Pacific Basin Shipping Limited (2343) Earnings Call Transcript & Summary

Welcome to today's Pacific Basin 2021, Quarter 1 Trading Results Update Conference Call. I am pleased to present Chief Executive Officer, Mr. Mats Berglund; and Chief Financial Officer, Mr. Peter Schulz. [Operator Instructions] Mr. Berglund, please begin.

Thank you very much, and welcome, everyone, for joining us today. So my name is Mats Berglund. I'm the CEO of the company. And with me here is Peter Schulz available also to answer any questions you may have. Please turn to Slide 2. And this slide shows our core fleet TCE earnings with the Handysize earnings to the left and the Supramax earnings to the right. And you can see very clearly, that the positive trend continues since the low first half of 2020. Things have been steadily improving. In the first quarter, we made $10,950 per day on our Handysize ships, and we have 77% of our days in Q2 covered at $16,100 per day. On our Supramaxes, we made $14,630 per day in the first quarter. And we have 79% of our Supramax days for Q2 covered at $18,000 per day. And these levels in Q2 that we have covered 16 a day for Handy and 18 a day for Supra are fairly similar to today's spot market rates as well. So we are adding and continuing to fill up the second quarter at roughly these rates and we will show you the spot market developments on the next slide. And we also remind you of our P&L breakeven levels, the dotted line on these graphs. With the Handysize breakeven level at about $8,700 per day and the Supramax breakeven level of about $10,100 per day. We also remind you that we have about 90 core Handysize ships and about 40 core Supramax ships. And it's easy to do the math and you can very clearly see that we make very attractive returns, especially in the second quarter this year. I do want to highlight to you that the Atlantic rates were significantly stronger in the first quarter, stronger than the Pacific rates, and that benefits our Supramax segment in particular because we have a majority of the Supramaxes exposed to the Atlantic market. And you can see that our Supras, we made 14,631 in Q1 and on the Handy, this 10,950. So a fairly significant difference, benefiting the Supramax, and that is much to do with the strong Atlantic market in the first half. But very encouragingly, recently, that has now shifted and we now have a significantly stronger Pacific markets than Atlantic market, and that is already visible in the cover rates for Q2 we have a majority of our Handysize fleet position in the Pacific. And so the second quarter is benefiting our Handysizes, in particular, and you can see that the Handysize rates are catching up very nicely in the second quarter, and we're making 161 so far on the hand and '18 a day on the sub process so far. Slide 3 shows how the index spot rates have developed and how much higher they have been this year compared to prior years. And this is proof of a very tight supply and demand balance. We'll talk more about why on the next slide. Now just a reminder of the lag between when we fix the ship and when that voyage is performed. It's a 1- to 3-month lag between fixing a ship and executing the voyage. So the strong rate spot fixtures in February and March is mainly appearing in our second quarter TCE earnings. Hence, it is not meaningful when rates change so dramatically to compare actual Q1 earnings with the index rates in Q1. Now we are, and we said in the annual results call that we did expect rates to settle a bit from the extremely high levels and we continue to believe that they will settle and find support well above prior year levels. And we're seeing that now actually, rates are finding support definitely in the Pacific, but also in the Atlantic at close to these levels that we are showing here. Those are still very attractive levels. Turn to Slide 4, and we'll talk about why are the rates so strong this year? It is very clearly a demand-driven upturn, and we have split the market drivers here into 3 sections. First, the core, the main market drivers is one, China. Chinese demand for drybulk imports is very strong. And it was also strong through Chinese New Year this year, but it's also demand from non-Chinese destinations that explain the strong market. Global grain loadings, for example, in the first quarter were 15% indicatively higher than the same