A Visit to Coracle of Cambridge

Searching around the Internet for something to listen to down the gym I was surprised to come across some shipping podcasts. It is rather surreal to be fighting the flab while listening to an in depth review of the impact the UK Bribery Act on shipping. Expanding the mind while shrinking the body, I suppose.

The podcasts are broadcast by Coracle, a company that provides online training for professionals in the shipping and commodity industries.  Coracle are based in Cambridge, close to where I live, and encourage people to call on them. So I did, incorporating it into a 50 mile training ride for a forthcoming sportive .

Coracle offices are in the St. John’s Innovation center, which is a new development near the Science Park in north Cambridge and close to the A14. Like most of Cambridge, the needs of the cyclist come first, and there are plenty of cycle lanes, although you have to watch out for zombies. On the return journey I used the fantastically smooth and fast 10-mile bridlepath from Cambridge to St Ives (the Busway).

I met James Tweed, the Managing Director of Coracle, and we quickly established we were part of the “Plymouth Mafia”, PYNDA graduates of the Shipping degree course in Plymouth. After Plymouth James worked as a tanker broker at Seascope, before moving onto to more cutting edge shipping businesses, including involvement in setting up a tanker freight derivatives broker and a shipping hedge fund. The establishment of Coracle is the latest business, and like the others, is at the forefront of what can be usefully done with new media technology.

So what does Coracle do and how does it make money? Coracle takes tradition paper / classroom content for a professional qualification, and turns it into a digital delivery process.  Coracle has done this with the Institute of Chartered Shipbrokers (ICS) course, which is available online, and email, through smart phones, and podcasts. What James and his team have done is look at the requirements for delivery content to people who are fitting professional qualifications around the day job, be that at sea or ashore, and solve the problems using the latest digital media. This also applies to the behind-the-scenes processes such as exam marking and grading. The process is proven and can be applied to any professional qualification or company training scheme, although naturally most of what Coracle has done is in shipping and related fields.

The key is the delivery. When I did my ICS exams in the 1990s it was through distance learning, which meant staying behind at work in MRC’s old bus station offices on the Cowley Road in Oxford and writing out reams of paper to send off for marking. It was boring and tedious and the phone was always interrupting, whereas today I could be sitting in a coffee shop learning online or maybe reading an email from Coracle on the train. Delivery anytime, anyplace, any how.

I maybe wrong but I don’t recall the professional education side of shipping being part of the earlier Dot.Com boom. The hot websites were about replacing someone, usually the agent or  broker from the business loop.

Now we are in an App-Boom. Coracle already has several apps on the market, and are developing more. They are currently looking for app developers. If that is your thing, then give them a ring. After all Cambridge is a pretty good place to be, especially if you are a cyclist. I can vouch for that.

VLCCs Benefit From Fuel Oil Arbitrage

Platts reports that at least two VLCCs have been chartered to carry High Sulphur Fuel Oil (HSFO) from Rotterdam to Singapore. The 2002-built, 299,222 dwt “ASTRO CHALLENGE” is reported by Platts to have been fixed by Litasco for loading 29 September on a $3m lumpsum basis.

VLCC carrying cargoes of bunkers from Rotterdam to Singapore are quite rare. According to Clarksons SIN, there were three reported VLCC fuel oil fixtures from Rotterdam to Singapore in 2011, ranging from $2.8m to $3.3m lumpsum. So far in 2012 there have been two similar voyages, plus the two upcoming voyages. The difference between Rotterdam 380cst Fuel Oil has drifted out to $28/tonne in the last two weeks of August.

