(8)--MaritimeEconomics航运经济与政策.pdf
8.1 THE PERFORMANCE OF SHIPPING INVESTMENTSThe shipping return paradoxIn the early 1950s Aristotle Onassis,one of shippings most colourful entrepreneurs,hatched a plan to take over the transport of Saudi Arabias oil.On 20 January 1954 hesigned the Jiddah Agreement with the Saudi Finance Minister,establishing the SaudiArabian Maritime Company(SAMCO)to ship Saudi oil.Initially Onassis was to supply500,000 tons of tankers,and as the ARAMCO(the US-controlled Saudi oil concession)fleet became obsolete,SAMCO would replace their ships with its own.InMay King Saud ratified the treaty and Onassis biggest tanker,launched in Germany,was named the Al Malik Saud Al-Awa in his honour.Needless to say,the oil companies did not welcome a private shipowner controllingthis strategic oil resource,nor did the American government.ARAMCO turned awayOnassis tankers from its terminal and the US State Department pressed Saudi Arabiato drop the agreement.Onassis became the target of an FBI investigation and the coupbecame a disaster.As the shipping cycle turned down in the summer of 1956,Onassisstanker fleet was laid up.Then he got lucky.On 25 July 1956 Egypt nationalized the SuezCanal,and in October Israel,Britain and France invaded Egypt to win back control.During this conflict Egypt blocked the Canal with 46 sunken ships and Middle East oilbound for the North Atlantic had to be shipped by the long route around the Cape ofGood Hope.Tanker rates surged from$4 per ton to more than$60 per ton and OnassisRisk,Return andShipping CompanyEconomicsA wise man will make more opportunities than he finds.(Sir Francis Bacon,English author,courtier,and philosopher,15611626)The pessimist sees difficulty in every opportunity.The optimist sees the opportunity in every difficulty.(Sir Winston Churchill,British prime minister)8 was ideally placed to take advantage of the boom.In six months he made a profit of$7580 million,equivalent to$1.5 billion at 2005 prices.1This is the stuff of legends,and Onassis was not the only entrepreneur to make a for-tune in shipowning.Livanos,Pao,Tung,Bergesen,Reconati,Niarchos,Onassis,Lemos,Haji-Ioannou,Ofer and Fredriksen are just a few of the families who have become fab-ulously wealthy in the shipping business during the last half century.But not everyonemakes a fortune in shipping.As we saw in Chapter 3,shipping companies face endlessrecessions and average returns tend to be both low and risky in the sense that investorsnever know when the market will dive into recession.So why do they pour their moneyinto the business?And how do fabulously wealthy shipowners like Aristotle Onassis andJohn Fredriksen fit into this business model?That is the shipping return paradox.In explaining this paradox we turn to microeconomic theory to get a better understand-ing of what determines the behaviour of companies in the shipping market.First we willbriefly review the industrys risk and return record to see what we are dealing with.Second,we will discuss how shipping companies make returns and work through anexample;Third,we will discuss the microeconomic model to establish what determinesnormal profits and the time-lags which contribute to the unpredictability of earnings;Finally,we will look in more detail at the part played by risk preference in pricing capital.Profile of shipping returns in the twentieth centuryWe start with a brief review of the shipping industrys financial performance over thelast century it has to be said at the outset that it makes gloomy reading.A.W.Kirkaldysreview of fifty years of British shipping,published in 1914,observed that in 1911,thebest year for a decade,the returns were no better than could be obtained by investingin first-class securities and that“at times shipping had to be run at a loss”.2Anotherstudy,by the Tramp Shipping Administrative Committee,found that,between 1930 and1935,214 tramp shipping companies had a return on capital of 1.45%per annum.3Admittedly the 1930s was a bad spell,but in the 1950s,a much better decade for ship-ping,things were not much better.Between 1950 and 1957 the Economist shippingshare index grew at only 10.3%per annum compared with 17.2%for the all companiesindex,and in the 1960s things got even worse.Between 1958 and 1969,the Economistshipping share index returned only 3.2%per annum,compared with 13.6%for all com-panies.A detailed analysis of private and public shipping companies by the RochdaleCommittee reported a return of 3.5%per annum for the period 19581969 and concluded that the return on capital employed over the period covered by our study wasvery low.4In the 1990s,a period of expansion in the stock market generally,the Oslo ShippingShares Index hardly increased and the return on capital employed by six public tankerowning companies published in 2001 showed an average return on equity of only 6.3%.5Another analysis of 12 shipping companies during the period 198897 concluded thatthe return on capital of six bulk shipping companies was 