​Buy low, sell high: Asset players still on the scene

A few years ago, we saw a number of private equity firms invest in shipping, only to find it was much more difficult than expected to generate their desired returns. But, undeterred, JP Morgan Global Maritime (JPM GM) has this year so far acquired four bulk carriers, comprising two capesizes and two supramaxes. 

JPM GM’s latest acquisition has been the capesize Hanjin Esperance, acquired in mid-March for $29.5m from bankrupt Hanjin Shipping. The private equity firm bought another capesize, since renamed True Frontier, from a unit of Hanjin for $20.5m at the end of January. Similarly, the firm bought a supramax, now known as Sage Caledonia, for $14.9m from Japan’s Daiichi Chuo, which filed for bankruptcy in September 2015.

So it seems JPM GM continues to follow a private-equity firm’s conventional investment strategy: buy distressed assets on the cheap and sell them at a higher price once the market recovers.

JPM GM hasn’t stated publicly what its business strategy is, so let’s look at the acquisitions as if they’re a pure asset play. The investment bank’s shipping arm has spent a combined $75.4m on the four vessels it has acquired so far this year, three of which were purchased in bank sales or at auction. Based on our estimates, the fleet currently has a market value of around $89m. That's a potential 18% profit, if the company were to sell these vessels tomorrow.

So if the investment bank wanted to sell, should it do so now or wait for asset values to rise further?

March has been a helluva month for the capesize market, thanks to China’s voracious appetite for iron ore imports. Spot rates have surged, particularly on runs from Western Australia (C5) and Brazil (C3) to China, which have seen 12-month and 24-month highs respectively. As a result of this optimism, and frantic fixing in both the spot and period markets, a five-year-old, 180,000-dwt capesize vessel is this week valued at almost $5.0m more than it was when March began, according to assessments from the Baltic Exchange.

Where capes are concerned, the key is China. Shipping is an industry that surprises the pessimist and punishes the optimist, so a market correction could be on the cards. Iron ore inventories at Chinese ports have already risen 18% since 2017 began. Port inventories stood at 134m tons on March 24, the highest level since 2004, which will suppress China’s import demand at some point in the near future.

Analysts estimate China currently has a 2.0x inventory-to-steel production ratio. The average for this ratio over the past five years is near 1.5x, which would imply a growing supply glut. Added to this, China is expected to cut its domestic steel production capacity in the coming years. Hebei, China’s main steel-producing province, has increased its capacity-cutting target for 2017 and will this year aim to cut its steelmaking capacity by 32.0m tons.
In early February, JPM GM fixed its cape True Frontier on a 12-month period charter to Rio Tinto at a daily rate of $11,450. Since then, one-year rates have advanced by almost $4,000 per day by our estimates. But with some uncertainty as to the future of Chinese import demand for iron ore, locking in a healthy rate on period charter is a sensible move that will provide JPM GM with predictable cashflows during the year ahead. Plus it has its supramaxes to fall back on, a segment that suffers less volatility in rates than for vessels with larger tonnages.

During their time in shipping, private-equity firms have learned to be cautious and it will be interesting to see JPM GM’s next moves to see how the firm has adapted.

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