One banana is a bit silly, the more bananas you have to pay for, the more dim your ideas are viewed. So . . . read this one, which I have helpfully annotated until you get the hang of it. At the bottom you will see the Banana Tax rating:
QUOTE The time is ripe for opportunistic buys in dry bulk, where risks taken now are likely be rewarded with respectable returns for “patient capital”. So believes Rahul Kapoor of Drewry Maritime Equity Research, who was speaking at the first Capital Link China Shipping Forum, held in Shanghai.
SO IF I HANG ON FOR LONG ENOUGH THEN ONE DAY I MIGHT MAKE A MODERATE RETURN? WOW! WHERE DO I SIGN UP FOR THIS?
In a survey of the main shipping markets and their outlook, Kapoor said Drewry sees energy shipping trades as remaining the more profitable ones to operate in, and sees little to justify investment in container tonnage, but in dry bulk it sees an opportune moment for secondhand buys because of dramatically depressed prices.
SOMEBODY ACTUALLY TOOK TIME TO PUT THIS INTO A PRESENTATION AND READ IT OUT? AND SOMEBODY TOOK TIME TO SIT THROUGH IT AND LISTEN? THEN SOMEBODY WROTE AN ARTICLE ABOUT IT? AND SOMEBODY EDITED IT? THEN SOMEBODY PRINTED IT? THEN I READ IT? THE MAN HOURS WASTED BY THE ABOVE STATEMENT SHOULD BE CHARGED AT THE HIGHEST TAXABLE RATE.
The Drewry secondhand dry bulk price index has slumped by 38.4% since January 2015.
THAT’S NOT EXACTLY THE ‘BUY’ SIGNAL ATTRIBUTED TO ANY MARKET IN THE WORLD.
Kapoor’s models predict a five-year panamax investment this year would produce an internal rate of return of 16% between now and 2020, and a similarly timed capesize play would bring 12%.
IT MUST BE TRUE BECAUSE HE HAS A MODEL. PITY THAT IT IS A CLAY MODEL OF A BIFFA BIN.
Kapoor believes recent “smart money” plays by John Fredriksen, Andreas Sohmen-Pao’s BW Group and Nikolas Martinos’s Thenamaris point in the same direction as Drewry’s numbers.
QUICK QUESTION: IF YOU READ THE PARAGRAPH ABOVE THIS, KAPOOR’S MODEL PREDICTS 12% RETURN FOR CAPES, BUT 16% RETURN FOR PANAMAXES. BUT ALL OF THE ‘SMART MONEY’ BOUGHT CAPES? I AM CONFUSED ABOUT THE ‘SMART’ PART OF THIS.
Buying the steel beats buying shares as a bet on dry-bulk recovery.
HE ASSUMES THAT THIS IS CORRECT, AND HE ALSO ASSUMES THAT YOU WILL ASSUME IT IS CORRECT, BUT TECHNICALLY HE IS ANSWERING A QUESTION THAT ISN’T BEING ASKED. AND IF IT WAS, THEN THE PERSON ASKING IT WOULD BE FINED SEVERAL BANANAS FOR BEING AN IDIOT.
“Investors who want to defensively play the dry bulk market can look to invest in physical assets as they would offer more certain and gradual return compared to stocks,” Kapoor told the Capital Link crowd. UNQUOTE
SORRY – THAT LAST PARAGRAPH DEFIES EVEN MY WITHERING WRATH FOR HOT AIR. NOT ONE SINGLE SHRED OF FACT IN THAT ONE. IN FACT QUITE A LONG AND PROVEN CASE FOR THE DIAMETRIC OPPOSITE BEING TRUE. I AM GOING TO GIVE MR KAPOOR A CRUMB OF SYMPATHY THAT THIS LOOKS A BIT QUOTED OUT OF CONTEXT. BUT THE JOURNALIST WHO WROTE IT SHOULD BE STRUNG UP BY HIS BANANA.