Where’s The Margin?

September 9, 2016

If context is everything, then recent news of a Neo-Panamax containership gashing her hull in the newly expanded Panama Canal certainly drew some unwanted attention. 

The incident, as it should, gives pause for reflection. At the time I was on a train of thought about the “dry bulk funk”, as TMT’s David Chinski calls it. A whole matrix of cause-and-effect can accumulate into a crippling situation very rapidly, whether physically or financially. Murphy’s Law probably originated with a Captain or Chief Engineer. (or maybe a VP Operations?)

 

All those stresses raise the pressure on the fulcrum that is a vessel’s operations center, officers and crew. The margin of safety, financial and otherwise, shrinks. Faced with these challenges, is it too much to contemplate building value in something?

 

Story-time: I was once aboard a freshly-unloaded bulk carrier. While departing the berth, her stern took an unplanned excursion off to port. A bouncing sensation and loud thumping noises suggested some nasty consequences in the propeller area. Inspection and a humbling low-speed trip to the loading port ensued, where the propeller had its mangled tips cut off. The next cargo discharge was followed by a dry-docking. The resultant shenanigans at far-off offices can only be imagined by us lesser mortals. One transatlantic round-trip later, for whatever reason, the ship was sold off. Maybe the last few straws had been enough.

 

Back to the train of thought. Once upon a time, there were a couple of Canadian mining companies that operated on a “margin of safety” principle. In essence, the output of the physical plants was about 85% of their full capability. With such over-capacity built in, there were stresses taken off the entire operation, from executives to plant equipment to local management and the miners themselves. Of special note was the employee safety performance, which was award-winning for the time. And yes, these were publicly-traded companies. 

 

Is this an out-dated idea in our brave new algorithm-driven world? Maybe; it’s likely too simplistic. Such a proposal today would no doubt be met with universal scorn. Outside a straight asset play, what finance guru would want to have 15% of an asset’s potential as a cushion? On the other hand, what should an investment prospector be looking to find? I hesitate to use the worn-out phrase “over-capacity”, especially these days. How would such a cushion be incorporated into a shipping company and made to work?

 

As seen in our minor ship-casualty examples above, it’s a safety zone. It’s that space between us and the car, ship or immovable object in the other lane. It’s the operating wiggle room in a company that isn’t solely financial (but can quickly become so).

 

The world we now live in is seeing the rapid compounding of computing power. The algorithm-driven systems mentioned above can’t just be utilized to find more convoluted trading methods. In shipping, that power has to go to work; not just in financing, but in operating, in maintaining and in optimizing all facets of that margin of safety. 
 

Posted on tonmiletrader.com , AUG. 5, 2016 

 

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