Interview with Paul Slater, Head of Qorval Marine


Fairplay December 14, 2016

In the second of a series of interviews with industry veterans on lessons learned from the tumultuous past decade, IHS Fairplay spoke with Paul Slater, head of Qorval Marine, a provider of shipping restructuring and consulting services.

Well known for his bearish prognostications and scathing views toward speculation, Slater began his shipping career in 1969 as a financial analyst at P&O and in subsequent decades served as CEO of Oceanic Finance Corp and chairman and CEO of First International.  The following is an edited version of an interview conducted in Manhattan on 7 December:

Greg Miller: If you look back over shipping industry behaviour during the past 10 years, what has been done right? What stands out to you as a positive example of how the industry should be proceeding in the future?

Paul Slater: “Very little. Although I would say that the LNG industry is brilliant. They have 90% of the ships sailing out of Qatar on long-term charters. And they built into those long-term charters a budget for maintenance and repair and a budget for periodic surveys, plus a margin. The margin isn’t extraordinary, but when you get to the end of the 10- or 15-year charters, those ships aren’t going to get scrapped.”

So the lesson learned here is the need for long-term coverage, and to only order new ships with charters attached? But the spot market plays such a major role in the markets today …

“Why on earth should the industry be dominated by the spot market? The spot market was set up to cover variations of supply and demand beyond the contractual requirements of time charters, not to be the primary market. Today, the spot market is used as the market.

“Why would you order a new ship if you didn’t have a contract for that ship? If I was to ask you to invest USD75 million in anything and the only income stream that was for sure lasted for three months, you’d think I was crazy. In the future, shipowners should react to demand by sharing the risks they cannot control with cargo owners by never ordering ships without securing employment.

“If you are a risk taker, you want to take risks you have some element of control over. The problem with the shipping industry today is that by going and building ships on spec, it actually took on risks it had no control over – the risks at the shipyard, the risks of the industries that consume the commodities being carried, and the risks of the industries that make the finished goods.”

I would say though that given how long the downturn has lasted, a lot of the time charters that previously existed have rolled off, which is why there are so many ships in the spot market. Those owners either can’t or won’t lock them up again because long-term rates are too low. And with all the ships in the spot market, the freight rates for cargo interests are very cheap, so why would a cargo interest want to sign a 10-year time charter for a vessel? And if not, how do we get ever away from the level of spot focus we have?

“Because ‘cheap’ isn’t the only issue. I have no doubt that there are a lot of major charterers that won’t touch a ship owned by private equity that has not been maintained properly, because the downside for them [the cargo interest] is enormous if the ship goes aground.

“I worry at the moment that we’re not spending enough on maintaining the ships, because there’s no money to be spent. I think that’s a risk factor that’s going to surface and a safety factor that’s going to surface. With these financial investment people [in charge], I think crew costs are being taken down to an unacceptable level.”

But what if there simply will not be enough 10-year charters available, or rather, rates on the 10-year charters on offer will be too low to be acceptable to vessel interests? Isn’t it inevitable that ships will get ordered anyway, speculatively, without long-term coverage? It’s not like shipping management will just do nothing …

“Why not? My message is: stop buying ships that you’re not making money on. It’s pathetic. Why buy a ship that will have a guaranteed daily loss?”

Because in some cases, the management gets paid very well even if there are large losses.

“Well, that goes to the quality of the owners – and I personally think the quality of a lot of these public owners is minimal. Some of these public companies have done nothing, yet they are paying extremely high salaries.

“I’m not a real believer in shipowners being public. I can’t see what it achieves, given the fact that the risks of shipping, as a service industry, are in the industries you serve, which you have no control over, and as a public company, you also have to serve the market value [of your stock].

“And with all of these private equity people, their only objective has been to look at asset values and invest based upon the idea that the asset values are going to go up.

“Throwing money at newbuildings on the belief that ship values will rise won’t work. Ship values haven’t risen, except in the extreme period of 2005-7 when charter rates went through the roof. If you’re going out and ordering a new ship that you won’t get for two years on the basis that by the time you get it, it will be worth more than it costs, I don’t believe there’s any historical basis for that.”

You brought up public companies and private equity. There’s a theory that the cyclicality in shipping rates is caused by the supply side, and specifically, by the cycle of capital availability to the supply side. We had this huge wave of capital coming into shipping during the past 10 years. Was there something different about the nature of the speculation and investment this time around – which has ultimately put all these ships in the spot market – versus the speculation and investment in previous decades?

