Shipping’s graveyard is littered with the carcasses of companies that found themselves with too much debt at a time when market cycles turned against them. Restructurings, bankruptcies, and liquidations have been some of the inevitable results. But what about the notion of having too little debt?

Odd as that may seem, the issue came to the fore at a recent Marine Money financial conference in relation to dry bulk owner Genco Shipping & Trading’s eventual goal to achieve zero debt as a public company. The goal is aligned with the owner’s new high-payout dividend policy, with an intention to continue rewarding shareholders no matter what rates the dry bulk market might bring. Under the model, Genco hopes to shed the traditional method of valuing shipping companies according to net asset value and instead shift to a share priced off dividend yield and cash flow. It’s a feat that’s never been tried before by a dry bulk shipowner. The hitch came when a zero-debt goal was criticized as a “lazy” approach to management by Flex LNG chief executive Oystein Kalleklev, who was sharing a panel with Genco CEO John Wobensmith.

Kalleklev later told TradeWinds on the sidelines that he couldn’t fathom relying solely on the cost of equity – which can range to 12% or more – when he could easily get loans at a rate of 2% to 3%. So sharp elbows aside, who’s right on the issue? Streetwise found that there is some disagreement. For example, one veteran finance man with experience on the shipowning side argued that Genco has this one right. “Basically, I think it’s a good idea,” he said. “It’s just challenging for an existing company to manage to get to that level.” While he agreed that equity can appear more costly at a price of between 8% and 12%, “the problem is that the value of equity at times goes negative and the equity generally doesn’t survive that” when debt is too high. This typically happens in the trough cycles to which shipping is especially susceptible, the ship finance expert said.

Shipowners may also issue extremely expensive “rescue equity” at such times, heavily diluting exiting shareholders. Another problem is that pricing models say the value of debt over equity is attributable to tax deductions from paying interest costs. “But shipping companies don’t pay taxes,” he noted. A final factor is that the cost of equity becomes cheaper as debt becomes lower, the finance expert said. “The public market experience is that if you can get to zero debt, the equity market likes that and will give you a better valuation,” he said.

Still, an equity analyst struck a position that leans more toward Kalleklev’s position. “At some point, you can be under-levered,” he said. “We are seeing more dry bulk and container ship companies with debt down to 20% to 35% after taking advantage of strong markets and that’s a very good thing. “But I’d agree that you don’t need to get to zero. I’d rather see a company with 20% debt using cash to buy back shares when they’re undervalued.” The analyst cited inflation as another concern. “If you think that interest rates are heading up, why would you not lock in some loans now at 2% to 3% above Libor while debt is cheap?” he said. Genco may need to settle the matter, but the journey could take a while. The shipowner is targeting zero “net debt” by the end of 2023, with hopes to shed the rest – if it can – sometime after that.

Low supply growth is likely to be a driver of the dry bulk market next year, according to Arrow Shipbroking. New deliveries are expected to slow significantly over the next two years, leading to a sharp drop in fleet growth, it said in its outlook presentation, and despite higher contracting this year, the orderbook is at the lowest level since 2005. Average trade growth of 2.5% per year between 2022 and 2024 would outweigh a fleet expansion of 2.1% over the same period, which should support vessel earnings, it said.

The widest gap in trade to fleet growth in 2022 was in the handysize segment, at a respective 4.9% versus 0.9%, followed by supramax, and panamax. Capesizes had the narrowest ratio, at 2.1% versus 1.9%, the brokerage’s research showed. Although trade growth momentum might have peaked, demand was still exceptionally strong, said Arrow’s head of research Burak Cetinok.

Minor bulk exports showed the biggest growth in the first 10 months of this year, gaining by 138.8 MMT, followed by coal, which increased by 80.9 MMT versus the same period in 2020. Iron ore showed a decline of 1.4 MMT. While demand in China for dry bulk commodities grew by 20.4 MMT in January to October, demand in the rest of the world surged by 208 MMT, and the short-term headwinds in China should turn into tailwinds next year, Mr. Cetinok said. The Chinese economy slowed from the third quarter of this year due to several factors, including flooding and power shortages which curtailed industrial output and new waves of the coronavirus outbreak which led to lockdowns. In addition, authorities-imposed steel production cuts in a bid to cool rising commodity prices as well as cut emissions, while the Evergrande woes accelerated an already cooling property market, eroding confidence among home buyers. “While there is no significant change in China’s dry bulk demand in the short-term, the situation is likely to improve after the winter Olympics in February, as we expect the Chinese government to step up its efforts in shoring up the economy,” Mr. Cetinok said.

