Where would you invest next? Executives of Foresight Ltd offer their insights to IMIF meeting in London
Shipping and offshore markets are predicted to be tough for some time to come, so members of the International Maritime Industries Forum eagerly awaited any investment tips that might be forthcoming when Anil Deshpande, chief executive of Foresight Ltd, addressed them on the theme Where would you invest next? A Foresight view.
Mr Deshpande offered not so much specific advice as a rundown of Foresight’s broad strategy, which bears the imprint of Ravi Mehrotra, founder and executive chairman of the company. Mr Mehrotra was among those present at the September 24 2015 meeting, at the London office of Quantum Shipping Services.
The chief executive was clear that “strategy in shipping is getting quite complex, ” but he cited the formula advanced by Mr Mehrotra, which was that remaining in the same field “could be very destructive. All the time, one should be looking for diversification.”
Since its establishment in 1984 by Mr Mehrotra, Foresight has ventured into many of the main shipping and offshore sectors, and sold much of its fleet just ahead of the 2008 financial crash, retooling for a significant comeback in recent years.
“Cycles, downturns, are friends, ” said Mr Deshpande. “If we are not prepared for downturns, then what the hell are we doing there? Downturns are going to happen, we have to be prepared and decide where to go next. You do not need to be perfect in predicting these, but need to be prepared.”
As to ‘barriers to entry’ to the business he had a clear view. “We love barriers to entry, ” he said, and these were present in dry cargo, oil, and offshore.
A company had to have “passion, passion, passion” in its commitment to the industry. “If you love something, then no matter what happens, you are going to face the music and come out the winner.”
Opportunities came only in downturns. The longest downturn he had seen was from 1982-89, “and that is when we built up our fleet.”
He spoke of the fall in the price of crude oil to between $50 and $45 per barrel, along with forecasts that it might drop to $20. The whole market of tankers and product carriers was undergoing structural change.
Mr Deshpande presented a statistical table which set current typical charter rates again the figures required for a 12.5% internal rate of return, a percentage he justified with these words: “It is a risky business. That is why for each risk you have to have that additional return.”
Among the sectors highlighted was the dry cargo market, where there was a large order book. The current three year charter rate was $12, 750 per day, whereas the rate required for a 12.5% return was $24, 500.
The LNG market was “pretty bad, ” with lots of ships on order and not much employment available. The three-year period charter rate of $40, 000 daily was half of what was required for a 12.5% internal rate of return.
Of the 120 jack-up rigs on order, up to half would never be built, said Mr Deshpande. “In the last crash, the number of jack-up rig owners was reduced from 40 in 1989 to only three or four.” Foresight liked to position its rigs in areas where charterers would require them when things went bad. “We could be in an era of five or six years of no returns. It could be that a long-term strategy is to be strong, be prepared and then perhaps expand.”
Mr Deshpande went on: “Shipbuilding capacity is another matter of concern, and you know how much China is building.”
He cautioned against pinning too much faith on low interest rates, a double-edged sword which “helps whatever old loans you have. But when you do anything new, a 10-year-facility with a swap and the spread and insurance from China Assurance, costs can easily go up to 7.5% or 8.5%.”
Foresight has over the years ordered from both China and Japan, and much of the question session at the IMIF meeting was devoted to the role of shipyards in offering contracts on favourable terms.
Members of the audience wanted to know whether Chinese yards would become more pragmatic in response to losing money. Mr Deshpande said: “My feeling is that they will go on building, to keep the people employed and use all the steel.” China would rather be hurt in keeping the yards going than have people without work, and shipping was important especially in helping the country get the coal and iron ore it needed.
He praised the endeavour of Chinese yards: “Whether the market is bad or good, they do their job with a lot of enthusiasm. I think the Chinese government is pretty clever. They are not going to put people out of work, and that means that they will continue building ships.”
In this view, he was supported by Mr Mehrotra, who drew attention to the way Japan had built its industrial base on the premise that labour was very important in turning an under-developed economy into an efficient nation. Once Japan moved to the next stage of development, the labour question did not matter so much. “That is exactly the case in China, ” which was making use of its $3.6trn reserves to reach a middle level economy, he said. It needed this employment as it moved forward. “What they have done is very intelligent.”
On the diversification theme, Mr Deshpande gave a progress report on Foresight’s shoe shop business, a joint venture with Pavers England, and said it had “just about broken even. There are 50 shops and sales are increasing, and the business is ripe for an initial public offering, the way to get the best return.” This was likely in 2018. In Foresight’s restaurant business, expansion was being planned in China.
IMIF chairman Jim Davis (who is a non-executive director of Foresight) thanked the Foresight leaders for their review of company strategy and added: “It is a complicated industry. It is so global, there are economic factors but we must remember also the social factors. It is a mish-mash of desires, not a clear-cut situation. In the middle is the ordinary owner, saying: do I put more ships in or not?”