Niton’s Scrap Fund, Hot Pancakes Amidst Irrational Exuberance

niton scrap fund

Foreword

Most of the commodity economics is about shortage: there is a shortage of “something for someone somewhere”, but now it is changing. Economically speaking,  few segments in the entire maritime spectrum still have considerable upside potential when we consider their downside risks.

We are still in the hangover phase of the commodity crisis as it also relates to the shipping markets. It seems contrarian, but spot shipping rates themselves aren’t the catalyst for the shipping market. On the asset side it is really the access to credit (more than interest rates) that is much more important and probably the biggest driver of the cycle.

How to keep faith in the reported numbers/historical values if we really don’t know what’s the real value of these assets on a going-forward basis ?

Beside commodity woes, one of the problem to which we are living right now is the zero interest rates policies because they are dislocating asset pricing. In normal times, buying low to sell higher later just because interest rates will be higher one day would suffice to justify a value appreciation of the asset. Apart from financing, the other hard stick is the supply and demand balance and in times of global excess of the supply, asset prices should be low. Because we don’t live into normal times , I can’t tell you if the price of the ship bought $15M is really worth $15M because it is financed with money that is so cheap to what the normal would be.

I have these two ideas:

Despite daily rates are outrageously low, I predict that the money will be still keep going there because macro conditions aren’t going to change overnight.

Low earnings inventories will counterintuitively bring new inventories into the global shipping market, outpacing the scrap rate.

Tradewinds

Small fund has a huge upside potential. It’s not totally new for a fund to try capitalizing on commodity cycles with special opportunities in real assets market (CarVal is another compelling example). The potential for AUM growth is at least tenfold.

investors

Firms like Niton typically do distressed-debt and special opportunities so don’t talk very much because the essence of the business is to identify bargains before someone else does. (They are first or early movers.)

However, the risk of Buying ships, Breaking them and Sell the Scrap is relatively simple to explain. While they are positioning their investors to benefit from the supply side economics of the commodity cycle, it is only through the intermediation between shipowners and ship breaking yards, (on a transaction based-approach, not gambling on a possible increase in value). Timing is excellent and I love the product.

Even 50% of that is certainly a lot of steel. It is a low-margin/high volume business unit based on a transactional approach will fit well into an existing trading portfolio.

About Scrap :

Scrap values fluctuate depending on how many ships are sent to the breakers on a given year and this is inversely related to freight rates. When a ship approach the end of their economic life, it may be more advantageous for owners to send ships to the breakers rather than keep it trading below their breakeven.

Sources:

[1] Tradewinds

[2] Naomi Christie, Bloomberg

Niton capital Partner SA

corporate_finance

Niton Capital Partner SA was founded in 2006 and is based in Geneva, Switzerland.

  © 2015 Navigating the commodity markets with Freight and Spreads

Commodity Merchant Trading & Shipping Advisory Services

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