period last year. And we have seen record U.S. soybean exports in the fourth quarter that continued well into 2021 and and as well as a very significant corn export from the U.S. to China. And this is a new and very encouraging trend. China used to be self-sufficient on corn. But in recent 4 or 5 months, they've started to take a lot of corn into China, and that's a new and very positive supportive trend in our market. The third main reason is minor bulk is bouncing back very nicely after the pandemic year, and its construction material, in particular, that's coming back strong. Minor but loadings were up indicatively 11% compared to the first quarter last year. And the fourth reason is that coal is also back. Coal is not increasing, but it's back to prior year levels. Indian coal, in particular, is back, and we are about 20% higher now than we were during last year. So cold back to prior year levels as well due to economic recovery. Other than these main and core drivers, there's a couple of temporary market drivers that we highlight here. One, we got some help from the cold cold winter, the cold Northern Hemisphere winter, which drove coal we have the trade friction, we still have the trade friction between Australia and China. And that tied up some capesize ships with Australian coal of the Chinese coast, causing some inefficiencies in the fleet the third factor, which may actually not be temporary, at least not so far, has the very high container rates. We think bulker rates are high, but container rates are even higher and it's triggering cargoes that can shift to bulk to make that shift. So we have breakout cargoes like banked cargoes and steel and logs and so on shifting to drybulk ships, which would otherwise have moved in containers. And the fourth reason we mentioned is a little bit of COVID inefficiencies in the fleet. It's still a very tricky to shift crews, and we have to wait. We have to quarantine, we have to deviate, and that is causing a little bit of inefficiency in the fleet, which is helping on the supply/demand balance. Not big, but it has some helping effects. Going forward, we do want to highlight that this is the time of year when the South American grain season kicks in, and there's no indications and that will not be a good Brazilian export season. It was a little bit late, started in Brazil. The export, but March was strong and indications are for a good South America and East Coast export season also this year. And it's encouraging to see GDP forecast revised up. It's encouraging to see the economic stimulus being rolled out, including infrastructure projects, and it's encouraging to see the rollout of vaccines, although, of course, COVID uncertainty remains. And the third going forward factor that we mentioned is that the supply side is much more benign than in prior years. And we are expecting reduced net fleet growth and especially so in our segments. Slide five, we're just showing this demand a bit more in detail. Now this -- what we're showing here is indicated data, right, and not 100% certain, but it's based on GPS signals, AIS signals, et cetera. And it's fairly reliable. And is indicating total drybulk, global drybulk volumes up roughly 8%. The first quarter '21 over the first quarter 2020. And by cargo commodity grains is up 15% and minor boxes, up 11%. Iron ore is up 9%, very strong growth percentages while coal, as mentioned, is not growing, but it's back up to prior year levels, as you can see on the down left graph here. And up about 20% since last summer. Turning to Slide 6 on the graph here, we show Clarkson's demand and supply forecasts for the full years of both 2021 and 2022. With demand growing faster than supply and especially so in our segments, where the fleet is expected to grow with below 2% per year. While demand for minor boxes around double the fleet growth at 4% to 5%. I would actually not be surprised to see it actually turn out higher because it's very unusual that minor bulk growth less than GDP growth. And with GDP growth forecast now at 6%. I would not be surprised to see [indiscernible] in fact, growing a bit faster than what Clarkson is forecasting here. On Slide 7, we want to emphasize how much we have grown our owned fleet. Over the years from 34 ships in 2012 to 117 owned ships now. And in particular, we have grown our Supramax portion. And we have done