Where would you invest next? A Foresight View

IMIF BUFFET LUNCHEON

Date: Thursday 24th September 2015

Venue: Quantum Shipping Services, Artillery House, 35 Artillery Lane, London E1.

Host & Speaker:  Anil Deshpande, CEO, Foresight Ltd

Subject: “Where would you invest next? A Foresight View”

Mr Deshpande began by referring to a project at Imperial College, London, involving. Innovative software designed to filter options from the millions on which the human mind might be working. What had that to do with shipping? “We don’t have that many millions of things, but who knows, strategy in shipping is getting quite complex.”

When one looked at data prepared by analysts and shipbrokers, there were so many factors that were beyond the graph on the screen.

Foresight group strategy, as elaborated by founder and executive chairman Ravi Mehrotra, was that remaining in the same field could be very destructive. All the time, one should be looking for diversification.

Mr Deshpande continued in straight-talking mode.

Barriers to entry? “We love barriers to entry.” Conditions in dry cargo, the oil industry, the offshore industry – a unit which can drill 10,000 m – were all barriers to entry.

“Cycles, downturns, are friends. If we are not prepared for downturns, then what the hell are we doing there? Downturns are going to happen, we have to be prepared and decide where to go next. You do not need to be perfect in predicting these, but need to be prepared, and that is what is happening today.”

Supporting this approach, “half the story is passion. If you love something, then no matter what happens, you are going to face the music and come out the winner.”

Surveying what he called the “oil imbalance,” he noted that the price had dropped from above $100 per barrel to $50 and $45, and some said it would drop as low as $20. At the same time, the relation between supply and demand changed by only 2.5m barrels per day. And then there was the worry that Iran would start producing 4.5m barrels per day when the sanctions were over. “The whole [market] structure of tankers and product carriers is undergoing structural change.”

Turning to financial markets, Mr Deshpande observed: “We have the lowest interest rates today, and that helps whatever old loans you have. But when you do anything new, a 10-year-facility with a swap and the spread and insurance from China Assurance, costs can easily go up to 7.5% or 8.5%.”

He added: “The question is: what is within our control? We do not really control a lot of the demand side.”

On a theme oft rehearsed within IMIF, he said: “Shipbuilding capacity is another matter of concern, and you know how much China is building. Whether the market is bad or good, they do their job with a lot of enthusiasm. I think the Chinese government is pretty clever. They are not going to put people out of work, and that means that they will continue building ships.”

In answer to a question whether the Chinese yards would become more pragmatic in the sense of reducing capacity, and how long it would take for them to act when the country realised the yards were losing money, Mr Deshpande reiterated:“My feeling is that they will go on building, to keep the people employed and use all the steel.”

As a country, they would rather be hurt in that way than having people without work, and shipping was important especially in helping the country get the coal and iron ore it needed.

The LNG market was pretty bad, with lots of ships on order and not many charterers available. The current three-year period charter rate of $40,000 daily was half of what was required for a 12.5% internal rate of return.

As to jack-up rigs, “we like to be in areas where charters will still require them when things go bad. In the last crash, the number of jack-up rig owners was reduced from 40 in 1989 to only three or four.” Of the 120 rigs on order, up to half would never be built, forecast Mr Deshpande. In that segment, “we could be in an era of five or six years of no returns. It could be that a long-term strategy is to be strong, be prepared and then perhaps expand.

In the dry cargo market, the order book was high, and the current three year charter rate was $12,750 per day, whereas the rate required for a 12.5% return was $24,500.

Mr Deshpande spoke of Foresight’s joint venture with Pavers England in a retail shoe business, where “we have just about broken even. There are 50 shops and sales are increasing, and the business is ripe for an initial public offering, the way to get the best return… in 2018.” Foresight was also in the restaurant business and in the next five years needed to have a total of at least 10 outlets. In this hospitality field, expansion was on the cards for China.

In the tanker sector, chemical carriers included, Foresight had two ships and needed to have a further three, or even five. In adding ships, “we are looking closely at chemical tankers.”

The opportunities come only in downturns, said the Foresight chief executive. The longest downturn he had seen was from 1982-89, “and that is when we built up our fleet.”

Asked about environmental regulations, Mr Deshpande said that such matters were making a dent in operating and design costs, but was sanguine about the longer term. “I feel with good training and procedures, once it gets into the system, it will eventually cost less in terms of crewing costs. I think people will take that in their stride.”

Mr Mehrotra came to the front of the audience to add his views. He said that the shipping industry was now in the service sector.  “Change your mindset, then things will get clearer,” was his advice.

He returned to a theme which had exercised the gathering – the future role of China in trade and shipbuilding.

Look what had happened with Japan, said Mr Mehrotra. This showed that employment of labour was very important in the growth of an under-developed economy into an efficient nation.

Japan had had a reserve of around $800bn which supported the transfer of the economy to a higher level, with people on more income. Japan had to move to the next stage, and had to keep the employment. Once the economy entered that further stage, the labour question did not matter so much. “That is exactly the case in China. They had $3.6trn reserves. They have reached the middle level economy. As it moves into [developed nation status], it needs this employment. The moment they reach that they will take it out. What they have done is very intelligent.”

Mr Deshpande summed up the shipping imperative: “It is a risky business. That is why for each risk you have to have that additional return.”

Jim Davis, chairman of IMIF, who is a non-executive director of Foresight, qualified Mr Mehrotra as the great optimist. “It is a complicated industry,” said Mr Davis. “It is so global, there are economic factors but we must remember also the social factors. It is a mish-mash of desires, not a clear-cut situation. In the middle is the ordinary owner, saying: do I put more ships in or not?

“You like ships, you tend to want to build them, and you like running them, and there is much emotion in shipping.”

Mr Davis thanked the Foresight chiefs for their “straight down-the-middle presentation,” and for their generous hospitality, and thanked Jean Richards for providing the venue at her Quantum Shipping Services office.