Adding stimulus now would only intensify inflationary pressures due to commodity supply shortages, which has led to price rises across the board, he added. Iron ore stockpiles at ports in China are at their highest since 2017, climbing towards the 160 MMT level, Arrow research showed, as steel output plummeted following a very strong first half of the year. Inefficiencies also played a significant role in the strong dry bulk market this year as the average non-sailing days rose due to congestion. How quickly the congestion unwinds will dictate market direction, he said.

Taylor Maritime Investments (TMI) expects the buoyant bulker market to last another two to three years. Continued strength in its main handysize niche will be supported by the favorable combination of slowing fleet growth, healthy demand for commodities, likely slower operating speeds for the global fleet and muted ship ordering arising from evolving emissions regulations. This should also boost secondhand vessel values.

TMI carried out an initial public offering in London in May, raising $254m, and then a capital raise of $75m in July. Net asset value has risen from $249m in May to $458m on 30 September. “This was driven by attractive vessel acquisitions that have strongly appreciated in value during the period,” the shipowner said. The fleet of 32 vessels, including two Supras, is worth $535m.

The average net time charter rate was $17,000 per day on 30 September, with an average duration of eight months. In the six months to 30 September, operating profit was $22m, while profit before tax was $127m, with demand and rates at the highest levels in a decade. The company’s first quarterly dividend for July to September is $0.175 per share. There is scope to pay an extraordinary dividend if the strong market persists, TMI said.

Chairman Nicholas Lykiardopulo said: “As a specialist owner of handysize vessels, the workhorses of the dry bulk shipping trade transporting necessity goods around the world, TMI has made a strong start as a listed company, delivering on its investment thesis by growing the fleet at attractive prices. TMI has built a strong foundation since IPO, with an excellent fleet and highly cash generative charters which will allow us to deliver predictable long-term income to shareholders,” he added.

Chief executive Ed Buttery said the first six months had been formative and dynamic for the company. He added the IPO proceeds were efficiently deployed through “new vessel acquisitions, successful chartering balancing attractive rates and visibility, and a strong investment position marrying agility with financial discipline“.

Ratings agency Fitch Ratings has maintained its neutral outlook for shipping in 2022 despite strong bulker and container ship markets, and the prospect of a recovery for tankers. The company has concerns over a “collapse” in demand due to the latest Covid-19 variant, Omicron, as well as a potentially slower than forecast global economic recovery. Fitch was positive on bulk carriers but said there was also some risk of falling boxship rates. The tanker sector could improve after a weak 2021, the agency believes.

“A continued global economic recovery is important for all shipping segments to maintain their favorable supply-demand balances into 2022,” Fitch said. One positive from the pandemic is supply chain issues such as congestion supporting rates, particularly for container ships, the agency added. “A potential increase in trade protectionism during the recovery could limit demand in some segments,” Fitch warned.

“Developments in IMO or EU emissions regulations could affect the medium-term outlook for cost structures or the earnings capacity of some shipping segments,” the agency added. The company is expecting a similar financial performance from shipowners in 2022, compared to the current year. Fitch said freight rates will be “fairly supportive”, which should underpin companies’ financial metrics.

In November, the United Nations Conference on Trade and Development (UNCTAD) report for 2021 set out major ongoing impacts likely to be felt from twin challenges. Growth in maritime trade is set to slow significantly again over the next four years from knock-on effects of the Covid-19 pandemic, with the economic recovery further blunted by high freight rates, the trade body forecast.

The pandemic’s impact on maritime trade volumes was less severe than initially expected in 2020 but its knock-on effects will be far-reaching and could transform seaborne transport, predicted UNCTAD’s Review of Maritime Transport 2021. Recovery across the global economy is threatened by high freight rates forecast to continue until 2023, UNCTAD added.

More than 140 bulk carriers of 15,000 dwt and over are at anchor off Indonesian coal exporting ports as fresh quarantine restrictions lead to loading delays and rapidly escalating congestion. Vessel-tracking shows that bulk carriers totaling 9.9 MDWT, including 83 panamax bulk carriers and a further 46 supramax vessels, are currently queuing off key terminals on east and southern Kalimantan, Indonesia, according to data compiled by Lloyd’s List.