The stars on the chart indicate the occasions when VLCCs have been fixed for similar cargoes of fuel oil from Rotterdam to Singapore between May 2008 (when Clarkson Research first started recording lumpsum prices) and September 2012. On average the lumpsum for reported voyages has been around $3.55m, with a low of $2.25m for a 280,000 tonne cargo in April 2009. The average lumpsum for the whole period was $4.22m. The average spread between Rotterdam and Singapore fuel oil prices during that period is $23.81/tonne, but the average on the actual reported voyages is slightly lower at $20.33/tonne. Therefore it doesn’t seem to be the arbitrage in the cost of the cargo, but the low cost of freight. Furthermore, the spread between Rotterdam and Singapore in the summer of 2008 reached over $50/tonne, but the VLCC market was healthy and the indicative lumpsum rarely fell below $6m. No reported fixtures took place during this period. Therefore, it would seem that when the lumpsum falls below $4m and the spread is over $20/tonne, and then the marginal gains are worth the risk of shipping a 270,000 tonne of fuel oil half-way across the world.

Copyright Craig Jallal, All Rights Reserved.

The New Panamax; 13,200-TEU Containership, 120,000 dwt Bulk Carrier

Paul Stott will be presenting his latest findings on the impact of the Panama Canal extension at the Low Carbon Shipping Conference at Newcastle University today (Wed 12 September 2012). There are lots of gems in Paul Stott’s latest analysis of the New Panama Canal “New Panamax and its Implications for Ship Design and Efficiency” (2012 Paul Stott, School of Marine Science and Technology, Newcastle University), but the one I like the most  is the use of AIS data to determine the “actual” operating draft of Post-Panamax Containerships. I have been a fan of using ship movements since my days on Lloyd’s Shipping Economist, but this is a particular clever use of the data.

But I am jumping ahead. The paper examines the impact of the expansion of the Panama Canal on ship design and efficiency. The impact on trade is important, but difficult to quantify. For instance, Paul points out that only 2.5% of world seaborne trade passes through the canal, but around 25% of the commercial fleet has a Panamax beam. Indeed, a Panamax broker at Clarksons once told me only about a third of the ships he fixed had ever transited the Canal.

Under the old dimensions the constraints on commercial ships centered on the beam. By making the dimensions longer and fatter, potentially a heavier combination of ship and cargo can enter the dock system. Then the constraint becomes the ship bottoming out on the floor of the dock.

Looking at Containerships first, Paul finds that the Panama Canal Authority (PCA), may have under-estimated the new maximum permissible size. The PCA estimates the maximum size will increase from around 4800-TEU (limited by beam) to 12000-TEU. However, typical of a the large Containership with a length of 366m and beam less than 49m is the 13100-TEU “MAERSK EDISON”. In ship registers the “MAERSK EDISON” is listed as having a scantling draft of 15.5m, which is too deep for the expanded Panama Canal. But the operating draft is not as low, and using AIS data an analysis of similar vessels revealed the mean draft was 12.6m and the median 12.9m, well inside the constraints of the new Panama Canal. As 50% of the PCA revenue comes from Containership transits, this potential increase in maximum size will be very welcome news for the PCA.

On the dry bulk side, the draft limitation also arises (or should that be “falls”). Paul finds the length and beam accommodates most 180,000 dwt Capesize, but these would be too deep in the water when laden. They will, however, be able to transit in ballast. The largest laden dry bulk carrier will be around 120,000 dwt. As Paul points out, this does not necessarily mean the “Mini-Cape” will become the new Panamax, as a lot depends on the cargo lot size preferred by charterers and receivers. But ship size tends to creep upward, so it seems likely this will be the new Panamax standard.

New Handysize / Supramax and 85,000-dwt designs will benefit from the increase in Panama Canal beam, as designers will be able to optimize hull designs without the beam constraints.

On the tanker side, a Suezmax will fit in the new locks, but not fully loaded. Like the Capesize, these will be able to transit in ballast or part laded. The largest standard tanker that can past through fully laden will be the Aframax of around 120,000 dwt. As in the dry bulk sector, there is room to optimize hull designs of the small sectors, and this might benefit the Product Tanker sector.

The paper goes on to suggest areas of further study, and I have included the paper below.

