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Greater diversity needed in shipping portfolios

Greater diversity needed in shipping portfolios
There has been a troubling trend of public equity markets demanding very specific pure play offerings from shipping companies, says BW Group chairman Andreas Sohmen-Pao.

Speaking on the distinguished panel at the Sea Asia Global Forum, Sohmen-Pao said there are investors who are interested in companies who are involved in not only particular sectors but also in specific segments such as only suezmax tankers for example.

He added that they do this because it makes it easy to assess the market and allocate capital from an investors point of view. While this simplifies investment decisions, it makes running the business very difficult due to the cyclical nature of shipping where diversification helps to even out the peaks and troughs.

“This is very hard to do from the shipping companies’ point of view because you need diversity to survive,” he said.

Nordea Bank president and group ceo Christian Clausen concurred, adding that the trend towards pure play shipping is an unsustainable one because of the nature of shipping.

Clausen went on to point out that there was an increasing need for companies to bring down risk by being more diversified. He said that while there is still financing available for good projects, the biggest problem now is getting the balance of capital allocation right and this is exacerbated by existing problems with loan portfolios and legacy assets.

“You can bring down risk by being more diversified and once you have diversified your balance sheet you will be able to get better access to financing for riskier projects,” he advised.

Sohmen-Pao said managing an organised exit from the era of quantitative easing and will be key to the health of the shipping industry in future. He noted for example that if the cost of capital started rising again and interest rates start hitting the 5% level this will have necessary and good consequences as it will prompt the filtering out of weaker companies.

“There will be excess yard capacity globally for the foreseeable future. There is no room to hide because any booming sector can immediately get new orders taken,” he said.

AP Moller-Maersk Group executive board member Claus Hemmingsen also noted that “yard overcapacity will always be there”. While many of the China yards have slowed down, Sohmen-Pao commented that none of them have been mothballed.

Pacific International Lines md SS Teo believed that while China will allow some yards to go bust, the big state-owned ones will still survive. Meanwhile through “imaginative financing”, some lines are still able to order new ships and there is thus a need to be more responsible with newbuilding orders.

On this point Precious Shipping md Khalid Hashim said the next few years for the dry bulk sector are all about a matter of survival. This could be done by speeding up scrapping and raising efficiency, he added. However, if rates spike up sharply, to double-digit levels, “we’re all dead”, he quipped.