Conference Debate: What kind of year will 2015 be?
An opening discussion at the Tanker Shipping & Trade Conference considered which contracts will make money, whether there is a funding gap, and how the shale revolution will affect the industry
For David Beckett, head of sourcing at SC Lowy – a market leader in secondary loan and high-yield bond trading -Aframax and Suezmax tanker business will offer better returns in 2015. This is because the trade routes are changing as a result of the USA becoming an exporter of crude oil. West Africa business will become very important, so vessels in this size range will attract interest.
“Obviously with MR [medium range] business everyone piled in because they felt that the different trade routes would stimulate demand. While we think the opportunities will be there we also see that capacity issues may mean that it is not the home run that a number of funds hope it would be. But we do not think it is going to be a disaster either.”
For Harald Lone, chairman and chief executive of Newport Shipping UK and a director of its subsidiary, Ecoships, the picture was a little less clear. “It is a struggle right now for everyone, especially the smaller shipowning companies. Recently we have seen another spike; an improvement in rates for the crude sector. So I think if I was going to put my money somewhere, I would probably go into that space. I think we are in for a tough market in 2015.”
Much will hinge on demand from China and India although, as Mr Beckett pointed out, when it comes to China transparency is limited and understanding GDP numbers and energy demand is going to be difficult.
“What we do know, or what we think we know, is that they will be using the low oil price to restock. We can therefore see a growth in the VLCC market from that perspective. We have also seen at first-hand – through deals we have been involved in, such as the joint venture between Sinotrans and CMES [China Merchants Energy Shipping] – that there is a clear intention on the part of the Chinese Government to build its VLCC capacity.
“The amount of capacity is going to be a question mark, given the focus of the Chinese Government on that side. I can see India growing, but they are going to have less of a focus on restocking.”
In India some of the coal power plants have been slowing down, so crude has been increasing there, agreed Mr Lone. “I think within the next 10-15 years China and India will probably account for about 35 per cent of the crude oil trade.”
Following a recent agreement with the USA, the Chinese are putting more emphasis on the environment, he added. “A lot of hydro plants have recently been commissioned, and there are more funds going into solar power plants and renewables, which might reduce some of the demand for crude oil.”
For Mr Beckett there is still a funding gap as a result of a lot of the banks that had traditionally financed the industry stepping back. Smaller companies with limited track records are perhaps most affected. “And that is where people like us can come in, on the alternative side.
“We are not going to be coming in with senior secured type funding, but what we can provide is interesting creative structures that can allow firms to scale and to refinance their existing load positions. I think there is still a gap on the re-financing side. There are a number of banks that are looking to leave the sector, but with billions of dollars that are maturing in the next couple of years or so. How to refinance those loans is an issue, particularly when the loan-to-values are so high. In some cases we have seen over 100 per cent.
“You need to be creative and you need the bank to be on board, to structure that arrangement and to keep the borrower interested. We feel that we can provide the kind of liquidity and creativity – such as mezzanine junior financing with equity kickers – that can overcome the funding gap experienced by smaller players.
“The German banks still have a huge number of impaired loans on their books to do with the industry. We are working hard with those banks to look for solutions. I think there will be continued opportunities there. ”
Harold Lone was quick to point out that money to fund the gap has entered the market from a range of sources, including IPOs, the public markets, private equity, hedge funds and different types of bonds.
“While a number of banks have stepped back, a few are now setting up including Merchant & Marine in Oslo, and CIT Bank in the USA. They are catering more for the middle sized and the smaller sized companies. Right now the traditional shipping banks that remain are very focused on their core customers, who tend to be the more established blue chip players.
“For anyone contemplating investing in the tanker sector it is also worth remembering that there are a lot of good second-hand vessels available. You do not need to go on contract.”
Rounding out the discussion both gentlemen were asked to predict, on a scale of 0-10, what kind of year 2015 would be if 2014 were a five.
“I would hope for a seven,” said Mr Lone. “As shipowners we cannot continue to operate in this low freight environment. More widely, I am concerned that a lot of politicians in Europe are pushing to move freight from highways to the sea lane at a time when more and more regulation is being introduced into the industry. We have to ensure these developments do not conspire to make us less competitive.”
For David Beckett, 2015 would be a better year than 2014 for tankers. “Overall we are pretty positive so maybe it is a seven, too.” TST