Deep Dive Into d'Amico International Shipping & the Product Tanker Sector

Okay, thank you. And hello to everybody. D'Amico started in 1936. My grandfather was a lumber trader, and when my father and his brothers came in the business, they thought that was a good idea instead of chartering a ship to load lumber, to own ships. So we started with sailing ships and steamships and so on. Then the war came, we lost everything. The Marshall Plan came in, and we started again with the Liberty ships. This is just to give you a very quick history of my family. Today we are a fleet of 80 ships, of which 42 are product carriers. These are 30 MRs, six Randys, and six LR1s as far as the tankers, whereas they're all dry cargo. The listed company is only covering the tanker side. We focus before on the Handys, we started with the Handys like everybody in the clean industry in the 60s, and we kept going with the Handys when we moved on to MRs in the 80s. Today we run the MRs and the LR1. The core of the fleet, the tanker fleet, is in the MR because it was the workhorse of the industry. All the traders used to fix MRs because the stem, the dimension of the stems of clean cargos were fitted for the MR, and it is still the most flexible ship. Now, if we look in the future, probably we are going to move on with higher segments, and the MRs are going to be limited more and on a regional basis for distribution. And maybe the LR1s and LR2s are going to get most of the long haul, long haul cargos, also because we do expect that the distance between the refineries and the consuming markets are going to be bigger for a number of reasons. Also because the more competitive refineries are all been built either in the East or in the US Gulf, and Europe being the biggest diesel market, and Europe is full of old refineries which I am afraid we are going to close. I think we are going to have a bigger ton-mile effect, and this will bring to an increase of size of ships, just for a matter of economy of scale, provided of course you have the capability, you're sure of tankage and terminals. So this is the first flash of what we are and what we are thinking of.

I would say that we are a mix of everything. In the sense that certainly we always have a very conservative approach. We built up in the years a very good relationship with our charters. I would say the majority of them are top oil companies or top traders. We tend to cover ourselves at least between 50 and 60 percent of the fleet, I would say more 60 than 50. And it's exactly where we are today, thank God. We of course charter with chartering on long term, with chartering on short term. And the lease of the bare boats and this type of thing are more of a financial approach, so it's more financially driven than pure industrial thinking. We try to be not speculators, let's put it this way. We look long term, and we believe a lot in relationship. And it has been paying off also in very difficult times. The thing did work.

But we, I would say, we are a little, a number of ships we are declining because we were, as far as tankers, we were with a fleet of over 50 ships, and a number also of them chartering on long term and medium term. We certainly through the various spikes but also the various crises, we have been delivering a lot of ships, and we have been also reducing, if you want, we have been selling a number of ships. But in the meantime, we also did a 22 new building program, which has been the last ship has been delivered in September 2019, last year, which was worth more than 700 million dollars. And we renewed the fleet. I think we had to do also due to the fact that older ships were coming in, and the older ships were losing ground on our consumption basis, and I'm afraid they will lose even more going ahead due to the various environmental matters and regulations that are going to come on us in the future, do we like it or not.

We are, I would say, certainly in a very defensive position now. We are not certainly looking to new building programs. We are preserving cash. The idea is to strengthen our balance sheet and of course deleverage as much as we can the company, because this is what everybody should be doing today, or anything else. We are looking also to opportunities if they are there, but they must be really there. Also because I think for the first time in modern time in the modern era in shipping, we are in front of quite big dilemmas, and this is of course keeping the new building order book quite down. We think that we don't really know what the ship of the future is. Of course we are still far away from 2050, which is the last date of the IMO program, and it is a very important date. But already today, you are at the risk to build a ship which is out of time maybe after two years of life. So it's better to be extremely careful what to do. The alternative to that is by second hand, if you want, from a number point of view it makes even more sense, but we prefer not doing that. So on top of it, I would say we are very much driven by our charters on our new building programs, and we certainly going to need even more in these difficult times and have the support of the charters on what ship to do, what ship to build, and principally what sort of technology to use.

Look, I mean, when we listed the company, our advisor was very much of the idea of listing it in Italy because of our name and because we are very well known where we are in my country. And I have to say I'm very happy to be here. I hear a lot of noises but there is no liquidity, I didn't see this lack of liquidity in Milan. I mean, Italy is a huge saving country, and we have extremely strong retail market. So I didn't feel any need to go to the US. On top of that, you have a dimension problem. If you are not big enough, they don't even look to you. So I would be going to the US only to look for problems, and frankly speaking, I have enough here.

Not necessarily. I mean, many, many investors are very happy with the dimension we are, because we control very well the company, we control very well our relationship with our charters, we control very well our relationship with our crew and so on and so forth. So the operation makes a lot of sense for us to be of a dimension of what it is. I don't think big is beautiful, not necessarily. And if you look at our G&A costs and you make analysis of our G&A costs against even our peers, this is mathematically proven. So I don't feel that thing.

