Presentation on the Marine Industry at the ELFA Equipment Management Conference in Orlando

Earlier in the week, Basil M Karatzas, Founder and CEO of Karatzas Marine Advisors & Co, upon the conference organizers’ thoughtful and generous invitation, presented at the Equipment Management Conference, which was attended by more than 300 professionals active in lending, leasing, asset management, equipment finance, appraisals, surveys, and auctions. The conference was hosted by the Equipment Leasing and Finance Association (ELFA) at the Omni Orlando Resort at Championsgate, a nicely located property and highly esteemed venue by golf players with its two championship 18-hole golf courses designed by accomplished architect and golfer Greg Norman.

The presentation by Basil Karatzas, ABV, ASA, CMS, was one of the several break-out sessions on specific industries and markets, and, as one would expect, it covered the marine industry for both international and also domestic (cabotage) business, in the Jones Act for inland, coastal, offshore and ocean-going market segments. Titled “The Marine Industry, International & Domestic: Overview, Challenges & Opportunities” touched upon several of the current trends impacting the shipping industry for the specialist professional in attendance within an hour’s allocated time.


In the international market, freight indices have exhibited lots of volatile in the last five years, and the Baltic Dry Index (BDI) has ranged from 300 points to 2500 points in said interval, but basically, it’s not any higher today than it was five years ago. The Baltic Capesize Index (BCI) has drawn lots of attention as it has turned negative for the first time ever in the history of the Baltic Exchange indices, but again, the BCI is an overly volatile index and its current negative readings reflect seasonality compounded with China’s industrial slow-down (due to tariffs?) and also highly impacted by major logistical disruptions due to COVID-19 (coronavirus). There is anecdotal evidence that Ultra Large Containership Vessels (ULCVs) are departing Chinese ports filled only at 10% capacity, as even more impactful repercussions to be expected in the sector. This year saw the implementation of IMO2020, which and by itself, has been a major challenge for shipowners: while spreads in pricing between Heavy Fuel Oil (HFO) and Low Sulphur Fuel Oil (LSFO) peaked at more than $300 per ton around the deadline, now, due to low trading demands, the spread has collapsed to appr. $100 per ton. Believers in Exhaust Gas Cleaning Systems (EGCS) (better known as “scrubbers”) went from “heroes to zeros” in a month, as the economics of scrubber technologies keeled over in terms of payback period and costs for daily fuel expenses budgets. And, IMO2020 is just a stepping-stone in the quest for better fuels (natural gas, hydrogen, NH3, methanol, biofuels, battery, etc) and technologies (hybrids, Flettner Rotor, etc) for getting to the zero emissions goal by 2050, a big target for an industry that emitted about 139 million tons of CO2 in 2018 – equal to CO2 from a quarter of Europe’s total passenger car fleet of 68m cars. At the same time, when the shipping industry obligated to meet new regulations and is seeking compliance, there is still excess tonnage in the market – some dating back to pre-financial crisis excesses, while shipowners have made minimal operating profits in the last decade and with weakened balance sheets at present, while still a great deal of ships are controlled by private equity funds and institutional investors, acquired at distressed levels via shipping-loan discounted acquisitions and, thus, are an “artificial” overhang over the market. And, despite “Phase 1” of trade agreement between the USA and PRC, there are many more impending trading agreements to take place (between US and UK, EU and UK, etc) under a seemingly ever encompassing spirit of anti-globalization and near-shoring.


The domestic shipping (or marine) industry has been partially insulated from world macro-events and has been more dependent on the fate of the US economy, which comparatively has been stronger than other economies of developed and developing countries. However, no economy or market can be immune to world events: 2018 has not been a good year for US grain exports and movement of grains by barge downstream the Mississippi River has collapsed from more than 42 mil tons in 2016 to almost 28 mil tons in 2019. Needless to say that movement of coal by barge (and mostly for rail) has been a declining business for a while, and without an expected recovery in the future – unlike the grain movement that is expected to recover strongly once PRC moves to honor the terms of Phase 1 of the trade agreement, hopefully. Movement of liquid cargoes (black oil, petroleum products, industrial chemicals, etc) seems to be a bright spot for domestic shipping, on the back of strong shale oil production (and exports), and the strength of the US economy and need of feedstock for industrial production. All in all, there has been almost 15% growth from 2017 trough levels to present for crude oil and products moved by barge, in-between volatility notwithstanding.


There were 42,542 shipping assets in the Jones Act market at the end of 2018 according to the U.S. Army Corps of Engineers, an outstanding number given that the world fleet of commercial vessels is just 38,000 assets, in absolute terms. However, there are “only” 9,411 self-propelled vessels in the Jones Act market, almost equivalent to the Panamanian register of ships, world’s largest. Inland assets consist 79% of the total Jones Act market, 85% of the Jones Act non-self-propelled and 58% of the Jones Act self-propelled market. Importantly, almost 25% of the Jones Act fleet is older than 30-years old, at a time when ships in the international market are scrapped around their 22nd anniversary (with a few ships having scrapped well before their 2nd Special Survey and Dry-Docking (10th anniversary from shipbuilder delivery)). Even for tank barge, where regulatory standards are higher and freight rates also higher, a good 10% of the Jones Act tank barge fleet is older than 30yrs old. Old age for shipping assets may be considered an increased cause for accidents, but definitely a cause for lower operational efficiencies. At a time when the industry is called upon to comply with higher regulatory standards (SubChapter M for tugs, etc), a shipowner is faced with a tough decision to make: whether to spend abundantly and try to make compliant a 30+ year old asset, or spend abundantly and head to the shipbuilders (as a rule of thumb, vessels built in the US, are more expensive to build than overseas by a factor of 4x-6x). There seems to be pressure for big players to get bigger (critical mass for financiers, shippers, regulation compliance overhead, etc), while smaller “mom-and-pop” players, the backbone of the inland market will be facing existential questions.


Looking to the offshore industry, the US Gulf and the Gulf of Mexico (GOM) seem to offer poor prospects for idling offshore assets in Port Fourcheon and elsewhere, but to paraphrase an old saying in the oil industry: “when the price of oil is too low, the best place to dig for oil is on Wall Street”. Lots of enthusiasm that Jones Act offshore assets can be re-purchased for the burgeoning offshore wind farm industry along the Atlantic Coast and New England with 26 GW already projected, and close to 20 W2W (Walk-to-Work vessels) and almost 50 CTVs (Crew Transfer Vessels) and WSOV (Windfarm Service Operation Vessels, or just Service Operation Vessels); however, engineers and naval architects are less enthused with the wholesale re-purposing prospects.

It would appear that nothing goes right for the marine industry at present, whether for international or cabotage trade: from regulations to anti-globalization to excess tonnage and new technologies that create risks for technological and functional obsolescence (whether curable or non-curable) and heightened risk for increased residual value exposure. But, as the saying goes, “a crisis is a terrible thing to waste” and shipowners could exploit the current circumstances to optimally position themselves to the financiers and shippers; and, for equipment finance professionals, in hard times, it’s optimal opportunity to build a solid portfolio of good clients and good assets that will meet and exceed market demands as customer needs and trends evolve.


The presentation can be downloaded by the ELFA conference website (accessible to ELFA Members and conference attendees); to obtain a copy otherwise, please email us!


Basil M Karatzas is a Certified Marine Surveyor (CMS) by NAMS, Accredited in Business Valuation (ABV) by AICPA and Accredited Senior Appraiser (ASA) for Machinery and Technical Specialties by ASA.

© 2018  - present Karatzas Marine Advisors & Co.   All Rights Reserved.

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