Leveraging our larger owned fleet and competitive cost structure to generate a strong result
Much Improved Financial Results
Dry bulk freight market conditions improved again in 2018 and our much larger owned fleet, TCE outperformance and competitive cost structure have positioned us well for this recovery, enabling us to record significantly stronger results for the year.
Market Recovery Continued
The Handysize and Supramax freight market continued to strengthen in 2018.
Clarksons Research estimates minor bulk tonne-mile demand to have grown 5.3%, benefitting from increased trades in bauxite, nickel ore, copper concentrate, logs and forestry products and other minor bulks in which we specialise.
Significantly reduced newbuilding deliveries and only 2.4% net growth in the global Handysize and Supramax fleets helped to support a healthier demand-supply balance despite minimal scrapping in the improved freight earnings environment.
The larger ship segments were disadvantaged by stagnant global tonnemile demand for grain, soybean and iron ore, resulting in only 1.2% growth in major bulk demand.
General market sentiment was challenged by the US-China trade uncertainties from mid-year, in particular in the fourth quarter when seasonal strong cargo flows of US grain and soybean to China failed to materialise. 2019 has started weaker than the last two years with a more pronounced Chinese New Year dip, compounded by the trade conflict, Chinese restrictions on coal imports and iron ore infrastructure disruptions in Brazil that undermined sentiment further. However, the seasonal recovery is now underway.
Pacific Basin Continues to Outperform
We engage directly with industrial users, traders and producers of dry bulk commodities for whom we carry cargo under spot and fixed-rate multi-shipment cargo contracts. This differentiates us from many shipowners who charter out their vessels on a time-charter basis as tonnage providers.
We generated average Handysize and Supramax daily TCE earnings of US$10,060 and US$12,190 per day net in 2018, outperforming the BHSI and BSI indices by 22% and 12% respectively.
Our ship operating expenses (“Opex”) of US$3,850 per day and general and administrative (“G&A”) overheads of US$740 per day are also very competitive compared to many of our peers.
Our TCE premium and competitive costs are driven by our ability to draw on our experienced commercial and technical teams, global office network, strong cargo support and large fleet of highquality interchangeable ships in ways that optimise ship and cargo combinations for maximum utilisation and by generating scale benefits and other efficiencies from good systems and strict cost control.
Positive Growth Initiatives
As announced in May 2018, we committed to purchase four modern vessels for US$88.5 million in a 50% equity-funded transaction that enhances our operating cash flow, EBITDA and balance sheet strength, lowers our P&L breakeven levels, and is accretive to our earnings per share.
We also acquired for cash one secondhand Handysize and one Supramax in April and August 2018 respectively. At the end of 2018, we committed to purchase a Supramax for delivery by the end of March 2019 and we sold an older, small Handysize, thereby trading up to a larger vessel with longer life at an attractive price.
These transactions have increased our owned fleet to 111 ships on the water, grown the proportion of our owned versus chartered ships (especially in Supramax), and reduced our owned vessel daily break-even levels.
We have grown our owned fleet more than threefold since 2012, positioning us well for the market recovery. Including chartered vessels, we operated an average of 224 ships in 2018.
We also continue to invest in state of the art systems with our most notable projects being the development of digital solutions for greater efficiencies and better commercial and operational optimisation and decisions.
Strengthening Balance Sheet
In June, we closed a US$325 million reducing revolving credit facility with a syndicate of eight leading international banks, and in November we closed another US$40 million bilateral term loan facility. These facilities refinance or extend existing facilities secured over a total of 69 of our owned ships at a competitive interest cost of LIBOR plus 1.5%. They extend our overall amortisation profile and further enhance our funding flexibility with access to long-term committed funding at an attractive cost which contributes to our competitive vessel P&L breakeven levels.
Environmental Regulations Impacting Vessel Investment Decisions
Pacific Basin continues to assess and plan for three major environmental regulations high on the industry agenda.
The Ballast Water Management Convention requires ballast water treatment systems (BWTS) to be fitted on ships during routine dockings between 2019 and 2024. 14 of our owned ships are now fitted with BWTS, and we have arranged to retrofit our remaining 97 owned vessels with a system based on filtration and electrocatalysis by the end of 2022.