If I was on an ordering mode, I would certainly look to the dual fuels because on short term, it is the only thing that you can look at. But you must also have the support of a charter who is prepared to pay the differential between a pure diesel ship and a dual fuel ship, because it's still strong. I mean, on an MR, it can be easily 8 million dollars. So it's fantastic. I mean, when you read about the things that can be done and whatever, and even declarations of intent by many big companies, it's a thing. But when you sit down and you try to put together a contract, it's a completely different story, and nobody's prepared to pay for it. So if there is the opportunity to make something which makes sense, of course we are here, but it's not that easy.

Well, 10 years is a short term thing. Even at 2030, we have a target, I'm a requirement coming in because we have to cut down emissions by 40% against 2008 if I'm not wrong. So this is something, but it's something which is achievable with the systems that we have today, without flying on hydrogen or ammonia. For 2050, I don't know how much is going to be my problem, but certainly a difficult thing. Where I see, I think the next 10 years we will still be on fuel, and of course low sulfur, probably we are going to sit also even on diesel. Today diesel is in some port like Singapore by a few dollars, but is even cheaper than very low sulfur fuel. So this is due to a specific market contingency. There is a lot of middle distillate around and they don't know what to do with it. But in 10 years, we're going to be there with some LNG powered ships and dual fuel ships, but I don't see a big change from here to there. The change is going to happen afterwards, and that is going to be a big question mark.

Look, the market has been, let's forget a second about the spike that we had on the first half because it was even unhealthy. We are paying back all the money there, so I wouldn't even take any consideration. The market is being hit by this pandemic, which is a unique situation. So on very short term, I am very cautious, very prudent. I think the fourth quarter of this year is not going to be this exceptional thing. We must forget historical numbers because it's not going to be like all the other fourth quarters of the past. Certainly demand is going to be a little bit stronger than the third one, but I frankly see a lot of softness around. I see traders, big traders, reputable traders and oil companies with ships due with a charter finishing in this period of a year, re-delivering ships, which is not a very good sign because normally, especially traders who trade the ship, they normally keep the ship for the fourth quarter, when they don't redeliver it. So the view of the oil operators are quite negative. But that is very short term. I think this pessimism is very much COVID driven. I think that the moment that a vaccine will be out, probably even only the news that the vaccine is out, is going to change a lot of things, maybe including our market. Certainly once people are trusting more of a system and trusting the fact that they can travel again, because one element which is destroying the market today is the lack of jet fuel, I mean not the lack of jet fuel, lack of flights. And this is really creating a huge problem. It's very good for the environment because we do not have all these planes going around, but I can tell you it is quite a strong thing. So when the system will be back on its feet, I think the market will certainly improve and will go the other way. And then at that moment, the fundamentals that you were talking about before, a low new building program, no new building ordering, and the fact that ships certainly are going to be scrapped in this period because I don't see any reason why you should keep a 20 or 23 or 24 year old ship, I'm talking 24 year old ships, they are still around. Then the fundamentals will kick in, and I think the market will recover, and will recover very well, and I think we'll recover for quite a while.

I think I will be around for the next 10 or 15 years, no problem. And I think oil will still be the majority of the energy mix, do we like it or not. Did we peak in 2019? I have no idea. I heard the story of oil peaking so many times, but I don't know. Probably it did, probably it is going to happen. I think I will be there for quite a while. Of course we cannot forget, and this is something I just jump to the tanker association which is something that we are talking in the tanker a lot, we must realize that oil is not there forever. And here again, probably for my generation, we are going to have enough oil to go ahead, but for the next one they certainly have to think of something different. And gas is just a bridge to this something different. Gas is not going to be the solution. You have an emission problem also via LNG anyhow.

I mean, it could. I think the crude market today, the products are more or less 35% of the volume of oil moved on water. So if you take 100 as the total oil moved on water, 35 are product and 65 is crude. So crude is still very much the king in town. But the crude fleet is by far bigger, so there is a balance in this. What is certainly going to happen, because it is in front of us, the producing countries or countries very close to the producing ones are building an incredible big refining capacity and capability. If you think of what India has been doing and of course what the Middle East has been doing, they are looking for the added value out of a barrel. And this will certainly increase the ship size in the product segment and the demand for product carriers, because in the meantime, continents like Europe will be obsolete in refining terms. I think a lot of refineries in Europe will be closing down. And I think COVID is accelerating this process. This process was already in the cards, but COVID is accelerating it. And to close a refinery in Europe is not very easy due to trade unions problems and so forth, and COVID is also giving good reason to the companies to say, look, there's no way I can keep refining here, so I have to close the thing. So I think it's a process that will happen, and you are going to have peaks where product can outperform the crude system. Is this going to be a structural thing? I don't know, to be frank.

