DOCTOR MARITIME EXPLAINS IT ALL ....

DUBAI PORTS WORLD: MAYBE BETTER OFF AFTER ALL!

Ten days ago, BBC TV asked me to comment on Dubai Ports World's proposed transfer of its interest in American ports to a separate, non-affiliated, American entity.  When the London anchor asked me if I thought it was a good business decision on Dubai's part, I was taken aback - I hadn't thought of it as a business decision at all.  But why not think of it that way?  Later I concluded that getting rid of the American ports is probably a good move for Dubai Ports World, although a move that would not normally have been available to them.

I based my conclusion on the following publicly available information:

At the end of 2004, P&O Ports, the company that Dubai Ports World acquired, published a graph showing the current port capacities and the ultimate future capacities of its four divisions - Asia, Americas, Australia/New Zealand and Europe.  The total current capacity was 15 million TEUs per year and the ultimate capacity would be 31 million TEUs per year, an increase of 16 million TEUs. (A TEU, 20 foot equivalent unit, is a standard container measure.)

Looking at the capacity growth by division, the Americas shows a growth of only about one third, while two of the other divisions double in capacity and the third more than triples.

If one were to eliminate the Americas division, then the current capacity would be 12 million TEUs and the ultimate capacity would be 27 million TEUs, an increase of 15 million TEUs.  While the increase in capacity is slightly smaller, the percentage increase is significantly greater, promising a higher return on investment.  (It should be noted that the Americas division includes a port in western Canada and a port in South America which presumably will not be transferred out of Dubai Ports World, but their inclusion should not change the conclusion.)

All of this information was available to Dubai Ports World during their negotiations with P&O Ports, but it would not have been possible for them to buy only three of the four P&O divisions.  In a standard corporate sale, P&O was selling an entire package, all or nothing.  Whether Dubai Ports World would have tried to sell the Americas division at some point in the future is unknown.  What is known is that now they must divest themselves of the division in the most public way imaginable.  It will be a forced sale but not a punitive sale except possibly in public perception.  When the transfer has been completed, Dubai Ports World may well be economically better structured than before.

Will the Bush administration now pressure potential buyers of the Americas division to insure that Dubai Ports World does not suffer an economic loss, and in fact, possibly make them better off than they would have been before the whole rumpus started?  If that happens it will be an extraordinary example of the law of unintended consequences.

INTERESTING RELETS.

I think that sometimes the day to day rush of information obscures more than it reveals.  Significant patterns are lost amid the onrush of data. 

In December of 2005, a 13 year old panamax bulker was chartered for 24 months at the daily rate of $13,250.  In February of 2006, the same vessel was relet for 12 months at the rate of $16,000 per day - that's half the period of the underlying charter for an increase in rate of $2,750 per day.  At the begining of March 2006, the same vessel was relet once more for 4 to 6 months at the rate of $18,750 per day - once again half the period of the underlying charter for an increase in rate of $2,750 per day!  Is this a pattern, a real and significant relationship?  I seriously doubt that it is, but 2 to 4 month charters for panamax bulkers have been reported at rates not too far from our half the period rate increase.

Has anyone studied the relationship between relet rates and the movements in the charter market?  It could be interesting.

CRUNCH TIME APPROACHES FOR IPOS

Last year at this time 12 month panamax bulker charter rates were in the US$35,000 to US$40,000 per day range.  This year charter rates for similar fixtures are down about 60%.

Last year profitability was not an issue, only the size of the pie to be divided.  This year, not only will the pie be smaller, but for some the cupboard will be bare.

The shipping business has always been cyclical and one of the functions of the down side of the cycle has been to eliminate weaker companies.  In the past, when shipping companies were either family businesses or very closely held, the disappearance of a shipping company was a relatively local affair.  But with public ownership of shipping companies, the expected health of shipping companies is a matter of widespread concern.

Forecasting the future for shipping companies has always been difficult for investment professionals.  Transparency has never been a part of shipping business culture, and the prevailing attitude is "we like it that way".

One way of estimating a shipping company's viability in down markets is by looking at how well it charters out its ships.  Companies that are consistently able to get charter rates above the prevailing average rate stand a better chance of thriving than their less competent competition.  This "advantage" can even be calculated during up markets, since it is our observation that the best chartering people get the best rates in up and down markets and similarly for the less expert.   Although it has yet to be proved in practice, chartering expertise could very well be a leading indicator for shipping company performance.

This morning one of the 2005 IPO companies announced that it had chartered out two of its panamax bulkers within the last few weeks.  Comparing the rates obtained with similar fixtures in the same time period was not encouraging, and might make stockholders nervous, but the sample size is still too small.

   

TERRORIST THREAT?

The characterization of Dubai Ports World as a potential terrorist threat to the United States is hardly credible.  The clamor is the result of misinformation and misunderstanding about how the maritime business operates and, I'm embarrased to say, a goodly portion of ethnic stereotyping.  If a terrorist really wants to use a maritme delivery vehicle for his bomb or chemical or biological weapon he would not use a marine container or a cruise ship or any of the avenues that we are watching.  They're evil, but they're not stupid.

How about this as a possible scenario?  Our terrorist buys, on the open market, a ten  or twelve year old handy size bulk carrier.  He organizes a one ship company in an eastern mediterranean country - there are thousands of such companies.  He hires a northern european management company to trade the ship for him, and makes or loses a little money over the next year or two.  At some point our terrorist hides his weapon aboard the ship and waits.  Eventually, the opportunity arises to call at a port in the United States, perhaps to deliver a cargo of cement or to load a cargo of scrap.  This is just a normal commercial transaction, one of thousands occuring daily.  Except this time ...