The bulk baby boom, that generation conceived in the frenzy of very easy credit and powered by ever-rising charter rates, was born against the backdrop of demand far outstripping supply. The name of the game was simply get more capacity. Securing a delivery slot was paramount. Paying for it was easy, with the bankers smiling at fat charter rates yielding ever-increasing asset values.
Shipbuilders found themselves with the upper hand, able to impose not only their prices, but more importantly their standard specifications. There was no interest to enter into the time and money consuming process of developing new designs.
Black, blue or red? The colour of the paint was about the only choice the yards would give to their customers.
Then the party came crashing down in October 2008. The new clean and sober resolve had hardly finished its thirty day change your life recovery program when in November 2008 the Chinese government dropped the biggest credit bomb the world had ever seen, unleashing a tsunami of stimulus that flooded China with waves of investment in real estate and infrastructure construction projects and the dry cargo market with an even more mega demand cycle. It was the after party, time to reload and rock!
As the late great George Harrison expressed with such simplicity “All Things Must Pass”. The irresistible forces of markets, physics and gravity combined with the stimulus of too much good times led to the mother of all “ménage a trois” hangovers.
The boom time high flying holy trinity of owners, their bankers and the yards who had been so busy buying each other drinks in the VIP corner were now being assaulted back to the harsh glare of a morning after wake up call. Taking off the beer goggles of the previous evening and seeing in the light of day that which had looked so seductive the night before, rubbing their eyes and sore heads and asking: “What have I brought home with me and how quickly can I make it go away?”
The reality is that they will not go away we have to live with them, even if they can barely find any paying work. Yes, they are young but not modern. These baby boomer bulkers are often very thirsty and today can find themselves drinking more than they earn.
With charter rates now locked into a long-term cycle of low earnings, the ship design industry has discovered a new growth sector, the LPC (lowest possible consumption), the only way to squeeze a long-term positive cash flow in a lean earnings environment. LPC is a survival imposed evolution that is also merging with the soon to be enforced regulations of going green.
For an owner who is long on cash and less dependent on leverage from the very diminished pool of bank financing, the new market situation is providing opportunities. Today they are finding shipbuilders hungry for any new business and having both the time and willingness to discuss new ideas, designs and equipment. With Japan locked into a yen distorted pricing structure and Korea too busy cashing in on the LNG and offshore boom, it leaves China as the new cradle for innovation for this new generation in dry bulk.
The now defunct boom time demand for ships likewise led to an expansion of shipbuilding capacity, especially in China. Greenfield yards are going extinct and will not be mourned. It is the state owned sector in China that has returned to prominence. These government controlled yards with their financial stability, years of experience, greatly improved research and development and now state of the art production facilities, are attracting what ever new business there is, producing a new population of bulk carriers that are far fewer in number than the thirsty boom babies.
If the boom generation was born of haste and convenience, these latest newcomers are by contrast the result of advanced, well thought out and informed design, using some of the most efficient and innovative main engines ever, all being well built by the best yards in China.
What the market is now witnessing is the birth of a two-tier market. Within the next 12 months, these newly designed and powered ships will start their trading lives. They will be the first tier of the dry market: greener, younger, fewer, costing less and performing better than the those of the boom generation making up the second tier.
Those investing in the new first tier have firm expectations their more attractive ships will have better life time returns, being the first to fix, preferred by charterers over the vastly larger pool of the second tier boom bulkers, overbuilt, less desired, and possibly a lost generation.