“Until recently, capital didn’t run at the shipping industry. The shipping industry ran at capital. It was only recently that we’ve gotten into this Micky Mouse game on Wall Street, with reckless money from the capital markets and capital providers running at shipping because they have too much capital. And shipping was never taking money from these private equity firms like this until the middle of the first decade [in the 2000s].

“I think the mentality of the investment community has been exposed as being typically MBA [Masters of Business Administration] driven. You talk to these people and they have no idea how to generate income – that’s a skill that’s in the hands of the shipowners, the good ones. All these [private equity] guys know how to do it try to negotiate with class on cost or beat up on ship management companies for cheaper crewing.

“The only thing the MBA types in these firms know how to do is the same thing they have done in the hotel business: come in and buy with the intention of selling again in three to five years. [They invest in shipping because] it sounds good on paper and they’ve got an allocation of money and they’ve got to use it.

“The problem, fundamentally, is that we’ve got the type of investors that have gone into public companies, and the type of owners who are public, and the MBA mentalities at these private equity firms, and they are all focused on indexes and spot markets. They’ve spent no time looking at projected demand. Instead, they say ‘we’ll go build these super ships and they’ll be so good they’ll get chartered, or they’ll be worth more when they’re delivered and we’ll sell them’. But the whole idea that you could go out and order a large number of ships and this would enable you to dictate the terms of their use is totally wrong. It has never been the case.

“Another thing these guys haven’t understood is China. The sudden emergence of China and the extraordinary demands that made on the shipping industry was really the beginning of all of the issues we’ve got today. I maintain that China doesn’t care about the shipping industry. Its only interest is to get freight rates down [for the commodities and goods it needs to ship]. This idea goes right past the minds of these [private equity] guys.”

And yet those new investors were able to finance their deals, however speculative. When you look back on the past 10 years, part of the reason we are where we are today is that all of these investors were able to obtain bank financing for so much completely speculative ordering – which brings us back to all of these spot ships we now have on the market.

“Correct. It was extraordinary.”

So that leads us to the banks. This year they have adopted a tougher stance with borrowers, and the traditional cheaper European bank finance seems to be pulling back from shipping. Do you think this is permanent or do you think we will ultimately get back to the cheap bank debt we saw in the mid-2000s?

“No, we’re not going back to that. But if I had a tanker with a 10-year charter to an oil major, I bet I could raise 70% of that [in bank debt] against the cash flow at a fine margin. And you couldn’t finance an LNG to trade in the spot market but you could finance an LNG carrier with a 15-year charter to the Qatari government.”

Maybe this new banking reality will be help push shipping back towards the longer-term charter coverage you’re talking about – plus there hasn’t been an IPO in New York in over a year and private equity looks like it’s running away from the industry.

It sounds to me like what you’re really recommending – when it comes to lessons learned – is a return to closer ties between cargo and vessel interests. Shipping economist Martin Stopford was saying this same thing at the last Connecticut Maritime Association conference, in relation to the need to get away from today’s confrontational spot-focused transactions and move back towards more ‘industrial’-style relations to facilitate the high-tech ‘Smart Shipping’ designs of the future. But I still don’t see how we get there from here, especially because it was the cargo interests that drove the move toward the spot model in the first place. There is such a large gap between the cargo interests and the vessel interests today.

“These [cargo and vessel] interests have been dragged apart because the investors have not been interested in the revenue streams, they’ve been interested in the speculative value of the assets – which is totally false, because the speculative value of the assets is driven by the cargo.

“There are too many ships out there today, but in my view, unless something extraordinary happens, we will inevitably get back to some sort of balance by the end of this decade, simply by attrition. The ageing of the fleet and now the closing of a vast amount of shipyards means we have a chance of getting the supply-demand balance into better shape.

“I’m not saying they [cargo interests] are going to do it today, but there’s nothing that will prevent an oil company from putting on 10-year charters. They will be picking up oil in different places and discharging in different places, but they will have a consistent business, so why not? And for the people with the ships, you don’t want to be worrying every 60 days as to where you’ve got to go and what you’ve got to pick up and who for.

“You’ve got to stay closely in touch with the people who are going to use the ships – the people who own the cargo. A ship is only worth anything when it carries a cargo and gets paid for it. Period. You don’t need to add anything to that.”