that consciously because the larger vessel sizes, Supramaxes, tends to have more upside in strong markets, and that's where we are now, and it gives us great leverage towards the better market that we are now experiencing. And we have continued to grow our Supra and Ultra fleet in the last 2 quarters. And we -- as already announced, we bought 5 Ultras, were 4 from Scorpio, and those were 5-year-old ships, all with brand-new scrubbers installed for 16.7 million each in November last year, and they're delivering to us now. 2 are already delivered and 2 are delivering later this month. And you can see how the price of such ships have developed nicely up in the graph to the left here with some 20%, 30% in only the last 3, 4 months. We also bought 1 more ultra early this year. That's also been announced earlier, but we did also buy 1 large candy sites 38,000 tonnes or some 5, 6 weeks ago that we have not previously mentioned. And that's to replace the smaller or the -- one of the smaller older Handys that we sold. So we continue to gradually sell the older 28,000 tonnes as they approach 20 years old, and we are replacing with 38,000 tonners. On Slide 8, we just show this remarkable recovery. And again, this is the market now we are back to 2010 levels in the last quarter. It is only a quarter yet, but this is the market that we have been working so hard over so many years to sit at 4 and our current core fleet of some 90 Handysizes and 40 Supramaxes is now making very attractive returns. And wrapping up on Slide 9, we do believe that we have a healthy demand outlook in front of us. We're seeing vaccine and stimulus rollouts, including infrastructure projects, typically very beneficial for the drybulk market. We're seeing GDP rate forecast being adjusted up. Clarks on half their mine about forecast at 4.8% for 2021, could be more. We are having a favorable supply situation. The fleet growth is much more benign than it has been. The drybulk order book at 5.6% overall is the lowest in living memory. It's only 3.5% for Handysize. And the Handy and Supramax fleet combined is expected to grow 1.8% this year and lower -- significantly lower than that next year. The risk is, of course, that we do get another wave of new build ordering driven by the strong rates. But so far, we are not seeing that. There are some new build orders, but not many. And the order book is actually continuing to slowly shrink rather than increase. We're watching that, obviously, carefully. And the reason for a people holding back on newbuilding orders, including ourselves, is, of course, that the environmental regulations will change the technology and it seems extremely strange to order a new ship today with a fuel oil engine, and it just makes more sense to wait for real, new technology to come and that will come. It will take some time. Also, we do want to mention that what is coming is IMO regulations that will dictate, not speed limits but power limitations, and that will force lower speed. So that is the only practical way for the existing fleet to meet the reducing CO2 targets that is gradually going to come in from 2023 and onwards, those regulations are currently being being formed by IMO, but it will definitely lead to lower speeds, which is also good to keep the supply limited, good for the market and good for the environment. And the third column here, we do want to emphasize again that we have great leverage towards this a better market. We have a larger owned fleet, significantly larger. We have an increasing Supramax proportion and the Supramax rate tends to go up higher in higher market situations. We have a competitive cost structure that we worked extremely hard with over many years. And we have a strong balance sheet. And the sensitivity and the math is quite easy. Plus $1,000 per day means $35 million to $40 million on our bottom line. And I do encourage you to do the math. I also encourage you to dial in again July 29 when we will have our 6 months first half report. I think that would be an exciting report, and we will also then be introducing you to our new CEO, Martin Fruergaard, he comes here to Hong Kong planned for June. He will start here July 1, and he takes over from me on August 1. And on July 29 interim call, we also look forward to discuss -- restarting our dividend again. So with that, I open up for questions. Thank you.