Only a handful of vessels were tracked at anchor in each of these areas earlier this month before news of the spread of the highly contagious Omicron variant emerged, based on congestion counts in early December. Indonesian authorities have announced a compulsory, 14-day quarantine for vessels that have called at certain countries, resulting in fixture cancellations this week and escalating loading days, according to unverified reports.

Since November 29, Indonesia has restricted entry to foreigners who have visited 11 countries in Africa in the prior 14 days. Most of these delayed shipments are reportedly destined for Hong Kong. In relation to congestion, the largest numbers have been seen at the Taboneo Banjarmasin, Samarinda and Kaliorang anchorages, data show. Adding to the delays were tsunami warnings, which were lifted on December 14.

Rates to ship coal to Indonesia from Hong Kong via a round voyage have gained over the past two weeks, rising to $22,638 per day on December 14, compared with $19,650 on December 1, according to assessments from the Baltic Exchange. Rates have dipped over the fourth quarter from a 2021 high of $38,563 daily on October 22, data show. Supramax rates on the Indonesia-India route have also climbed since late November, and are at $23,183 daily, but much lower than the five-year high of nearly $40,000 daily seen on September 1.

Indonesia is the world’s second-largest coal exporter after Australia and the biggest shipper of thermal coal used for power. Exports from Indonesia so far in 2021 are estimated at 348 MMT, according to the most recent monthly research from London shipbrokers Simpson Spence & Young.

Congestion at discharging terminals in China also remains elevated as restrictions on crews there also delay bulk carriers. Some 265 bulk carriers totaling 20.2 MDWT are tracked at anchor off northern China, according to Lloyd’s List Intelligence data compiled by Lloyd’s List. This figure shows no signs of unwinding; congestion in the same region totaled 250 ships of 19.8 MDWT on October 22, data show.

Average Capesize TC rates fell by $6,289 today to $32,838 per day today. This marks a fall of 16% session-on-session, the largest percentage fall since May last year. Despite this sharp fall, rates are still 29% higher versus the recent low last month.

Australian volumes have performed extremely well so far this month. At their current pace, the iron ore majors here are on track to ship about 80.4 MMT of iron ore in December, an increase of 4% YoY and 14% MoM. 

This has helped to keep the Pacific relatively strong. Our latest Capesize TCE assessments suggest that an Australia – China round voyage pays over $11,500 per day more than a Brazil – China round voyage.

2021 has been “frenetic” yet “fantastic” for Trafigura’s dry freight desk, according to its chief, who thinks the hectic, yet lucrative, trading conditions will continue next year too. Alan Cumming told TradeWinds that the inefficiencies that have been absorbing tonnage from bulker markets will continue to provide support in 2022. “I think that fleet inefficiency has been one of the big drivers but doesn’t seem to be resolving. So short term, at least, it looks like it’ll remain historically quite strong,” he said. “Further forwards, I think there’s a lot of change in regulations and emissions controls coming up, which is going to change the way that we trade.”

For Cumming, the biggest lesson from 2021 was: “Just be adaptable. Be ready to make change. And be ready to challenge your view every single day. It’s been a fantastic year in terms of earnings for the market. But it hasn’t been a year without its complications, with quarantines globally, crew changes and congestion particularly in China has been disruptive,” he said. “Probably the most challenging thing this year is that the traditional style of market analytics or fundamental analysis was a lot more difficult because of disruption due to Covid.”

Unlike in tankers, Trafigura does not own any vessels in its bulker fleet. The trader had an average between 50 to 55 bulkers on time-charter during 2021, peaking at about 80 vessels, Cumming said. Around three-quarters of the fleet are supramax bulkers and the rest are panamax. Cumming thinks the fleet will remain at around 50 or so vessels for the foreseeable future. Trafigura had about 40 and 45 bulkers on charter during 2020 on average. The trader has its own iron-ore export terminal at Porto Sudeste, Brazil, for which it books capesizes on a voyage basis.

Trafigura had a very bearish outlook for dry markets going into 2021 but changed up its strategy as soon as it saw that the upturn in earnings wouldn’t just be a flash in the pan, Cumming said. Cargo volumes were up, fixtures were up, and the trader increased its chartered-in fleet to handle the increased supply of cargo, he added. Cargo volumes rose to 41.6 MMT in the fiscal year that ended on 30 September, of which 63% was from internal Trafigura business. This is up from 37.4 MMT in the previous 12 months. Fixtures rose by nearly 9% to 1,226 over the and the dry-freight desk’s profit more than doubled. “There’s obviously been an energy crisis, so coal has made a comeback; the demand for coal has been strong,” Cumming said.