LCS 2012 Paper Paul Stott REVISON A Sept 1012

Looking for Turning Points

Buy low, sell high is the asset play mantra, but timing is crucial. Can we spot when to buy, and sell?

In 2005 Amir Alizadeh, Nikos Nomikos and Stefan Van Dellen of Cass Business School in London produced a paper “Investment Timing and Trading Strategies in the Sale and Purchase Market for Ships” examining a method for timing sale and purchase activity. The model is based on the Price / Earnings ratio (P/E), familiar to investors in the stock markets.

Investors in shipping are looking for two sets of gains, the capital gain from ship price appreciation (the buy low, sell high) and gains from trading the vessel (earnings). The two gains are linked, as it is the increase in earnings that drives the expectation the price will rise.  This can be seen in the chart of the long term relationship between price and earnings. It illustrates the lead out (to use cycling terminology – I am still on an Olympics buzz) of earnings, and then the “sprint” in prices. The researchers found that just before any significant market recovery, the spread between earnings and prices tends to narrow. This is can be seen clearly in the run up to the boom.

The model uses this theoretical relationship and gathers information on the difference between the long term mean P/E ratio and current P/E ratio. Slow and fast Moving Averages (MA) are used to filter the information and it is the spread between the differences between the MAs and the long term mean P/E ratio that throws up the buy or sell signal. A positive difference indicates the start of a price appreciation era, and a negative difference indicates the start of an era when the price will fall. The researchers tested the theory against a buy and hold strategy (it fared better) and for statistical anomalies. They also ran Monte Carlo simulations on the trading rule and found that overall it fared better than a buy and hold strategy.

The original paper was published in 2005, and I wanted to see if the P/E ratio theory could tell us something about market today. The original paper measures the P/E ratio for several sizes of bulk carrier, using the five-year old price, and the one year time charter rate as a proxy for earnings. In the model the one-year timecharter rate is used instead of spot earnings because this contains information about future expectations. I have stripped down the model to just the Capesize vessel, and extend it to the end of August 2012 (the data in the original paper ended in 2004), to see what the indicators are showing today.

The table below shows my application of the P/E ratio trading rule theory to five-year old Capesize prices. Any errors and omissions are my fault, not that of the original researchers, Cass Business School or anyone else. I did not test it against a buy and hold analysis, nor have I done a Monte Carlo analysis of the rule. This is not investment advice and you should do your own research and due diligence. The table is for illustration and entertainment purposes only.  What the table illustrates are 11 Buy / Sell phases indicated by my version of the P/E Ration theory.

Two of the Buy / Sell phases would have produced a negative result. In the first, (May 1994 to November 1995), the timecharter rate steadily rose during the period, so there may have been a positive operating result to balance the capital loss. The second loss period (September 2011 to March 2012) had declines in operational gains and capital gains. In both cases the Sell indicator was triggered around six months too late. But the investor would not have sold then as the sale price was below the initial purchase price. Most likely the sale in these eras would have occurred on the respective peaks. In five of the Buy / Sell phases, the timecharter rate declined during the hold period. Also the indicators seem to miss the peak price realizable during the hold period, so the gains were not optimized. Altering the fast and slow moving averages or introducing other filters (as in the original study) would probably give a clearer picture.

The researchers in 2005 found the trading rule correctly identified the buy signal when in the 2003-2004 market when earnings increased sharply compared to ship prices. This comes across in phase six. Later, in phase eight, trading on the buy and sell figures would have produced the biggest capital gains of $79.5m, and dragged the investor out of what was to become an illiquid sale and purchase market. But most of the time the capital gains were small, or another way of looking at it, is that the losses were controlled.

The latest buy indicator was triggered in August this year. Overall Capesize rates and prices are similar to those of the 1990s, and I expect that when the Sell indicator is triggered, the capital gain will be relatively small, too.  I will let you know.

Copyright Craig Jallal. All Rights Reserved.

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