You see, what used to be that the product ships used to stay in the clean market up to 15 years, and when they were moving to dirty, more than crude, I mean, moving to fuel. Right now, fuel is another commodity on the way out because the new generation of refineries they don't produce fuel at all. The fuel market is being saved by not too much by the tanker because the high sulfur is quite limited today and will be more and more limited. But today we are using high sulfur fuel as a by-product for the modern refinery, especially in the United States, and we can re-crack the commodity and get diesel and gasoline out of it. But how long this is going to happen, I don't know. So what is going to disappear is fuel itself, and then you don't need any more ships for fuel. Where probably your crude carrier can go into vegetable oils and so on, but even there, you're entering in the food chain, so I don't know how long they are going to accept that. So old is going to be more and more complicated going ahead. Now I think we'll shorten the life of the product carrier. The average age of a product carrier ship is 24 years, yeah, so it's ridiculous. A crude carrier goes to 21, 22 maximum.

Intertanko is protecting as far as it can the interest of all the tanker owners who are of course members. And in doing the interest of the members, we do also the interest of non-members because we belong to the same industry. We are trying, and I think trying with quite a success because it's a fantastic association, not for me but for its history and for the people who have been working in it, where they are giving a lot of added value in the rules and regulations which are coming in. We wouldn't say we are lobbying because it's determined, I don't like, but I mean, we are certainly giving the opinion, and we are here giving an opinion which has some specific gravity by all the institutions, starting from the IMO, which is our home. And I would say the chairman has to do the job of being a guy who doesn't tell too many stupidities all together, and anyhow helping the machinery to move as smoothly as they can. We are many members, so you know many members, they bring a lot of value to the industry, but you have also to remember that there are many people around, so you have to make happy everybody.

What I feel really is that shipping is a global industry, and we are going everywhere, in all continents, in all countries, in all economic zones, and so on and so forth. For us, it is paramount, it is absolutely imperative that IMO keeps the position it has today and is not weakened by regional actions. I am referring a little bit to the emission trading rules that Europe wants to impose. And I'm very worried about that because, let's forget the complexity of the thing, but it's very important that we have one body to follow. We cannot start following many ones. Already the United States took a position with OPA 90 at the time, and it's been an issue. If also Europe takes its position in different things, it will be very difficult for us to trade our ships everywhere because we cannot follow everybody on everything. So it's important we keep one body, and I think IMO is our body more than anybody else.

I think it's not too much of European shipowners, it's to European trade. And it will end up in an increase of cost for the European trade, and will end up also in something that we have to think about every time that we are coming to Europe, we have to change system. Or IMO has to accept this system against other ones, but it's not the most efficient one. Every time that I try to learn it, it is complicated, because we must start being sort of traders of credits and debits, which is really going to be a headache.

Look, the two main problems have been certainly the crew, and the second one has been the vetting, because we have to have our ships approved. To have our ships approved, we need inspections. To do inspections was not that easy; it was close to impossible. So we end up with the fantastic cooperation of the oil companies, we end up with a remote system which is permitting today to keep the system working. Without that, we are dead today. Going back to the crew, the crew is a very serious thing. Unfortunately, governments do not first of all, we are always looking to the COVID problem in their backyard, and they are not looking at the global thing. Even on the crew problem, even the United Nations came out with a suggestion if not a recommendation. The point is that governments do not understand that seafarers are, top people, necessary or essential workers. Without them, the whole chain on energy, even on food, will be at risk. All the distribution chain. So we cannot just forget them. It's not number one, it's a human thing. You cannot keep people on board of a ship for more than a year telling them, 'Be patient, because one day you're going to go home.' It's ridiculous. Number one, he wants to go home. And number two, he is covering the job of somebody else who is idle at home, and you go to work. So we need a fast track in all the system, in countries through visas, immigration, procedures for testing on COVID. And I would like even add one more: when the vaccine will be out, one, two, three, four, many are going to be, you're not going to use it on everybody in the world all at once. It's going to come in by stages. Certainly the medical people are going to be the first one, and then the older generation, and so on and so forth. I would like that the seafarers are in the fast track in this case, because they have to be immune more before anybody else, because otherwise the system is really in a problem.

I would say my priority today would be still the leverage. One, be a stronger company, which doesn't mean a bigger company in terms of fleet. I would certainly look at dividends for the good of my shareholders, starting from myself. And I will be looking certainly at new building. You cannot not look at new building, because if you don't build at a certain point, you are out of the game. You cannot live on your secondhand ships if you want to deliver a good service to the company the way we are trying to do, and I think we are succeeding in doing so. Certainly new build will be a certain point in the list, but we have to be extremely careful what sort of technology we are going to use at that point.