The IMO 2020 global 0.5% sulphur limit takes effect on 1 January 2020, and shipowners will have to comply either by using more expensive low-sulphur fuel, or by continuing to burn heavy fuel oil in combination with installing exhaust gas cleaning systems or “scrubbers”. We expect the majority of the global dry bulk fleet, especially smaller vessels such as our Handysize ships, will comply by using low-sulphur fuel.
Some owners of larger vessels with higher fuel consumption, including some Supramaxes, are planning to install scrubbers. As we cannot risk being competitively disadvantaged, we are well prepared and have arrangements in place with repair yards and scrubber makers to install scrubbers on our owned Supramax vessels. These arrangements include fitting and testing scrubbers to gain experience early and to evaluate the equipment both technically and operationally.
Whichever compliance method owners adopt, we believe that the IMO 2020 regulations will reduce capacity in the short term to the benefit of the freight market, as vessels burning more expensive low-sulphur fuel will operate at more economic slower speeds, and vessels to be retrofitted with scrubbers will be withdrawn from the market for several weeks for scrubber installation.
In April 2018, the IMO announced an ambitious strategy to cut total greenhouse gas emissions from shipping by at least 50% by 2050 (compared to 2008) and improve average CO2 efficiency by at least 40% by 2030 and 70% by 2050. The easiest first step to decrease carbon emissions is to reduce speed, but our view is that these new IMO targets will in due course lead to the development of new fuels, engine technology and vessel designs that are not available or practical today.
Combined, we believe that these regulations will discourage new ship ordering in the short and medium term until new, lower-emissions ship designs become available. We expect these new environmental regulations to be positive for the supply-demand balance and benefit larger, stronger companies with high quality fleets that are better positioned to adapt and cope both practically and financially with compliance and new technology.
The IMF recently adjusted its 2019 global economic growth forecast down to 3.5%, citing rising trade protectionism and instability in emerging markets as well as a slowdown in Europe. However, this still represents a healthy level of growth which, widely-spread geographically, continues to bode well for minor bulk demand.
Supply is expected to be kept in check as many shipowners in our segments refrain from ordering new ships. Clarksons Research estimates combined Handysize and Supramax net capacity growth of 2.0% for 2019 against 4.3% growth in minor bulk tonne-mile demand.
The trade conflict between the United States and China has resulted in import tariffs on a wide range of goods traded between the two countries and has undermined sentiment. Affected goods include US agricultural products, primarily soybean, as well as forest products and cement. However, our cargo diversity and cargo book provide some insulation from these protectionist actions and, despite the weaker USChina trade, minor bulk freight rates were mostly stronger through 2018 compared to corresponding periods in 2017.
A resolution between the United States and China could provide the dry bulk market with a boost, while a protracted trade conflict could further undermine global GDP growth and consequently overall trade and dry bulk demand.
We expect to see increased volatility in 2019, influenced by uncertainty about the trade conflict and slower economic growth, but also by compliance preparations for the 2020 sulphur cap leading to tighter supply. New environmental regulations like this disrupt existing supply and discourage fleet growth.
Well Positioned for the Future
The gap between newbuilding and secondhand prices remains large and we still see upside in secondhand vessel values. We will continue to grow by looking opportunistically at good quality secondhand ship acquisitions as prices are still historically attractive, resulting in reasonable breakeven levels and shorter payback times. We will also consider opportunities to trade up by selling smaller, older ships and buying larger, younger secondhand ships with longer life at attractive prices.
Our robust customer-focused business model, high laden utilisation, global office network, experienced people, larger owned fleet and competitive cost structure position us well for the future. Our healthy cash and net gearing enhance our ability to take advantage of opportunities to grow our business and attract cargo as a strong partner.
We have a truly global business and office network and, with our headquarters in Hong Kong, we are geographically well positioned to maintain leadership particularly in Asia’s growing minor bulk shipping sector.
Towards the end of 2018, Pacific Basin won Dry Bulk Operator of the Year at the Lloyd’s List Global Awards and the Customer Care Award at the International Bulk Journal’s IBJ Awards. These awards specifically acknowledged our commitment to quality operations, our fleet growth and our commitment to placing customers at the focal point of our business, striving to provide them with a superior experience, and investing in a truly customer-focused infrastructure and business model. The awards are welcomed recognition of both our seagoing and shore staff’s combined contributions that drive us towards our vision of being the first choice partner for customers and other stakeholders, all of whom we acknowledge for the part they play in our success.
We thank all our stakeholders for your continued support.
Chief Executive Officer