“In terms of our volumes, they’re up from what they were last year. Origins and destinations haven’t changed dramatically — Indonesia, Australia, Colombia and South Africa remain the big areas for us.” Trafigura has supplied more coal to China this past year and bigger volumes have come from suppliers in Canada, Indonesia, Russia, and South Africa, where the trader has commenced a strategic offtake agreement. Trafigura also expanded into new regions in 2021. “We added a new area that we hadn’t really been active in before, which was the Indian Ocean, where we started to operate a little bit more in the supramax space,” Cumming told TradeWinds. “The reason why we moved into it is it’s a swing basin between the Atlantic and the Pacific and gives us more visibility on the wider market.”

The firm in March hired Vivek Kumar, who worked previously for Norwegian operator Western Bulk, to head up the new Indian Ocean unit. The supramax-focused unit handles third-party cargoes of coal, cement, and the usual mix of bulk cargoes in the Indian Ocean. Until now, Trafigura’s supramax and ultramax bulkers have been focused on West Coast South America, in Chile, Peru and Mexico, serving big exporters and traders of mineral concentrates such as copper, zinc and lead.

Trafigura’s dry freight desk comprises 14 chartering staff, two more than last year, who were hired to handle increased demand and to help grow the firm’s third-party trading book. The firm is happy with the size of its dry desk for now and does not intend to grow it significantly, Cumming said. “The real focus is performance, whether we’re buying or selling freight, and making sure that we’re a reliable counterpart on both sides of that,” he added.

London-listed Taylor Maritime Investments (TMI) has become the biggest investor in Singapore bulker rival Grindrod Shipping as it sells its first ships. The Ed Buttery-led owner is spending $77.9m on a 22.6% stake acquired from a wholly owned subsidiary of Grindrod’s largest shareholder Remgro. The company has also bought a 2.2% position in the open market, giving it 24.8%.

Grindrod’s annual report from March shows South African investment group Remgro with a holding of 22.8%, and the next biggest shareholder as PSG Asset Management on 10.7%. Nasdaq and Johannesburg-listed Grindrod has “an attractive, modern fleet” of 25 predominantly Japanese-built geared dry bulk vessels, which are highly complementary to TMI’s portfolio, the shipowner said. The deal is being partly funded through the sale of two Chinese-built vessels for a combined $42.8m — an internal rate of return of 100%. Cash and an existing debt facility will also be used.

The Grindrod transaction at $18.00 per share is “attractive” in the light of the company’s prospects and represents an annualized dividend yield of 16%, TMI said. The stock closed at $15.26 in New York on Friday. The deal is consistent with TMI’s strategy of seeking growth opportunities to increase shareholder returns at a time when dry bulk market fundamentals remain strong with a historically low order book and a robust global demand outlook, the owner added. “The acquisition is also consistent with its policy of fleet renewal through the selective disposal of assets,” TMI said.

Chief executive Buttery said: “We believe the investment in Grindrod Shipping is an excellent opportunity where we know and respect the company which has a high-quality, young and complementary fleet. The acquisition will be internally funded by asset sales at premium valuations, cash on the balance sheet and prudent, short-term use of the company’s revolving credit facility,” he added. TMI, which listed in London in May, views Grindrod as a highly cash-generative business. “Our investment is expected to be accretive from both a capital and income perspective with no impact on our dividend policy, our potential to pay an extraordinary dividend nor on our ungeared long term capital structure,” Buttery said. The company revealed it consulted several shareholders about the deal. Supportive feedback led the board to go ahead. TMI will have 27 vessels after the unnamed ships leave the fleet.

Car carrier owners are steering their way towards big profits in the coming years as fleet growth remains very low. Clarksons Platou Securities believes between 100 and 200 new vessels are needed from 2024 up to 2030 to meet demand growth and compensate for attrition due to age and new regulations. The Norwegian investment bank, which is starting coverage of Oslo-listed owners Hoegh Autoliners and Wallenius Wilhelmsen with “buy” ratings, said there had been underinvestment in newbuildings for many years.

Net fleet growth is expected to be just 0.9% in 2022 and 0.7% in 2023. In 2024, more ships are due for delivery, but net fleet growth is expected to stay below 3%. At the same time, increased environmental focus and regulation will drive the need for significant fleet replacement, the company believes.

