Angeliki Frangou: Shipping is a highly cyclic industry, and what it is witnessing today and happened before. It is not a present-day phenomenon

She is the fifth generation of a shipping family and knows from the inside the traditional way of managing a maritime company. She at the same time makes the best possible use of the advantages provided by the international money markets. Ms. Angeliki Frangou, Chairman and CEO of Navios Maritime Holdings, in an exclusive interview with Economic Outlook, refers to the cyclicity of the shipping market, the excesses of the past, and points out what management must now focus on.

Angeliki Frangou Interview: Markos Kantzios (economic outlook 28 May 2009)

She at the same time notes the murky landscape of the cancellations and delays of newbuilding orders, and stresses that the banks have faced, and continue to face, the situation with seriousness. She further points out Piraeus’ advantages as shipping center, underlining its accumulated knowledge. As for the company’s future plans, she believes that some worthwhile investment will arise in this market for the 250 million dollars generated in June last year with Navios Maritime Acquisition, a subsidiary of Navios Maritime Holdings…

How would you describe the present situation in the charter market, especially in dry bulk?

Shipping is a highly cyclic industry, and what it is witnessing today and happened before. It is not a present-day phenomenon. We had crises in ’70 and in ’80, we have a crisis now. Of course, the recent crisis was very sudden.

No one was expecting what happened in 2008. It was sudden. The cause, in this case, was the global financial and credit crisis, which resulted in the freezing of all the markets, the freezing of money in the banks, and consequently the sharp decline of the charter market.

Today (May 28), the Baltic Dry Index has exceeded 3000 points, whereas last December it was at 600 points, consequently we can say that there has been a rise of nearly 500 percent. Of course, this is far removed from the 9000 and 11000 thousand points it had reached. The reality, however, is that China, and particularly its urbanization, was and remains the fundamental factor in the growth of the dry bulk products transport (which is our main line transport work), boosted by the international building and industrial growth. Therefore, although a crisis exists, we rely, I would say, on this urbanization, mainly in China, and to a lesser degree in India. Additionally, since all the support packages in the world are founded on infrastructure development projects, we believe that this will positively impact an increase in demand. Of course, there will be fluctuations.

Do you think that the liquidity of the previous years can salvage the situation? Wasthisliquiditymanagedcorrectly?

That depends each company, each family, and the business model they are applying. Also important, of course, is whether during the good years enough money was put aside so as to withstand the prospective difficulties.

There have also been excesses. One example is that, in the past, every new ship order used to be scrutinized, how much it cost, how it could be repaid, how much would be earned from the charters, before a decision was made on whether the investment was advantageous. During the period of euphoria, the newbuilding orders were not examined in that way, but rather with the reasoning that the order will be placed at a specific price and the ship would be re-sold, at a profit, to a third party, resulting in orders being placed and ships being purchased without first securing their charters and/or their loans. Then the conditions changed, and the values of the newbuildings fell substantially, especially those of the dry bulk carriers, more than the other categories of ships.

But no one has a crystal ball to see what is going to happen. In shipping, no one knows when a rise or fall of the market come, or how long it will last, so one should bear in mind that shipping is cyclical. By engaging in conservative management in the good years, the difficulties can be overcome in the hard years.

Generally, I believe that Greek shipping took advantage of the good period to its benefit, and the Greek-owned fleet is No. 1 in the world. The big test and wager is to emerge from this crisis, too, with gains, because although, as I said before, a conservative management is needed, but in shipping you also must take risks. This market now provides, and will continue to provide, opportunities, which, however, we must be in a position to assess correctly.

Has the listing of shipping companies on the stockmarket worked positively? Was it a correct decision?

Shipping is a large industry and I consider it necessary that the companies active in the field should seek listing on the stockmarkets. Navios was the first dry bulk company to list on the American stockmarket in 2004, and it generated 200 million dollars. Of course, there had been companies listed in Europe, and specifically in Oslo, and also in Asia.

Stockmarkets provide access to alternative forms of borrowing and generating capital. They enable a spread of the risk and growth of the company.

Indeed, in a field such as maritime where scale economy plays a major role, it was inevitable, I would say, that shipping and specifically the dry bulk transport companies would list on the international stockmarkets, as was previously the case with the liquid cargo transport companies. It was an inevitable development which, if properly and wisely taken advantage of, will help.

In your view, in this charte rmarket, arethelistedshippingin a tougher spot than those that aren’t listed?

We can’t say that the shipping companies that aren’t listed are in a better position than the listed ones. There are different management models and other prospects, depending on the targets set out by each company. But by being listed, a shipping company has the ability of access to larger capital and that has helped greatly to now in generating substantial liquidity from the bourses.

