Key Differences between Container, Dry Bulk & Liquid Tanker Shipping - PT Berlian

Posted by D.O.G. 2/12/06, WS Intellivest Forum

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Some key differences between container shipping, dry bulk shipping and liquid (tanker) shipping:

Container ships are content-agnostic, so they can be easily redeployed. Result: contracts are often short-term, and the spot market isn't very volatile - new shipping slots become available frequently, so anyone who can wait even a week will probably find space for their cargo. Because containers can carry high-value cargo e.g. Ferraris, container ships come in a variety of sizes. Even small ships can be viable if they stick to valuable cargo, or specialize in plying narrower and shallower waterways unreachable by larger ships.

Dry bulk ships are generally fixed in the type of cargo they carry, whether it's rice, corn, soybeans, coal, iron ore, aggregates etc. The cargo is also generally of low per-weight value, making huge ships necessary for economies of scale. Owners seek out long-term contracts because margins are so thin (and gearing so high) that any downtime could turn the operation unprofitable. Conversely this means that available capacity fluctuates greatly, and makes the spot market extremely volatile, as the BDI charts make clear. Recent demand in China and India for raw commodities, especially coal and iron ore, have driven up bulk rates for these routes as owners with long-term charters have been unable to re-deploy their fleets. As a result, opportunistic owners in the spot market have made a killing.

Liquid (tanker) shipping is similar to dry bulk shipping in the low per-weight value of cargo (oils, basic chemicals) but carries contamination/corrosion risks which basically make changing cargo types more difficult. Again, large ships are needed to obtain economies of scale, and owners seek out long-term contracts to minimize downtime. Available capacity also fluctuates, and spot markets are volatile. Again, recent demand from India and China for liquid commodities (crude and refined oils, edible oils, basic chemicals) have increased tanker rates, and spot market operators have done well.

Extra: Gas (LPG, LNG) tankers are specialized vessels that are extremely expensive and are normally operated on very long-term (typically 20 years) charters. Spot operators have also done well recently, again on demand from China and India.

Does Berlian have a competitive advantage? It has grown steadily for many years, but that doesn't mean the owners were particularly smart. In particular, if their long-term contracts were long enough to bracket the low points in the tanker cycle, then they simply skipped those periods entirely. They could have been lucky, not smart, and they might not get lucky again.

In recent years Berlian's spot and short-term contract operations have capitalized on rate spikes due to China and India. But with the massive newbuildings going on worldwide (any ship order placed now will only be delivered in 2008 at the earliest) there is no guarantee that tanker rates will remain high.

Fundamentally, the tanker market is undergoing a sea change because IMO regulations now require all operating oil tankers (crude, refined and edible oils included) under its purview to be double-hulled from 2010 onwards i.e. single-hulled tankers must be phased out by then.

Berlian's 5 gas tankers are all double-hulled. Its chemical tanker fleet is almost all double-hulled (30 of 34 ships). But of Berlian's 17-strong oil tanker fleet, only 4 are double-hulled (see IPO prospectus p119). This means significant capital expenditure in the medium-term by Berlian to replace the unsuitable vessels. To finance this, they can sell more shares or cut the dividends - probably both.

Finally, the secondary listing on SGX was a 100% Vendor Share sale. No new money was received by the company. The IPO was effectively an owner cash-out, to the tune of $184m.

Question: if the owners don't believe in their company enough to hold on to their shares, should you buy their shares?

After all, if the prospects for the company are indeed as good as claimed, with rising demand, rising rates et al, wouldn't new shares be a more sensible option? With good future results the share price would undoubtedly rise, and the owners can then sell their shares later at better prices. Why sell now, when things look good, and the company could actually use the money (to replace the non double-hulled tankers, fleet expansion etc)?

A cynic might say that the owners know the good times are coming to an end soon, so they cashed out while they could. As usual, YMMV.