Thursday, January 31, 2013

Guest Blog: Andreas Christogiannis and the Ocean Engineering Systems Management Track


Hi Everyone,
I know it has been a while since the last post. Stay tuned for a Plant Trek blog entry. The following is a guest blog post from Andrea Christogiannis. He was on my core team this summer and can speak definitively about his experience with the Ocean Engineering Systems Management track. Enjoy!

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Ships ahoy!!!

My name is Andreas Christogiannis. I am an LGO 2014 student and the first LGO to join the new Mech.E “Ocean Engineering Systems Management” track.

Let me share a story about the business of ocean shipping and the re-formation of the MIT International Shipping Club…

When Captain Odysseus bought his first ship, “MV (motor vessel) Lisa”, he entered an unimpressive business: shipping fertilizer. The ship’s seller had put him in touch with a trader in East Africa who would buy any shipment he could get his hands on. The trader agreed with Captain Odysseus on a 3 year long “COA” (contract of affreightment): MV Lisa would load fertilizer in Malaysia once a month and carry it over the Indian Ocean to the port of Dar Es Salam in Tanzania, East Africa. The ship had a cargo capacity of 23,000 tons; for every ton shipped, MV Lisa would earn $8.5; for 23,000 tons shipped, she would earn $195,500. Minus monthly operating costs of $135,000, MV Lisa would make a monthly operating profit of $60,500. Or $2,178,000 over the three years the COA lasted.
Captain Odysseus was rubbing his hands, thinking that he had only paid $1,750,000 for the 26 year old ship. In less than three years his investment would pay off!

His joy didn’t last long though. While MV Lisa was hard at work plowing the Indian Ocean every month and earning freight for her owner, China was hit by an unprecedented draught. The Chinese government started chartering (hiring) any dry cargo ships that were available to ship grain to China. Because of the port infrastructure in China, the most attractive ships were of the size of MV Lisa. This spike in demand for carrying capacity caused a spike in hire rates for this ship type: From earning a mediocre $7,000-8,000 per day, ships similar to MV Lisa (“handysizes”) gradually demanded and achieved daily hire rates of 10, 15, 20, 25 thousand dollars per day!
                                                                                       
But why was Captain Odysseus unhappy? Because his ship was earning an equivalent of roughly $6,500 while the market was booming at $25,000! And he was locked in a three year contract, during which he had no chance to share the upside of this market.
He knew he could not have predicted the draught in China and the increase in hire rates it caused, but this wasn’t enough to calm him down.
In his mind, he wasn’t making $6,500 per day; he was losing $18,500 per day by not being part of the $25,000 per-day spot market for handysize ships.

What should he do?

During his last trip to Oslo, Captain Odysseus had met Bjorn, a Norwegian banker who pitched to him some hedging tools called forward freight agreements (FFAs). Basically, using these so called “shipping derivatives” you could take a long or a short position on the freight market for a specific shipping route. If only he had a way to predict when the market would turn south again, he would sell it short and make a huge profit. Meanwhile, his MV Lisa was still carrying fertilizer to Africa for much less money compared to what ships on the spot market (available for hire) were earning.

Captain Odysseus called the Norwegian financial wizard, but was informed that he had taken a new job with a shipping private equity fund in Hartford, CT. When he finally tracked down Bjorn, he explained the situation that was keeping him awake at night. He then asked Bjorn to structure for him an FFA that would bet against this market. The timing should be right, though: you don’t want to sell the market short too soon!

He felt he could trust Bjorn; during Bjorn’s presentation in Oslo he had observed his very strong analytical and quantitative skills. However, Bjorn’s response surprised him: instead of betting against the market, Captain Odysseus should bet in favor of it! Bjorn’s reasoning was simple: China would keep buying grain shipments and thus hiring ships for many months to come, since Southeast Asia was now entering its annual dry season and production was expected to stay at low levels.

Captain Odysseus was not convinced; his gut feeling was telling him that if you are too late for a “party”, you should not try getting in; you should stay “sober” and wait for the next day to do a couple deals with the unsuspicious hangover party goers.

He decided not to decide and to do nothing. Out of nowhere, another unexpected development proved both him and Bjorn wrong: China did keep buying grain shipments. However, to reduce its supply chain risk, the Asian giant’s government had a state owned grain company order from Chinese shipyards no less than a hundred new building handysize ships; yes, the type and size similar to MV Lisa. As months passed and new ships entered the ocean, the market started a painful decline. Ships started making operating losses. Now it was too late to bet against the market: its decline was widely expected and already priced in the derivatives. Meanwhile, MV Lisa kept earning a fantastic $60,500 operating profit per month.
Captain Odysseus repaid the ship’s mortgage in less than 3 years and started thinking about acquiring foreclosed ships from bankrupt competitors…

The events in the above story have never happened. Also, the story is incomplete.
And this is exactly why it mirrors the business of Ocean Shipping:

·  Unprecedented events shape the industry every day, 24/7. This industry is global by definition and knowledge of geography, politics, cultures, and weather patterns is equally important to economics, negotiations, engineering, and operations.
·  Decision making always relies on incomplete information.
·  Experts in the industry will openly admit that there are many things they haven’t yet learned or cannot possibly know.
·  Short term risk & return VS long term risk management and averaged out earnings: MV Lisa’s earnings once looked disappointing; a few months later she was beating the market.
·  Rigorous analysis VS gut feeling: none alone is sufficient for success. Also, taking action at the right time is of paramount importance.
·  A ship is a lady. “She” asks for care and attention and can change your life.

Isn’t that exciting? Welcome to the world of Shipping!

The MIT International Shipping Club

Coming from Greece (15% of the global sea trade is done with Greek-owned and operated ships) and having worked in that industry, I would take for granted that people know shipping and are excited about it.

When I came to MIT, I realized that people were excited about many fascinating industries; shipping was not one of them. That spurred the decision to create a student club which would make shipping more visible and more attractive to the MIT community.
It was not an easy task to get people on board; why should they spend time on shipping when they can have careers in engineering, consulting, or banking? As we learned in our Organizational Processes class the last fall, the early adopters should be found first: people that either already have an interest in shipping or are curious and inquisitive by nature.
A core team of early adopters from backgrounds as diverse as the Navy, shipping finance and offshore engineering was formed.
From then on the network started expanding: the club has captured the attention of other student organizations spanning from mining, to oil & gas and to marine engineering.


Our first event! -and a bit of a sales pitch J

Boosted by the support of Professor Henry Marcus and many MIT Ocean Engineering faculty, we are at the exciting point of hosting our first guest talk for 2013:
Dr Arlie Sterling of Marsoft will visit the MIT campus and talk about “Pricing of risk in the Shipping Industry”.

Understanding Shipping Risk is vital to anyone wanting to venture into the shipping industry. 
Shipowners and Banks use Risk and Market Analysis to make crucial decisions, such as:

- Enter or exit a shipping market? 
- Invest in high-value newbuilding fuel-saving ECO ships or low-priced second-hand vessels?
- Employ vessels on long-term time charters or trade them in the spot market?
- Stay in or exit ship-financing?
- Demand better terms or pricing on their new shipping loans?

Particulars of the event:
ETA: Monday, February 11th 2013, 12:00pm-1:00pm EST
Port: MIT Sloan E51-145
Misc: lunch and refreshments will be provided

We will be delighted to welcome all of you on board, as well as any of your classmates that are interested in the shipping industry!

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