We've covered the impact of the recent dry bulk market movements on the operating sector in our recent article, but there are some market participants whose model ensures money is made in any market by walking away from commitments.
We should stress at the outset that these operators form a vanishingly-small percentage of a sector that provides significant benefits to ship and cargo owners alike. However, the impact of their actions can be significant and they ultimately thrive due to the unique 'acceptances' that prevail in the sector (low disclosure, limited time, and significant pressure).
Typical company set up
Take, as a practical example, a cluster of operating companies that operate from one of the world's largest shipping hubs. We've been following this cluster for almost 20 years, and their modus operandi has changed little during that time:
- Register in a low disclosure jurisdiction (Marshall Islands appears to be the venue of choice)
- Route your business through a well known, if not necessarily global, broking shop (whose principals may or may not be 'in on the joke')
- Put together an appealing website and a fairly believable brokers' background, including plenty of useful information including fixture lists and names of suppliers, banks, and P&I providers
- Take ships on period terms
- Ask the owners to pay for bunkers (or purchase in a different name)
- Walk away when the market moves against them (or even when it doesn't)
- Leave both ship and cargo owners to try and recover losses from a 'brass plate'
- Repeat under new name (occasionally even 'cuckooing' by buying an established business with a better name)
This cluster currently includes approximately 20 companies and grows at around one company a year. We are so used to the ebb and flow of this group that almost any company that pops up with at least some of the characteristics above rings alarm bells. Needless to say, our reports make the risks very clear. However, the success of these companies in repeating their model is largely due to the lack of time ship and cargo owners have to scratch beneath the surface of an outwardly decent-looking operator. A lot of the information provided by these companies does actually 'check out'. They answer their phone (always a bonus), they are actually entered with a P&I club that you recognise, and the long stream of references provides glowing feedback on the performance of the operator.
Telltale signs to look out for
Spending a little more time on checks can also reveal less positive detail, for example:
- The company doesn't exist in the jurisdiction suggested (sometimes this is difficult to tell, but occasionally the backgrounds are sloppy enough to suggest that an 'Inc' is registered in a jurisdiction that only uses 'Ltd')
- The company DOES exist in the jurisdiction suggested, but from a date several months (or years) after the first fixtures provided on your useful list
- The referees provided include some of the companies used by this cluster in the past, some even sharing phone numbers/personnel with your current operator
- Less obviously connected referees are unable to provide any more than verbatim repeat of the wording in your fixture list
- The ships fixed in the past were scrapped at the time the fixture were on charter to a completely different operator, or were nowhere near the suggested port calls made
Seems obvious, right? But this cluster has made a living on the inability of many market participants to find the time to dig deeper on their checks, or to believe that the secure above-market charter they have just landed may not be as solid as it seems. The kicker is the utter lack of security provided by these businesses, meaning any attempt at recovery or mitigating losses is adding a costly insult to injury. Public shaming (a tactic favoured in recent years) only really works if your counterparty has a sense of shame.
The importance of reading the small print
You'll get tired of hearing this from us one day, but we can't emphasise enough the need to allow time to dig around the edges of companies like these and read the small print of what they provide. Time is obviously money, and very tight subjects make the task almost impossible, but the downsides (and direct/indirect costs) of dealing with operators like these often vastly outweigh the potential profits on the deal.
We are always happy to advise on cases like this, hopefully before you fix, rather than advising you on what's not available for you to recover after the event. Give us a call today.
