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!!!
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!