The Mastermind Behind Clarksons: Martin Stopford

The Mastermind

Clarksons PLC’s Profile: Fully integrated shipping, offshore broking banking platform, 48 offices and 1420 employees worldwide. CKN:LN

Martin Stopford, Managing Director of Clarkson Research Services Limited CRSL


Shipping is not a boring activity and has always attracted ultra-smart individuals . Martin Stopford, the Brit Economist, Author of Maritime Economics is one of them. He is the Mastermind behind  Clarksons Research, part of Clarksons group, someone with formidable intellectuals. Stopford has delivered hopes, anecdotes and excellent stats at Nor Shipping 2015.

FORCING LOWER COSTS WILL ALSO FORCE FREIGHT RATES LOWER because of the market forces.

Plainly speaking bulk freight is only a derivative (of something) and technology is a decoupling cost factor for rates that’s what it is.

Although Shipowners may limit pains, they can’t bank on these by cutting costs: it’s a zero-sum game and the most efficient fleet in the world will still burn money at low rates. No Free lunch exists for efficient units because rates are a tracker of freight costs. Suppose that Freight Cost Components drop by 30% at T=2, Freight Rates at T=1 are no longer justified => the most efficient fleet will generate lower rates and at low rates the most efficient unit no longer commands a slightly higher premium(contrary to the conditions prevailing when rates are high). It’s about this basis thing.

Efficiency incentizes productivity (more demolition) and better rates in the long-run (fair for everybody) but it’s not a Free Lunch.

Shipowners have financed themselves with debt, and so taken on nominal obligations whose sustainability is based on forward-looking nominal arrangements.

Forward-looking nominal arrangements create a very large asymmetry between unexpected price adjustments upwards and downwards.

For any unit, an unexpected price adjustment upwards in the freight (F) they sell to market is welcome news – units gets more money, its balance sheet expands in the happiest way of all, more assets matched by more equity.

But for a leveraged unit, a downward nominal price shift may force deadweight adjustment costs, which may range from the renegotiation of existing contracts, debt restructuring, to formal bankruptcy.

Units run at a losses for long periods of time: it is downward price stickiness.

Let

equation 1.1where :

S= Shipowner i

F is the mean F(i) across all shipping firms.

‘a’ measures the extent to which each shipowner wants to follow whatever the competitor is doing.

The Shipowner S minimises its loss by setting :

equation 1.222In a symmetric game, where all shipowners face the same loss function, the unique Nash Equilibrium is F(S)=F=F*. We only get multiple equilibria if b = 0, where it doesn’t matter what they do, as long as they all do the same thing.

On the other hand, if there are only two possible values for F(s), for example F(t-1) and F*, then both F(t-1) and F* will be the Nash Equilibrium, if a > b.

The Nash equilibrium predicts that any firms who deviates will crash.

In game theory, the Nash equilibrium is a solution concept of a non-cooperative game involving two or more players, in which each player is assumed to know the equilibrium strategies of the other players, and no player has anything to gain by changing only their own strategy.

That’s a coordination dilemma that we have in the shipping industry, because all firms can get stuck in the bad equilibrium F(t-1), unless someone convinces everyone to jump to F* together.

PRIVACY WALL

We also happen to think that Stopford and others”miss the boat” on data: it’s a TRAP.

First when you give away your data in the hand of a broker and/or data provider, do you realize that will  learn them more about you and your business than they truly really pretend to know about the trade !

Be aware that the Dual-Role Broker/Data Provider when dealing (I have particularly in mind Clarksons) creates an ubiquitous potential for sulfuric conflict of interests.

Who is exactly served by the DATA and who is serving itself in the Data ? [1]

KOCH AND CARGILL DO NOT GIVE THEIR DATA, SO SHOULD YOU ? [2]

Simple Bunkering management and Active Route Management that are used since more than 30 years are quite inexpensive and achieve the best for shipowners.

DATA (2nd gen sensors, RFIDs, “the cloud“, the next technology) further under the hood will inevitably hit a privacy wall. BIMCO and owner-minded organizations will not embrace data captivity initiatives because if so, they will concede some of their members’ bargaining power.

Performance and efficiency clauses driven by data are skewed towards one side, the cloud will not favor investors and asset owners in the way they’d expected.

Jacques Rightship

Koch and Cargill, two of the largest commodity traders in the world already use Rightship for vetting (wisely arguing efficiency rating).

Quickly they have understood the “discounting power” of the performance ranking/bargaining tool as it pertains to emissions. 

Emissions

It is also a part of the explanation for everlasting ludicrous renewed c/ps in an already low markets.

In absence of a risk premia or scarcity, Freight will be traded and regarded as nothing more than a derivative of a trade activity.

Improving the user experience (putting a smile on their face like Stopford suggested) only means “cutting the PRICE”! Honestly, who has ever wanted to pay more for its freight ?

On Mr. Stopford’s “squeezing value out of the transport chain and smiles on customer faces” at 7:48. It’s hard to associate the generic term of “Value” with “Freight”.

In a freight contract, parties are fundamentally at the opposite, any incremental value will be invariably created at the expense of one or the other.[3] Given the operational context it is easy to alienate users. The value creation process of this economic activity may lies within abiding strictly to a contract.[4]

THE GAMING ASPECT OF SHIPPING

In an industry with a lot of smart people like Martin Stopford, it is difficult to outsmart the game and perhaps for some reasons, the sum of smart people, by their behaviors, tends to engage into risky trades. They are also more likely to die through the violence of the war, the Nash equilibrium predicts it.

Those who have filled their coffers in the early 2000s still want to play  the game professionally in a MARKET now commanding entities to lose money or burn cash.

Years ago, Stopford said on Shipping:

-“it’s like poker, play the players, look for the sucker and if he’s not there, get out, cause it’s probably you !”

This is a top tip as it pertains to the current market and it conveys a strong message !

This time shipping wants to see the “Smart guys in room” to retire go play another game (maybe duller).

The Game is over in Shipping: from now to 2020, the industry will cumulatively lose more ­than 3X the amount of money they made during 2000-2007

Technology will change. The trade and its faces will change but the Shipping business traditions and principles remained unchanged since 200 years.[5]

The Shipping industry will always continue to require quality operators, hard work, entrepreneurial spirit with an enormous sense of Judgment and these are qualities of the Norwegian-controlled Ship-owning organizations.

[1] [CLARKSONS DESCRIBES ITSELF AS “THE LEADING DATA PROVIDER IN SHIPPING MARKETS” AND THE WORLD’S LARGEST BROKER]

[2] [TRADERS UNDERSTAND BETTER THAN ANYBODY ELSE THE VALUE AND RISK OF GIVING AWAY CRITICAL INFOS ABOUT THEIR OPS TO OTHER PEOPLE]

[3] [A VALID REMARK FOR DATA PRIVACY]

[4] [AGAIN, RISKS AND COSTS MUST BE WELL APPORTIONED IN THE CONTRACTS].
[5] [LANDMARK DECISIONS CAN STILL REVERSE THE COURSE OF THE PAST 200 YEARS].


Commodity Merchant Trading and Shipping Advisory Services

The “NON-SAID” during the course of presentations at shipping conferences MATTERS. Organizations are encouraged to call us for impartial & unprejudiced advices.

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© 2015 Navigating the commodity markets with Freight and Spreads

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