7%per annum,whilst six linerand specialized companies averaged 8%return on capital.It concluded that thesereturns were in most cases inadequate to recover capital at a prudent rate and retain 320RISK,RETURN AND SHIPPING COMPANY ECONOMICSCHAPTER8 sufficient earnings to support asset replacement and expansion.6However,in 2003 thewhole picture changed,revealing a very different side to the business.The boom of20038 turned out to be an oasis in a desert of indifferent returns,and as earningsincreased and asset values more than doubled it became,as we saw in Chapter 3,one ofthe most profitable markets in shipping history with investors trebling their capital infive years.Shipping risk and the capital asset pricing modelHowever there is more to the paradox than low returns.The capital asset pricing(CAP)model used by most investment analysts equates volatility with risk(we discuss theCAP model in Section 8.4),and shipping returns are very volatile.The sort of revenuevolatility shipowners face is illustrated in Figure 8.1,which shows the earnings distri-bution for a shipping index covering the average earnings of tankers,bulk carriers,con-tainer-ships and LPG tankers.During the 820 weeks between 1990 and 2005 earningsaveraged$14,600 per day but varied between$9,000 per day and$42,000 per day witha standard deviation of$5,900 per day.That is a very wide range.Extending the analysisto individual ship types,Table 8.1 compares the volatility of the monthly spot earningsof eight different types of bulk vessels using the standard deviation as a percentage ofthe mean earnings.This ratio ranges from 52%for a products tanker to 75%for aCapesize bulk carrier,and is extraordinarily high when compared with most businesses,where a month-to-month volatility of 10%would be considered extreme.To put it intoperspective,if the average earnings are the revenue stream needed to run the businessand make a normal profit(an issue we return to later in the chapter),shipping companiesoften earn 50%more or less than is required.This volatility ripplesthrough all the markets,producing a close correla-tion between the freightrate movements in differ-ent shipping market sec-tors.This point isillustrated by the correla-tion analysis in Table 8.2,which demonstrates theclose correlation betweenthe earnings of nine shiptypes.For example,thecorrelation between theearnings of a Panamaxbulk carrier and a Capesizebulk carrier is 84%,soinvesting in Capesizesbrings similar revenue risks321THE PERFORMANCE OF SHIPPING INVESTMENTS8.1CHAPTER8Figure 8.1Distribution of shipping earnings,19902005Source:Martin Stopford,2005 and Clarksons to investing in Panamaxes.However,for some other ship types the revenue correlation is much lower.For example,VLCCs and Handymax bulk carriers have acorrelation coefficient of 11%so their revenue fluctuations have tended to move inopposite directions.There is also a negative correlation between offshore and container-ships.In theory shipowners can reduce the volatility of their earnings by incorporatingships with low or negative correlations in their fleet.But investors may prefer not toreduce their volatility risk,since all that does is to lock in a low return,a clue,perhaps,to how shipping investors view the business.Comparison of shipping with financial investmentsThis combination of volatile earnings and low returns distinguishes shipping from otherinvestments.For example,the return on investment(ROI)summary over the period322RISK,RETURN AND SHIPPING COMPANY ECONOMICSCHAPTER8Table 8.2 Correlation matrix for monthly earnings of shipping market segments,19902002MPPContainer-VLCCAframaxProductsCapesizePanamaxHandymaxLPG 16kdwt shipVLCC100%Aframax84%100%Products59%80%100%Capesize30%39%27%100%Panamax7%18%17%84%100%Handymax11%4%8%70%86%100%LPG36%32%33%33%15%2%100%MPP 16kdwt26%22%7%52%75%84%2%100%Containership9%9%14%59%68%71%14%68%100%Table 8.1 Shipping earnings volatility by market sector,19902005MeanStandard deviation$/day$/day%meanCapesize bulk carrier20,32315,26575%Suezmax tanker25,25717,47969%VLCC tanker(diesel)33,75422,82068%Panamax bulk carrier11,5527,48565%ULCC tanker(turbine)25,07415,96064%Aframax tanker22,22313,33960%Handymax bulk carrier11,4356,85360%Clean products tanker15,4038,04852%Average20,62813,40665%Source:Analysis based on CRSL data 19752002 in Table 8.3 shows that Treasury bills,the safest investment,paid 6.6%perannum,whilst LIBOR(the London interbank offered rate),the eurodollar base rate usedto finance most shipping loans,averaged 8.5%with a standard deviation of 3.9%.Corporate bonds paid 9.6%,but with a much higher standard deviation of 11.7%,andgovernment bonds were much the same.By far the highest ROI was for the S&P 500stock market index,which paid 14.1%.Shipping,as we have seen,is a very different story,with bulk carriers earning only 7.2%,with a standard deviation of 40%,making themtwice as risky as the S&P 500.We will discuss how this return is calculated in the nextsection.Because most investment is managed by