In the case of a private company, the shareholders must put in their own money, so this limits the available capital. Conversely, the prospects of a listed company are greater, since it can generate equity and debt, it can also use alternative forms of borrowing, it can float, for example, various forms of stocks and bonds. With its stock, a listed company has the flexibility to formulate some other structures of own capital which a private company does not have the ability to do. At the same time, though, there must be transparency in the listed companies, organization and strictly structured procedures are required, which is not a prerequisite in private companies.

But how exposed are they to the market fluctuations?

All the markets are governed by the duo “greed and fear”. Up until a short while ago, there was absolute fear due to the collapse of the money markets and the freeze in bank lending. A rise started gradually. We see, in other words, that as soon as it was announced, for example, that China will indeed have a growth rate of some 8 percent, there was euphoria. Nearly all the shares of the listed shipping companies rose from their lowest value in recent months and have nearly tripled their stockmarket value.

How do you feel about the way the banks are managing their shipping portfolios?

I believe that the situation was faced with seriousness by the banks. There was the knowledge that shipping is cyclical and that what we see today can change. The banks did not hasten to force the shipowners to desperate moves and sell-off of ships. Almost all the banks gave time to the shipowners to face the new situation.

Besides, the type of borrowing and other obligations he has plays an important role in a shipowners collaboration with the banks. I believe that the big problem will be companies that have many new orders. Because the situation can be faced, somewhat, with ships that have already been delivered. But if the newbuilding program is very big and requires a lot of capital to be financed, which is not available at that time, there I think there will be a problem.

What is the condition in newbuilding delays and cancellations?

The substance is that no one knows how many ships will actually enter the water. The slippage (delays) is estimated to reach 30\%, 40\%, 50\%, while the shipyards say the opposite, that there will be no slippage. I can’t know what will happen. But I do know the facts and that what we are seeing is that in the second half of 2008 slippage was at 21 percent, meaning delays in the delivery of vessels that had been anticipated to enter the water against those were indeed delivered.

In the first quarter of 2009, the slippage percentage was above 30 percent, which means that when there are so many cancellations and delays in the delivery of ships at the beginning of the year, when the ship has been almost completed and therefore the prepayment of the ship has progressed to a substantial proportion, it is an indication, and the course of the slippage needs to be monitored in order to see where it will really end.

If 2009 produces large increases in cancellations and slippage, then we will have a much higher number in 2010.

On what aspects should management focus in the present conjuncture?

When we speak of ship management, as shipowners the only thing we can control is the cost. This is a very good period for concentrating on cost management, which is directly reflected in the company’s results and profits.

The good thing in such periods is that there is a more generalized drop in prices. The cost of, for example, spare parts, lubricants, paints, etc. fall and this helps in reducing the operational expenses.

On the other hand, it is also fundamental that every company looks at the needs it has. We all hope that recovery will be fast in coming, but we also have to take a position, to see what our capital needs are for the following years, so that the company will survive and grow. What I’m trying to say is that this is not a different situation. Yes, it is a new crisis, but there have always been crises, sometimes lesser, sometimes bigger.

Spot ortimecharter?

When the market was at very good levels, long-term timecharters were agreed for ships for period of 3 or 5 years, with a good charter rate and good charterers. This prospect, of course, has disappeared recently. The difference is that, at this moment, such a long-term contract is not profitable.

In today’s market, what one must seek is smaller duration charters so as to be in a position to quickly reposition to higher charter rates. Also important is to monitor the developing markets, chiefly China, which comprises the barometer for the developments in the dry bulk market.

What are the advantages and prospects of Piraeus as a shipping center?

Certainly Greece, and more specifically Piraeus, is a shipping hub that has the accumulated knowledge of many years and in crisis confrontation. The bad thing is one not knowing that there will also be a crisis. From there on, we have examples from the past on how such a difficult market is faced.

That is why we, immediately after the purchase of the company, put the biggest emphasis on the Piraeus office, which we expanded and developed, despite the fact that, as you know, Navios Maritime Holdings is listed in the New York Stock Exchange (NYSE). We maintained offices there too, naturally, but mainly we developed the Piraeus office.

I believe that Piraeus is and should continue to be an international shipping hub. Shipping, for Greece, is a field with prospects and provides the ability to capable, specialized and experienced staff to be involved in the country’s most important branch.

New investments?

Naviosestablished the conditions so as to take advantage of investment opportunities. In July 2008 we generated 250 million, with Navios Maritime Acquisition, which is NYSE-listed and of which Navios Maritime Holdings is a 20 percent shareholder. We have the ability to invest in any type of liquid or dry bulk transport ship, and we believe that we will find worthwhile investments in this market.