[Operator Instructions] And our first question comes from James Teo with Bloomberg Intelligence.

2 questions from me. One is on rates. And if we look at the Handysize index, I mean, it was over 3,000, I think, back in 2007, 2008. So what's the likelihood that the rates this cycle, albeit it's a very early stage of the cycle, could we ever go back to those highs again? And then what kind of conditions would we need to get back there because we are, as I understand, a record low in terms of order book and all such -- all these very favorable conditions, right? So would this be enough, you think, to bring us back to those days? This is my first question. And second question is on tonne-mileage, in terms of maybe shifting supply/demand or import/export nations, maybe Australia, China relations causing some of this shift. Do we expect this to affect Pac basin and maybe positively in terms of tonne-mileage or demand increase? Or how should we see it in terms of tonne-mileage?

Yes. Thank you. The first question, will we see Handysize rates as high as we did in 2007, 2008? It's certainly nothing that we are planning for. Things were just exceptionally high those days. But we are seeing rates back to the 2010 levels, right? In 2010, we averaged $16,000 a day. Our index rates was around $16,000 per day. And as you can see, we are at these levels now for Handysize. 2007, 2008, rates were $30,000 per day, and it's just astronomically high, and I don't think we should expect to come back to those levels. We'll take it if we get it. But the difference then was that the world fleet was operating at absolutely full speed, and there was 0 spare capacity left. What we have now is still a little bit of spare capacity or elasticity, if you will, in the fleet by way of -- we're not that absolute maximum speed. So that's why we think it's realistic to assume little bit lower than these astronomically high numbers that we saw in 2007, 2008. Your second question on kind of fleet utilization and inefficiency caused by the Australia, China trades that, and is that affecting Pacific Basin not directly that coal moving from Australia to China who got stuck was primarily Capesize ships and not affecting us maybe a little bit positively indirectly because, again, it does tie up capacity when these things happen and congestion is tying up ships and that's tightening the supply-demand balance a little bit, but not a big factor for us. We do not expect -- we do not see anything on the horizon now. Again, there's always an uncertainty with geopolitical things going on. But we are through, it seems like the the negative impact. We had a significant negative impact of the U.S.-China trade spat on on soybean, right, with the tariffs that came in that reduced the soybean trade from U.S. to China significantly in 2019. And starting in late '20, we're back up to really solid levels. And as mentioned, corn has also started to move. And the swine fever herd is back. It seems like demand is very strong from China on grain. So I hope that answers your question.

Our next question comes from Mike Sell with Alquity.

Congratulations on a great set of numbers. Could you just give us a little bit more detail on why we're seeing the volatility? You've given a very good explanation about why things have improved. But why did they overshoot? And why did they come back? I know it's volatile, but a little bit more color there would be useful.

Yes. I think it's just the volatility is just proof of a tight supply-demand balance, right? It's been a long wait, right? It's been a long period of of too much supply, and we're finally -- with the combination of demand, it's primarily demand driven, we should say, right? But again, the supply side is also coming down. And what drove rates up in the fourth quarter and early this year was the Atlantic market, as mentioned, it was demand from the Atlantic, primarily driven by very strong U.S. exports of grain to China and also corn and then again, elsewhere, pent-up demand after the pandemic, other countries also coming back, filling their stocks again, grain demand very, very strong. Construction material bouncing back, as we mentioned. Why is it coming off a little bit? Well, again, we did expect it to come off. It was just maybe just a little bit overheated for a while. But again, it's finding a floor now. And again, at significantly higher levels than we've had in earlier years. So I think it's just proof of a stronger demand/supply balance.

And just a follow-up, it sounds like from what you've said that we could go back to those sort of peak rates of a few weeks ago, given the very strong demand/supply as we move through the balance of the year. Whilst you wouldn't predict that, is that something that is possible? Or you think that's a one and done, it's not going to happen?

No. I think it's certainly possible, and we should expect maybe a bit more volatility, and that is a result of a tighter supply demand balance. Again, the U.S. Gulf market has tapered off now. That's seasonal, so it's kind of natural that it comes off a bit, and we probably have to wait a little bit before we see the South American grain season kind of pushing at its peak, that probably added high in May or June, right? A little bit early to that, so maybe a little bit of a period of of -- a little bit of a weight before we have a potential new permits again. But again, rates are finding support at current levels.

Our next question comes from Parash Jain of HSBC.

This is Parash Jain. I'm not sure if the operator got the name wrong or if somebody else is on the line. But let me know if I can go ahead because I'm also in the queue.

Go ahead, Parash.