financial institutions such as pension funds(see Chapter 7),the pricingof capital reflects thedemand for the type ofassets they invest in.Theusual approach is to meas-ure risk by volatility,usingthe standard deviation ofthe historic returns of theasset.They expect a higherreturn on volatile assets anda lower return on invest-ments which are stable andpredictable.To illustratethis point,Figure 8.2 plotsthe ROI against risk,meas-ured by the standard devia-tion of the return over theperiod 19752002,on thehorizontal axis and averagereturn on the vertical axis.323THE PERFORMANCE OF SHIPPING INVESTMENTS8.1CHAPTER8Figure 8.2Risk pricing of various assets,19752002Source:Ibbotson,variousTable 8.3 Annual rate of return on various investments since 1975PeriodROI(%)Standard deviation(%)Inflation197520014.63.1Treasury bills197520016.62.7LIBOR(6 months)197520048.53.9Long-term gov bonds197520019.612.8Corporate bonds197520019.611.7S&P 5001975200114.115.1Bulk shipping197520047.240Tanker shipping197520024.970.4Source:Ibbotson Associates There is clearly a relationship.Treasury bills,with a volatility of only 3%,paid 6.6%,a premium 2%above the rate of inflation.That could be taken as the basic remunerationon a safe investment.As the volatility increases,so does the ROI,reaching 15%for theS&P 500,providing a risk premium of about 8%over inflation.A regression equationfitted to the points on the chart provides an estimate of the investment function over thisperiod.On average the ROI increases by 0.5%for each 1%increase in volatility.If thismodel holds for shipping,a bulk carrier investment,with a volatility of 35%,should paya return of about 22%(i.e.6.6%cost of capital plus 17%risk premium).However,aswe saw earlier in this section,it only paid 7.2%.8.2 THE SHIPPING COMPANY INVESTMENT MODELThe shipping companys split personaIf investors can make 6.6%on safe Treasury bills and 15%on the S&P 500(an indexof US stocks),why should they invest in shipping,which offers a similar return but has 40%volatility?Generations of shipowners and their bankers must have seen something in the business,even in the hard times,and sure enough when we examinethe microeconomic structure of the shipping market,we do indeed find an answer.Inclassical economics there is no right level of profit.The normal profit is whateverthe participants in the market are prepared to settle for.In many ways shipping companies are very similar to the firms which classicaleconomists had in mind when they developed their theory of perfect competition.In classical economic theory a firm is a technical unit in which commodities are produced.Its entrepreneur(owner and manager)decides how much of,and how,one ormore commodities will be produced,and gains the profit or bears the loss which resultsfrom his decision.7In other words,the firm transforms inputs into output and theowner pockets the profits or makes good the losses,and shipping remains this sort ofbusiness.Over 5,000 companies 8compete fiercely in a market place where barriers tofree competition such as tariffs,transport costs and product branding hardly exist.9Owning an average of only five ships,many of these companies bear an uncanny resem-blance to Joseph Schumpeters description of a typical firm operating in the marketplace of classical economics:The unit of the private property economy was the firm of medium size.Its typicallegal form was the private partnership.Barring the sleeping partner,it was typically managed by the owner or owners,a fact that it is important to keep inmind in any effort to understand classic economics.10This description fits many of the Greek,Norwegian and Asian shipping companiesoperating in the bulk shipping market in recent decades.Admittedly the specializedmarkets(see Chapter 12)and the liner business(see Chapter 13)do not fit this descriptionso well,but bulk shipping certainly fits the classical economic model.324RISK,RETURN AND SHIPPING COMPANY ECONOMICSCHAPTER8 But the perfect competitionmodel does not tell us howmuch that profit will be,justthat it will tend towards thenormal level for the indus-try.This normal profit is thereturn needed to keep supplyand demand in balance,andthat means keeping investorsin the business long term.11When supply and demandare out of line,the returnmoves temporarily above orbelow the normal profit forthe business,and the marketresponds by correcting theimbalance.In the long runthe normal profit earned by a specific company willaverage out of a level whichreflects the companys performance in three aspects of the business:remuneration forthe use of capital;the return for good management:and the risk taken(see Box 8.1).Capital dominates the shipping business.In the classical model,entrepreneurs buymaterials(factors of production)and add value to them.In shipping the factors of production are ships,and operating expenses and capital dominate the business,withoperating expenses accounting for a small proportion of the cost of transport.So althoughthe companys primar
