K M Sheth explains the Shipping Business

Source: Annual Report 2016-17 of GE Shipping

Shipping, as we know too well, is a truly
global business in every respect as well as
a cyclical and volatile one in which many
moving parts across the world has a bearing
on earnings as well as asset values. It is
not unusual to see swings of 50% or more
in earnings and swings of 30% or more in
values within a period of twelve months.
The natural outcome is that shipping is not
a linear result oriented industry and hence
issues such as quarter-on-quarter growth
of revenue or profit are of little relevance

This therefore begs the question as to the
most prudent strategy for a management
team to follow towards creating long term
value in such an industry.

At its core, success in the commodity
shipping business can come by doing two
basic things well: buying and selling the
right ships at the right price and time, and
running the ships well in the interim.

Let us discuss our approach to both of these.
Shipping is a highly capital intensive business
where allocation of capital is one of the key
determinants of long term profitability.

As you may have noticed, interest and
depreciation, which are directly affected
by the capital cost of the asset, constitute
almost half of our operating cost base.

This shows the key role that the acquisition price
of ships plays in our profitability.
This leads to critical decisions that the
management needs to take on when is
the ‘right’ time to buy and whether long
term returns are better served by being
diversified or focusing on a single sector
of the industry.

On both these issues we
have had intense internal discussions. On
the issue of diversification within shipping,
we believe that staying diversified is more
beneficial as shipping cycles across
sectors do not move in tandem and thus
we gain more trading opportunities across
assets whilst also reducing the time we
need to sit on ‘cash’. This is of course not
to say that moving across asset classes
will be seamless and therefore there will be
periods of time when cash is the best bet
for building long term value.

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