Okay, Matt. And it seems like even the market is conspiring to give you a send off at the peak. I have 3 questions. First, on the demand side, can you talk about what does Biden's stimulus mean to the market? I understand that the Chinese stimulus has a direct correlation with probably the amount of commodities will be consumed. But with U.S., is it more like repair and maintenance? And therefore, the impact may not be pronounced in the drybulk market? Second is, I mean, in the past, you used to show us a slide where you used to show that look at the return and even on a 5-year old vessel, the return are dismiss it, so we will not see a surge in new build. Now by that math, it looks like the returns are more than sufficient to not only cover the cost of capital, but to make a decent return. Apart from the regulatory aspect, do you think is there anything else which is holding the ship owners from ordering this? And my last question is on 2023, the EEX side, which you touched upon on limiting the speed of the vessels through the power. I understand that Handysize, Handymax, even drybulk in general, typically sales at like 13, 14 knots. Even do these vessels -- speed will also be impacted because of this regulation? And if so, isn't that an excuse for shipowners to order a vessel now to get it delivered in 2023 to replace their existing fleet?

Thanks, Parash. First question on demand affected by the Biden's stimulus I think, overall, it's very positive. It's difficult to be extremely specific on what it will mean. But again, infrastructure projects is very good for for drybulk overall. It drives steel. It drives cement, it drives all kinds of minor bulk construction material. Logs is used to pour cement in, right, to build cement forms and so on. It drives a lot of the minor bulk commodities, and we are very happy to ship the material to the U.S. We do carry a lot of it already, some by way of contract and some by way of spot cargoes. Chinese steel exports have increased significantly in recent months. Again, we carry cement, we carry gypsum, we carry clinker, slag but exactly specifically what that will mean is just difficult to quantify but obviously, positive. The second question on return on vessels. I think the slide you're referring to is #22. It's in the appendix there. It shows the second-hand values compared to the newbuilding prices. And it's important to track that, right, that we have previously pointed to the wide gap between these 2 and when a secondhand price goes up to the price of a new building, you've got to be worried that people start to order newbuildings. But newbuilding prices are also going up at the moment, as you can see on that Slide 22 so there's still a gap. But again, the absolutely biggest reason for why people are not ordering new ships today is the technology question, right? I mean we see the rate -- these new rules coming, we see an enormous push to develop real new technology ships that is going to take 10 years, right, or 8 to 10 years. Before that is commercially viable in our segments and so on. But it's not going to take 20 or 25 years. And you order -- the depreciation time is normally 25 years for a new ship, right? So why not buy a 10-year-old ship for half the price, which you can comfortably depreciate until 2030? Or at these rates, you'll have it depreciated in 2 years' time. But rather than to order a new ship that's delivering 2 years from now into a market that you don't know what it will be, and it will have a fuel oil engine. You're not going to get 25 years out of that ship, right? I just don't understand people going to the shipyards ordering new ships with fuel oil engines today when you can buy second-hand ships. So it is still much more attractive to buy secondhand ships and the return, if you do a proper calculation today, you've got to use a much shorter depreciation time on a new building than you're used to. And again, that just makes the secondhand investment alternative, much more attractive. And the 2023 EEXI and EEOI, more importantly, the operating index that will affect all ships and new buildings as well, although a little bit -- they will have a little bit of an advantage, but it's not is not that dramatic. What will drive out these fuel oil engine ships is more longer-term when there will be other few other fuels available, other nonfossil fuels available. But all ships will have to gradually speed down or slow down as a result of the EEOI rules, there's still being -- still work in progress, so to speak. So it's difficult to pinpoint exactly. But to give you a feel, yes, dry bulk ships are -- have a design speed of 14 knots. But dry bulk ships have not gone 14 knots since 2010 and 2007 and 2008. And the current speed is 11.5%. For the world's fleet, 11.2%, 11.5%. Our ships goes a bit quicker. But it's going to push ships down to -- gradually down to 9 and 10 knots towards the end of the century, right? Decade -- sorry, decade. So it kicks in, as it looks now, '23 or '24, maybe the first year is it marketed as '23 or '24. It's '23, '24 and then you're going to have to follow this trajectory of lowering your CO2 emissions. And again, the only practical way to do that is to gradually slow down to show that reducing trajectory. And we think that will have a positive impact on the fee. I don't think that will drive new bill orders. And that doesn't change the my argument on your second question, right? I know you want to...

