Billionaire Wilbur Ross is betting that the slump in shipping which drove oil-tanker returns to a 14-year low and rates for commodity carriers to the cheapest in a decade is ending.
The 73-year-old, whose New York-based WL Ross & Co. manages about $10 billion in assets, is part of a group spending $900 million on 30 ships hauling gasoline, diesel and other refined products. It is Ross’s first shipping investment and deploying “another few hundred million” in the industry “is certainly easy to do,” he said in interviews on Aug. 5 and Aug. 12.
That outlook contrasts with the pessimism of John Fredriksen, the founder of Frontline Ltd., the biggest operator of the largest crude carriers. The 67-year-old billionaire said in May it would probably be another year or two before ship values collapse and he can start adding to his fleet.
“The history of the industry is one that goes from immense prosperity to immense poverty and back again, and we think that’s going to continue,” Ross said by telephone. “We’re not necessarily at the exact bottom of the cycle, but we think we are relatively close to it.”
Demand for shipping will strengthen because new refineries are being built in China and India, increasing the distance that vessels have to travel to deliver crude and pick up refined-oil products, Ross said. That will compensate for a “lackluster” U.S. economy, Europe “in much the same condition” and “very modest” growth in Japan, he said.
“We do see growth in the emerging countries, but probably at a little lower rate than it had been,” Ross said. “China maybe grows at 7 or 8 percent instead of nine plus.”
Railcars to Textiles
Ross made his fortune by taking over distressed companies and turning them around, with acquisitions in everything from steel to railcars to textiles. His investment of about $300 million is in Diamond S Shipping of Greenwich, Connecticut, which is buying the tankers from Cido Tanker Holding Co.
Diamond S Shipping was founded in 2007 by First Reserve Corp., a private equity company, and Craig H. Stevenson, the former chairman and chief executive officer of OMI Corp., a shipping company sold in 2007. Diamond S Shipping already has 10 new tankers on order at shipyards.
Shipping rates plunged in 2008 as economies spiraled into the worst global recession since World War II. While demand for raw materials rebounded within a year and stock markets rallied, returns from hauling commodities by sea have yet to recover.
Oil-tanker owners who were earning as much as $229,000 a day in 2007 and 2008 ordered the most vessels in three decades, expanding the fleet just as demand collapsed. Daily returns on the Saudi Arabia-to-Japan route, the industry’s benchmark, were at $167 on Aug. 12, 0.6 percent of the amount Hamilton, Bermuda- based Frontline says it needs to break even.
The Baltic Dry Index, a measure of the cost of carrying coal, iron ore and grain, closed at 1,287 points on Aug. 12, according to the London-based Baltic Exchange, which publishes daily rates for more than 50 maritime routes. The gauge peaked at 11,793 points in May 2008.
The Baltic Clean Tanker Index, reflecting rates on seven routes for ships carrying refined-oil products, fared better. It fell to 678 points on Aug. 12, down from 1,509 in June 2008. Most of the product tankers being acquired by Diamond S Shipping have charter accords in place for the next four years, which “will get us through the worst of the period,” Ross said.
Equity markets are not anticipating a rebound any time soon. A measure of the combined earnings of the 12-member Bloomberg Dry Ships Index will drop 17 percent this year, according to analysts’ estimates compiled by Bloomberg. Frontline will report a loss of $30 million in 2011 and net income of $426,000 in 2012, the mean of 19 estimates shows. The company made $699 million in 2008.
Forward-freight agreements, traded by brokers and used to bet on future transport costs, are also bearish. They anticipate returns for owners of very large crude carriers no higher than $20,760 a day through 2013, according to Imarex ASA, a broker of the derivatives in Oslo. Returns on capesizes, the biggest ships in the Baltic Dry Index, won’t exceed $18,095 through 2016. Rates reached $234,000 in 2008.
An emerging threat is that economies will slump back into recession as governments fail to spur the growth needed to create enough jobs. Unemployment in the U.S., the world’s biggest oil user, is running at 9.1 percent, more than double the lowest level in 2006.
European economies from Greece to Ireland are contending with debt crises that raised the cost of government borrowing and forced cuts in public spending. The yield on Greek 10-year bonds is at 15.49 percent, 13.16 percentage points more than on benchmark German bunds, and the state is planning 78 billion euros ($112.7 billion) of budget cuts and asset sales.
“Shipping will be hit hard if there is a new recession as the industry is already facing significant headwinds,” Frode Morkedal from RS Platou Markets AS said in a report Aug. 8. “If there is a new recession, there will be a need to raise equity or other risk capital in order to survive,” said the Oslo-based analyst, whose recommendations on shipping companies would have returned 46 percent for investors following them over two years.
While global demand for crude will expand by a “couple of percent” a year, most of the growth will come from emerging economies including India and China, Ross said. New refineries also are more likely to be built in those countries, increasing the need for ships to import oil and export refined products. A greater distance between where oil is refined and where it is consumed means vessels will be tied up for longer, he said.
Even if economies expand less than forecast next year, global oil demand would still rise by 600,000 barrels a day, the Paris-based International Energy Agency said Aug. 10.
China’s refinery capacity almost doubled in a decade, according to data from BP Plc. The Asian nation’s industry would have to expand another 74 percent to match that of the U.S., which has a population about a quarter of its size.
The Chinese economy will increase 9.3 percent this year and 8.75 percent in 2012, according to the median of as many as nine economists’ estimates compiled by Bloomberg. That’s as much as five times faster than the U.S.
China will consume 10.6 million barrels of oil a day in 2012, compared with 10 million barrels this year, the U.S. Energy Information Administration is forecasting. That growth is equal to almost an extra supertanker cargo every three days. China is already the world’s biggest consumer of coal, iron ore and wheat, which are carried by capesizes and other classes of dry bulk carrier.
About 90 percent of global trade moves by sea, according to the Round Table of International Shipping Associations.
WL Ross & Co. is not the first private equity company to show an interest in shipping. Carlyle Group, based in Washington, said in March it was creating a venture to buy more than $5 billion of shipping assets including container and dry bulk vessels and tankers.
“We are not a mature industry in regard to private equity,” said Peter S. Shaerf, a managing director at New York- based AMA Capital Partners LLC, which advises on transactions in the shipping industry. “When the likes of Wilbur Ross step up, then obviously it turns heads and others will take a second or third look at the space. Bottom fishing is a private equity specialty.”
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