Hong Kong-based dry bulk specialist, Pacific Basin had tested the waters in a variety of ways before arriving at the optimum formula for running one of the largest and most successful minor bulk operators in the world.
The company began its life as a joint venture between the founding management team of Chris Buttery and Paul Over and Belgian shipowner CMB. The management team subsequently bought out CMB.
Following the buyout the company had a flirtation with the NASDAQ in 1994 until two years later Malaysian interests moved in to buy up the company’s assets. But Chris Buttery and Paul Over retained the name of Pacific Basin and relaunched the company in 1998.
Second listing leads to original team bowing out
In 2004 the management decided to take a second punt on the equities market, this time on the Hong Kong Stock Exchange. It was a decision that reaped rich rewards ($US72m was raised), which helped boost the fleet beyond 19 owned vessels (more including newbuilding, second-hand commitments and options), seven chartered and 16 managed ships. Whether by luck or judgement by the management team, the timing of the listing could not have been better. From 2005 to 2008 the shipping market went stratospheric. Perhaps aware of the correction and lean times to come (although who could have guessed how long it would last?) Chris Buttery and Paul Over sold out their shares and retired from their executive positions in the company.
During the period of shifting tides in ownership Pacific Basin was quietly evolving in ways that would have lasting and positive results to this day. Most importantly, in 2000 the company bought a ship manager, giving Pacific Basin complete control of the shipping operation. As Pacific Basin’s present chief executive, Mats Berglund explains, they had also formulated the optimum modus operandi.
A winning combination comes together
“There are two distinct business models for an operation such as ours. One is to time charter out your ships. This effectively makes you a tonnage provider. You manage the ships technically yourself, and that is important. But commercially speaking you do not employ the ships day to day. We do. We deal with the shippers directly. And we take cargo contracts. That – combined with our fleet size – is the fundamental reason behind our ability to outperform the market,” he says.
“It is primarily about scale and the ability to operate vessels that are laden for a high percentage of their time at sea,” says Mr Berglund.
“We operate handysize and supramax vessels because of the versatility of these crane-assisted ships. Such mid-sized dry bulk vessels can carry so many different cargos,” he adds.
Every single owned handysize ship in the Pacific Basin fleet is logs-fitted. With this additional attribute the vessels can carry any of the minor cargos. The company is very particular about the ships that it buys and charters in. Primarily Japanese built, they are considered the best performers for fuel consumption and reliability, and best designed for the company’s trades.
“If you have the scale, if you have a good fleet and you have good people around the world, you can find and develop the necessary cargo combinations,” says Mr Berglund.
“Our vessels spend more than 90% of their days at sea in a laden state. If you have capesize ships you would be happy to achieve 50% laden days at sea because there are no backhauls. That is why we can outperform the market,” he adds.
With a comprehensive global office network and with its fleet of interchangeable ships, Pacific Basin has built an ultra-efficient logistical system.
“It’s cargo in, cargo out,” he says.
“It is a matter of finding cargoes and developing these combinations, building working relationships, and controlling the valuable cargos, either by way of cargo contracts or through the relationships we have with charterers. But you cannot build such a business model with a small fleet. You must have the scale and the focus,” adds Mr Berglund.
As of today, Pacific Basin has about 260 ships on the water and the company is the largest owner/operator of handysize vessels in the world. But Mr Berglund complains that the market is still extraordinarily fragmented with Pacific Basin controlling only 6% of the market. “There is still room for growth,” he insists.
Meanwhile, the company has created an effective way of exploiting a large number of vessels outside its ownership in order to gain that necessary scale. Of the 260 ships mentioned, Pacific Basin owns 106 vessels with an additional 30 vessels long term chartered (together known as the core fleet). It then takes short-term positions around that core system to optimize operations, as Mr Berglund explains.
“If we have a cargo in a port and our closest core ship is five days away but there is a third party ship just two days away we look to charter in that ship on a short term arrangement and use our own ship for third party cargo. That way we generate a very high utilisation of our own fleet and make a little margin on the operating activity,” he says.
Did Pacific Basin make a rare miscalculation?
Today the average age of Pacific Basin’s owned fleet is eight years. One reason for that may be that the company sold a number of ships in 2007 and 2008 before pushing for growth once again in 2010.
“The thinking of the company at that time was that the price of dry bulk vessels was ridiculously high and the stellar freight rates unsustainable. It was partly why the company diversified at that time,” says Mr Berglund.
It was during 2007-2009 that Pacific Basin’s harsher critics might suggest that the company made one of its rare missteps. With the capital generated from the sale of vessels and operating cash flows, the company diversified into terminals, ro-ro ships, towage business and even equity investment in unconventional gas and Chinese real estate. In the event, only the gas investment and the part of the towage business that served the Gorgon offshore gas project off Western Australia could be considered a success. Mr Berglund recalls:
“With hindsight we probably should have paid the money back to the shareholders, but at least the company did not continue to invest in dry bulk vessels at that overheated time in the dry bulk cycle. The thinking was to invest in sectors that did not correlate with the dry bulk market,” he adds.
By 2014, to all intents and purposes, Pacific Basin decided to return exclusively to its core business of dry bulk.
Mr Berglund sums up the company’s current position:
Extolling the virtues of a listed shipping operation
“We are a listed company and so essentially we manage other people’s money. Investors want focus. They want to know what they are going to get. They don’t buy Pacific Basin to get ro-ros. And they don’t buy Pacific Basin to get real estate in China. Those diversifications were a distraction for our shareholders and, on a day to day basis, for our management and staff.
“As a public company, our shareholders want to manage their own diversification. They don’t want us to do that for them,” he adds.
While many shipowners in Asia remain largely family-owned, Pacific Basin’s decision to go public is another key condition of its success, says Mr Berglund.
“As far as we are concerned the greater the transparency and the higher the levels of corporate governance the better it is for us. We want our investors to have full confidence and deep insight into what we do. It gives us more access to capital,” he adds.
The final piece in Pacific Basin’s perfect jigsaw is its location. Mr Berglund sums it up thus:
“We have our base here in [Hong Kong]. We have our history here and we have most of our staff here supported by teams in 11 regional offices around the world. Hong Kong is great value for money when it comes to back office functions. Our staff members are deeply loyal and highly ethical.
“More than half our seafarers are Chinese and recruited and trained through our Dalian manning office. All our owned ships are Hong Kong-registered/flagged. In fact we are a big contributor to the Hong Kong Registry and we are happy with the services we get from it. Together with the Hong Kong Shipowners Association, the Shipping Register contributes to this being a good place to be based and Hong Kong’s nature and city life makes this one of the most exciting places in the world,” Mr Berglund concludes.
The above story features in the recently published Hong Kong Maritime Hub: Tales from the frontline, which has been released to commemorate this year’s Hong Kong Maritime Week. To read the whole publication go to: http://www.hongkongmaritimehub.com/hong-kong-maritime-hub-tales-frontline/