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JPMorgan making big profits by flipping cargo vessels

A freighter traverses the Port of Corpus Christi, Tex., in 2013. U.S. buyers leaped into the ship market this year, purchasing 51.

Eddie Seal/Bloomberg

JPMorgan Chase & Co. is flipping ships and making millions.

The U.S. investment bank has emerged as the biggest buyer of second-hand cargo freighters this year, taking advantage of bargains after a wave of bankruptcies in the shipping industry even as shipping rates rise.

JPMorgan bought 12 ships for $250-million (U.S.) according to VesselsValue Ltd. That works out to about $20-million each – a tenth of a cargo freighter's selling price several years ago when the shipping industry was much healthier.

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"They're snapping up other people's bankruptcies," said Claudia Norrgren, associate director of VesselsValue, which tracks the ship market.

After making no second-hand deals in 2016, U.S. buyers leaped into the market in 2017 to lead a list compiled by VesselsValue. Buyers, including Eagle Bulk Shipping Inc. and Rowan Companies PLC, spent a total of more than $600-million on 51 ships, most of them bulk commodity carriers, container ships or offshore drilling support vessels.

Buyers from Greece are a distant second place, spending $385-million on 20 ships. South Korean shipowners added 13 freighters for $228-million, according to VesselsValue.

JPMorgan's Global Maritime Investment Fund II raised $480-million to invest in shipping markets "experiencing substantial distress, with values trading near historical lows."

"In the shipping space, investors have the potential to capitalize on an historic opportunity to acquire quality assets at very favourable prices," the company said in June, declining to comment for this story.

Ms. Norrgren said JPMorgan's first sale of 2017 was a profitable one. JPMorgan paid $20.5-million for a bulk ship called True Frontier in January and sold it for almost $30-million seven months later.

The price of a five-year-old capesize ship, a massive freighter built to carry iron ore over the oceans, plunged to about $20-million at auction in 2016, down from $180-million in 2008. But used ship prices are rising this year, she said, as "savvy buyers" pick over the remains of bankrupt companies that include South Korea's Hanjin Shipping, once the owner of the True Frontier.

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"Freight rates and charter rates can swing wildly in just a few weeks. And if you have ships ready to take advantage of the spot market, you can make a lot of money," she said from London.

A closely watched measure of rates charged by bulk ships on the world's main routes, the Baltic Dry Index, has risen by 42 per cent this year. The index hit a 25-year low in early 2016 as a build-up of fleets that followed the market's peak coincided with a global economic slowdown. The oversupply of vessels and a dwindling number of commodity shipments spurred several years of bankruptcies and partnerships.

China is driving the growth in demand for shipping as it increases its purchases of iron ore from Brazil and coal from Australia, said Basil Karatzas of Karatzas Marine Advisors and Co. in New York.

Also stoking demand is the move toward global supply chains. For instance, Mexico, a big consumer of U.S. corn and wheat, has responded to tension with the United States and switched some of its buying to South America. The longer route is tying up ships for more days, Mr. Karatzas said.

Capesize vessels cost a shipper about $20,000 a day to charter, a sharp rise from $5,000 in early 2016. Still, the daily rate is barely enough to cover costs of fuel, crew and financing, Mr. Karatzas said. At the shipping market's peak in 2008, a shipowner could charge about $180,000 a day, he said.

"The market is good, but not great," he said.

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Mr. Karatzas said the size of the world's fleet of ships built to carry such dry bulk commodities as iron ore, grain and sugar is more balanced than in recent years. For shipowners, this means they are able to charge more.

He cautioned that new orders from shipowners, spurred by higher charter rates, could change this. "If people start getting crazy now, very easily in 18 months we could have an oversupplied market," he said, noting many have learned the hard way it's easier to buy ships than it is to operate them profitably.

There are about 10,000 dry bulk ships in service and another 714 to be delivered, Ms. Norrgren said. But about half the order book is for the large capesize vessels, which can sway prices. If charter rates keep rising, a new round of orders could easily upset the supply-demand balance.

"The trouble with ship owners is they get very excited," she said. "Nobody wants to be left behind."

Rob Carrick speaks with lawyer and author Ellen Bessner about how financial advisers and clients can work best together to avoid disagreement.
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