Frode Morkedal, managing director of research at Clarksons Platou, said: “On the back of very low fleet growth and a strong recovery in global vehicles production, we expect the car carrier market to improve further in the years ahead. In sum, the supply-demand balance looks favorable for the foreseeable future,” he added.

About 80% of the car carrier trade is shipments of new cars from factories. Global vehicle production is estimated to be less than 80m units in 2021. Although up from the lows of 2020, this is still well below the 90m-plus units produced in 2019, according to Clarksons Platou’s figures. A lack of semiconductors has kept production below demand, but this appears to be easing as 2021 draws to a close. “We expect production growth to spur higher shipments during 2022 and 2023,” Morkedal said.

Clarksons Platou is factoring in 9% volume growth in 2022 and 6% in 2023. Operators like Hoegh Autoliners and Wallenius Wilhelmsen typically have a high share of volume contracts that last for several years. Because of constrained fleet growth and the expected strong shipments ahead, the investment bank argues carmakers should be willing to raise net freight rates to secure capacity. “We, therefore, expect upcoming rate renewals to be successful for car carrier operators,” Morkedal said.

Clarksons Platou was a joint bookrunner for Hoegh Autoliners’ $152m November initial public offering in Oslo. Clarksons shipbroking group’s research arm Clarksons Research said the car carrier sector has seen an impressively swift and firm rebound this year from the severe impacts of Covid-19. The market is now experiencing the strongest conditions since the financial crisis, it believes. Sentiment is positive as improved demand and disruption upside factors have significantly tightened the market. Seaborne car trade volumes in 2021 so far have remained well above the weakest levels seen in the second quarter of last year, as pent-up demand and economic improvements fed through.

The fleet stood at 764 vessels of 4m ceu at the start of November 2021, up just 1.1% from the start of the year. A total of 11 vessels of 56,000 ceu were delivered from January to October. Demolition has slowed markedly from last year’s 23 ships of 114,000 ceu to just four ships of 13,000 ceu this year, Clarksons Research said. With market conditions the strongest in years, there has been a rebound in newbuilding interest this year. Another 37 ships of 259,000 ceu have been contracted in 2021, all of which will be LNG-capable. “More orders are likely to be confirmed with fleet renewal in focus,” the research company said.

The one-year time charter rate for a 6,500-ceu pure car truck carrier (PCTC) had risen to $34,000 per day by the end of November, the highest since mid-2008 and up from just $17,000 at the start of the year, and $10,000 in mid-2020. The same term deal for a 5,000-ceu PCTC stood at $25,000 per day by November, up from as low as $7,500 per day in mid-2020. But the company warned: “While fundamentals look positive for the coming years, some correction in rates from current highs remains possible as and when congestion and other disruption upside factors ease back.”

Analysts at Braemar ACM have run the rule over the year in dry bulk, where earnings hit highs not experienced for 13 years, with soaring demand for all manner of commodities. Key findings include the statistic that the capesize segment saw the biggest fleet growth this year, up 3.5% year-to-date, largely thanks to an above average series of newcastlemax deliveries. In panamaxes, Braemar ACM analysts conceded their surprise at how much support has come from coal this year, accounting for 43% of demand growth over the first 10 months of 2021, driven by China’s energy shortages plus the shake-up to trade flows resulting from China’s ban on Australian coal.

Within the supramax market, steel trades have been particularly supportive of this segment, making up more than half of the year-on-year increase in employment so far in 2021. “In terms of tons moved, trade of these goods on Supras has jumped by 30% year-on-year so far in 2021 as some countries have been unable to meet rapidly increasing demand with local production. Because of the shake-up to trade patterns that this has caused, employment generated by these voyages has increased disproportionately, soaring by 38% year-on-year,” the dry bulk annual review stated.

In second place, fertilizers have driven 30% of the demand growth for Supras so far this year, again backed by local production shortfalls, on top of a long-term trend of growing fertilizer trade driven by established grain producers consistently expanding crop sizes. Supras also have received significant support from other industrial bulks so far this year. Copper concentrate trade has surged by 20% year-on-year and 14% versus 2019 as a surge in copper prices has encouraged more smelting activity. Supramax capacity has grown by 2.9% in 2021 to just over 200 MDWT. The handy fleet, meanwhile, has continued to grow at the slowest pace relative to the other sizes – the fleet has grown by just 1.5%, crossing the 90 MDWT mark.