Pacific Basin puts focus on dry bulk
'Focus not diversification' has become the mantra for Mats Berglund, who took over as chief executive at dry-bulk, towage and ferries company Pacific Basin Shipping on June 1.
As a result, investors will see more investment to expand the firm's fleet of bulk-cargo ships and tugs - and an exit from the ports business and the loss-making roll-on/roll-off ferry division.
Those inside the company, especially in the 18 offices around the world away from Hong Kong, can also expect more financial responsibility at a local level, described as 'empowerment' by Berglund. 'They have got the local contacts, but they need to understand the daily time charter equivalent rates and running costs' as a way to maximise charter earnings and revenue.
This comes as the company last week reported a first-half net loss of US$195.93 million. This included a US$190 million impairment on the six loss-making ferries, which followed an US$80 million impairment on the same ships in the first half of last year. The total write-down of US$270 million represents almost half the US$549 million Pacific Basin agreed to pay for the ships when it entered the roll-on/roll-off market in early 2008.
Berglund avoided criticising the then management's decision to invest in that market more than five years ago. He pointed out the dry-bulk cargo market was peaking and the shipping industry expected it to fall, although nobody could predict the almost overnight collapse following the Lehman Brothers banking crisis when liquidity evaporated and trade seized up.
As a result, it was understandable that management should look at diversifying away from the core dry-bulk operation, he said.
Berglund added that if Pacific Basin had kept investing in dry-bulk tonnage as prices peaked, the company would have lost more money than on the roll-on/roll-off ferries when ship values dropped.
He said ferries were 'a completely different business' compared with traditional shipping and more akin to an extension of the road haulage industry with ships operating on fixed routes and timetables. Existing operators such as DFDS Seaways had the logistics network in place whereas Pacific Basin 'as a tonnage provider was left with few options', especially in a sector where there already was overcapacity and underutilised ships.
'We don't want to start competing with them. There would be a bloodbath,' Berglund said. 'They would do everything to protect their own lines.'
He conceded the ferry sector was a buyer's market with other ships aside from the Pacific Basin ferries up for sale, which was why the firm did not expect an early disposal of the ships.
'We see more upside in dry cargo' than roll-on/roll-offs, Berglund said, adding that it was 'interesting times' for the dry-bulk sector.
He said the price of new and secondhand dry-bulk vessels was 'back to pre-boom levels' with that of a secondhand 32,000 deadweight tonne Handysize ship down to about US$16 million, the same as in 2004. 'There is only so much more prices can drop.'
As a result, the firm is keen to expand its fleet of Handysize and Handymax dry-cargo ships, which comprise 158 vessels on the water with 22 on order. 'We will shift more money into dry cargo and get a return on it,' he said, adding the company would be 'picky about what we buy'.
Pacific Basin had cash balances of US$657 million and bank borrowings of US$853 million at the end of the first half of this year, while there were vessel capital expenditure commitments of US$262 million. By comparison, the financing ratio for acquiring new ships typically involves up to 40 per cent from internal corporate reserve and at least 60 per cent from external sources.
The company had no timeframe of when to expand its fleet, but it has purchase options on 19 of its chartered Handysize and Handymax ships, which can start to be exercised in the current half of this year.
While the company warned charter rates would be weaker this year than in 2011, they could start to rise next year or in 2014.
Berglund pointed out that 28 per cent of the global Handysize fleet was more than 25 years old. About 9 per cent of the fleet was expected to be scrapped this year, and if the trend continued next year, it would match the 9 per cent growth in ship deliveries that have been forecast in 2013.
As a result, there would be zero overall fleet growth next year while cargo volumes are expected to continue to increase after the 20 per cent gain in China's imports of minor bulks such as logs, fertiliser and nickel in the first half of this year.
We don't want to start competing with them. There would be a bloodbath Mats Berglund
$270m The total write-down, in US dollars, Pacific Basin has made for six ferries, which the firm bought for US$549 million in early 2008