The other day I was sitting in the economy class lounge at East Midlands airport, sipping a non-vintage Cava from a plastic flute while humming the theme tune to ‘Bonanza’ when who should I see across the way, but my old buddy Pippy. Pippy is a high flyin’ dry bulk trader who’s worked for the best of the best out there. I siddled up to him and said ‘Howdy’ and we shot the breeze for an hour or so waiting for our flights.
I asked him why he thought all these rich dudes are buying up Capesize ships at the moment. I told him about my plan to create a floating health club using a Capesize (tennis courts on deck, squash in holds 1 and 9, a weights room in 2 and 8, with spa and sauna plus a bar and changing rooms in the rest). He didn’t take to it well, but he did point out a few interesting facts and figures for me regarding buying a ship right now.
A modern capesize vessel was sold from a listed company into private ‘old money’ of shipping for $19.2m not so long ago. Basically that ship will need to earn about $11,400 per day over its life to break even. One argument is well, that’s darned cheap right? Historically yeah, I guess it does look cheap. But hang on there partner. It’s only cheap if it makes you money, and this one looks like it might not be a money spinner.
Granted, a lot of the buyers of these capesizes are also tanker owners who are choosing to take their chips off the table there while the cards are still running hot in order to place them somewhere where the luck must surely eventually change. Pippy showed me a little graph which I thought I would share with you, which puts prices vs earnings into some kind of historic format.
What Pippy was telling me was that if you take the value of a ship, then divide it by its earnings over the next five years then you come up with a ratio. When a ship costs $20m and it earns $20m then the ratio is 1.0. The higher this ratio gets frankly the better it is to sell a ship rather than buy it. Pippy took the FFA forward curve to model earnings over the next five years, in effect creating an arbitrage window for owners of tonnage or those wishing to buy.
This graph shows that buying a ship right now isn’t the best deal, but is far from the worst. The ratio for the $19.2m ship comes in at 1.25, kind of better than most ratios, but not at the end of the normal distribution curve either. Now let’s talk bucks here. The average earnings over the next five years of the FFA curve when we were chatting was $8,481 (average of the 4t/c’s, not the 5 t/c’s).
So the buyer is committing to funding a loss of $5.43m if he bought the ship and hedged the earnings. What Pippy said was that it looks a decent trade if you take the other side of it. The guy who sold his ship could now take some of that cash (once he’s let his bankers off the hook) and buy the long dated FFA curve. It looks a bit like an options trade right? Like a slightly odd shaped covered call, but using the earnings as cover.
What Pippy had to say certainly got my head thinking. My weekly stats round-up will have to give this more context, detail, different ship types and granularity. Pippy jetted off in his flat bed seat, destination Monaco, cursing the penny pinching that dry bulk traders are having to do to survive these days. I headed off into the night, watching the bright lights of Newark twinkle below me while tucking into a bag of Wotsits and a mini Mars Bar that I had unfortunately sat on, looking forward to getting home to my one bed flat in Airdrie.