These are certainly not boom times for shipping. Freight rates are still low. Share prices remain depressed. Yet somehow, US-listed shipowners are raising unprecedented sums on Wall Street via equity and debt sales. How to explain this dichotomy?

The answer, at least in part, is counter-cyclical speculation on the dry bulk recovery. This should set off alarm bells and stir a sense of déjà vu, because if money keeps flowing into dry bulk at the current pace, we know from recent experience where that leads, and it’s not good.

A Fairplay data analysis found that between 1 January and 15 March, US-listed shipowners grossed USD2.455 billion from the sale of equity and debt securities. In the first 10 weeks of this year, these companies raised more than they did in the first 10 months of last year. If this pace continues through year-end, 2017 would actually top 2014 as the best-ever year for shipping in the US capital markets, despite the fact that freight rates and asset values are tepid.

Of total proceeds through 15 March, money raised by bulker owners represented the largest share: USD1.12 billion or 45.7%. As this money is being raised, bulkers are being purchased in the second-hand market through en bloc deals by Golden Ocean (acquiring the fleet of Quintana) and Eagle Bulk (acquiring the fleet of Greenship Bulk Trust), as well as through individual ship deals by others such as Star Bulk and Norwegian OTC-listed Songa Bulk.

The shift toward capital raising and asset acquisitions appears set to intensify. Stifel analyst Ben Nolan recently pointed to “four or five private equity firms looking to raise more than USD500 million collectively” to invest in dry bulk.
It doesn’t take a soothsayer to see what could happen next. Sellers of on-the-water bulkers can and will raise prices. At a certain point, which could be very soon, it will make more sense to order a newbuilding than buy second-hand, given attractive pricing and financing offered by hungry Asian yards. Newbuildings will be alluring because freight rates have yet to recover and buying on-the-water bulkers exposes speculators to a greater risk of pre-rate-recovery losses. The consensus is that a dry bulk recovery is still two years away, in 2019, roughly the time when a newbuilding ordered today would be delivered. For an investor, that timeline implies a potential to order a newbuilding and ‘flip’ the contract for a profit before delivery.

The flaw in this thinking is that the market recovery in dry bulk has been two years away for over a half-decade. In 2011, dry bulk was recovering in 2013. In 2013, it was recovering in 2015. In 2015, it was 2017. Today, it’s 2019. Like clockwork, the dry bulk investment thesis of buying low and selling high continually re-emerges following a brief mourning period after each false start. When renewed enthusiasm translates into newbuilding orders, incremental capacity smothers the recovery.

The concept of ‘self-cancelling predictions’, the opposite of self-fulfilling prophecies, offers insight into how investment flows stifle shipping upturns. In a self-fulfilling prophecy, a belief in the future alters human behaviour and creates that predicted future – for example, personal failure induced by a lack of self-confidence. In a self-cancelling prediction, a belief that something will happen prevents it from happening (or from persisting, if it does happen). For example, if too many commuters use GPS devices to pick the least-congested route, that route becomes congested.

With so much money flowing into dry bulk in 2017, the risk of yet another self-cancelling prediction for this sector is escalating. It is time to watch the yards very carefully. If public companies, private Greek families, or private equity groups starting inking orders, the best course for owners of bulkers on the water could be to sell.