Monday, July 6, 2015

Review of Maritime Economics 3e by Martin Stopford

Martin Stopford's famous Maritime Economics is referenced in The Shipping Man. If you recall from Shipping Man, cargo ships fall into one of two categories: bulk carriers, which carry one consignment that fills the ship (like iron ore, coal, or wheat) and liners, which carry an assortment of cargoes that are too small to fill a ship.

A bulk carrier operation is an office with an assistant and a Greek owner at boozy lunches making charter deals. A large crude oil tanker fleet is a Norwegian doing snus and a tiny back office. Running a liner fleet is much more management intensive than owning bulk carriers. The liner companies have at least an order of magnitude more employees per ship on shore than the bulk carrier owners. Bulk carriers are autocratic, perfect for a Greek (the real profit is made buying or selling ships) and the liner companies are bureaucratic.

Why anyone would want to own ships is beyond me. As soon as you take delivery of a new one, your competitors order ones that are bigger, faster, and more fuel efficient. The cost per ton mile continually falls; shipping rates have had trouble even keeping up with the rate of inflation. (And in addition to the increased scale economies and fuel efficiency of the ships, port operations have gotten much more efficient, further lowering costs.)

Here is a great example of what a bad investment ships are. Buying a 60,000 dwt dry bulk carrier at the top of the market in 1980 would've cost $22 million. The Seagram Building sold for $86 million in June 1979. From 1982-1987 there was a bear market in dry bulk ships and the value never exceeded $10 million. Meanwhile, in 2000, when the ship was probably ready to be scrapped, the Seagram Building was resold for $375 million (more than quadrupling in value).

Ships seems to be like the lottery ticket investments (negative expected value, extremely high skew) that attract morons. Ships have very high skew because the supply is inelastic enough (although not perfectly inelastic, as we'll see) that the rates an owner can charge will have huge swings. Huge swings attract speculators with borrowed money. Remember, Falkenstein's observation that stupid money buys

"lottery tickets hoping to get rich quick with no effort. The effect is for really high-risk investments to have the most delusional investors, the most opportunistic sellers, and pathetic returns. [...] By ridding your asset classes of these objectively bad assets, you can improve your returns"
Simply based on the barriers to exit and the remarkable consistency (over centuries!) with which shipowners over-optimistically buy ships, I suspect that ships are an objectively bad asset class. Falky has also observed that "the rich are stupid because they contain a disproportionate number of lucky morons who did not realize they were taking as much risk as there were," and this seems to match up well with famous shipowners.

One thing I never realized is that the supply is ships is, even in the short run, not perfectly inelastic. The supply of shipping can increase overnight in response to a price increase. How? Mainly, the ships steam faster. That gives you additional ton*miles per year.

A good deal of thought goes into calculating how fast ships should go. The reason is that fuel consumption is proportional to the cube of ship speed [pdf]. There is an optimum speed for a given set of freight rates and fuel cost.

Even though I am not tempted to own ships, one fun thing about shipping is that it is the free market in action. You can actually see the supply and demand curves moving around and, with the varying price volatility in the different shipping markets, get a sense of how elastic or inelastic the various kinds of supply and demand are.

Right now we can watch Maersk in the process of creating a brutal container ship glut (see 1, 2) . Combining the currently low rates, the number of new orders, and the low iron ore and met coal prices (which should keep steel prices low and discourage scrapping of ships), it seems as though this glut could last a long time. I'll be passing on shipping company unsecured debt, thanks.

Who can resist The Great Wave Off Kanagawa on the cover? 3.5/5.

6 comments:

CP said...

ULCS order book glut sends shivers down liner industry spine
http://www.sagarsandesh.in/shipping/ulcs-order-book-glut-sends-shivers-down-liner-industry-spine/

"During the last five years, i.e. 2009 through to 2013, eleven of the Top 25 ULCS carrier publishing their relevant financials made an operating profit only once. That was, without exception for all of them in 2010, the liner trades recovery year following the steep fall during the 2009 worldwide economic/financial crisis, when nearly all carriers were operating in the red."

CP said...

Building the Triple-E
https://www.youtube.com/watch?v=vxeREd3s_UE

Taylor Conant said...

The idea of an objectively bad asset class is interesting. I wonder if it is also the case that a.) Somehow ship owners are subsidized by governments or b.) The economics of shipowning are different than were led to believe from official statistics, and therefore it's quite rational (ie profitable) to own them-- perhaps because its easy to evade taxes?

I wonder if shipping is an objectively bad asset class, what does this say about state navies?

Taylor Conant said...

The idea of an objectively bad asset class is interesting. I wonder if it is also the case that a.) Somehow ship owners are subsidized by governments or b.) The economics of shipowning are different than were led to believe from official statistics, and therefore it's quite rational (ie profitable) to own them-- perhaps because its easy to evade taxes?

I wonder if shipping is an objectively bad asset class, what does this say about state navies?

Taylor Conant said...

The idea of an objectively bad asset class is interesting. I wonder if it is also the case that a.) Somehow ship owners are subsidized by governments or b.) The economics of shipowning are different than were led to believe from official statistics, and therefore it's quite rational (ie profitable) to own them-- perhaps because its easy to evade taxes?

I wonder if shipping is an objectively bad asset class, what does this say about state navies?

CP said...

Seems like anything with huge barriers to exit tends to be in the bad asset class category. Ships are like airplanes.

Ships may be even worse than airplanes - regulation artificially limits the technological change in passenger aircraft. The 737 is a 50 year old design (granted, with significant updates).