Yes. I mean, we study very carefully the fuel performance of the very, very latest designs that the shipyards are trying to to market, and they will be caught out by these trajectories as well. And as Mats said before, even if you order the latest, latest Japanese fuel-efficient Phase III design today, you cannot get 25 years out of that chip. With the regulations, right? And in order to pay the high prices, these are expensive ships. You need those long depreciation time. So the calculations are still second-hand ships make more sense. Better return, lower residual risk. And if it was the case that you could sort of cloud of this rules and regulations by ordering these brand-new ships. I think you see a lot of people doing that now. It would make a lot of sense. But the proof is in the pudding. You're not seeing a lot of orders of these ships today because everyone can make the same calculations.

Our next question comes from Andrew Lee of Jefferies.

I've just got a few questions. The first one I have is the second half covered rate, right, is low and you explained it by the backhaul voyages. Is this a deliberate ploy, say, by the customers who think that rates could go down, so not wind lock in contracts? Or is this a ploy that the company wants to have a higher exposure, right, just because of the high rates or is this within normal seasonality? That's the first question. Second question is on the second-hand vessel prices. As you mentioned earlier, the prices have actually increased. So does that mean that the returns from buying the secondhand ship today is not as attractive? And so I'm trying to get a sense in terms of, are you still going to be considering buying secondhand vessels going forward? Third question is the underperformance for the first quarter explained, as you said, by the lag. So do you think that will be recovered and you get flat or outperformance by the first half? And then finally, would you say you're more optimistic now than when you were during the 20 -- well, FY '20 results conference call?

Thanks, Andrew. The second half cover rates are at around 9, 3 a day for some 25% of our days, and that's obviously low in the context of today's spot rates. But if you look at where rates were in the first half of '20 and second half '20 they're not that low, right? But it's obviously contracts taken at -- during prior years when rates were lower. But they're also looking a bit artificially low because of the fact that they are backhaul heavy. So when we combine those cargo contracts for the backhaul leg, with higher-paying front holes, it tends to result in higher actual earnings and also on the Supra side there, there's no scrubber benefit included in those valuations because we don't know if we're going to perform contract with a scrubber ship or not. So we're conservatively not including the the scrubber benefit in the TCE estimate. So again, they will end up being higher. I can tell you that we are obviously not interested whatsoever to take contracts at these levels today. So yes, there is an element of keeping the spot exposure large because we do fundamentally believe that we're in a much better supply demand situation, and we are more optimistic about rates going forward. We have come from an extremely low rate period, right? So -- and the cargo customers are still a little bit hesitate to book cargoes at today is much higher levels, right? So they're kind of hoping for rates to go down, but often, that doesn't happen, and they need to get used to these higher rate levels for a while before they prepare to book contracts, long-term contracts at these higher levels. I should tell you, right, that the cargo cover that we had, for example, going into the second quarter was even lower than this cargo cover that we have for the second half. And we still end up averaging 16 and 18 a day for Handy and Supra, respectively. So those are the comments on the second half cover levels. The second question you're asking, secondhand values have gone up and will you continue to buy? Are the returns still feel high enough? So rates are still attractive on second-hand ships even at these levels that we're seeing now. I mean, today's spot levels, it's extremely attractive, but you've got to assume a bit more conservative longer-term freight rates. But we are still inspecting ships. We mentioned we bought 1 Handysize 5, 6 weeks ago. It hasn't delivered yet, but we committed it 5, 6 weeks ago. I think that's some proof that we're still willing to open our wallets. We have capacity to buy more, but we will be very disciplined, and we will continue to only buy the right ships at the right prices. So maybe expect a little bit of a slowdown in the pace of buying, but it depends on what becomes available at what prices. Competition is very stiff today for secondhand ships. Lots of people are inspecting the ships. And we were very fortunate to be able to secure ships in November last year from Scorpio and also the other Ultra that we bought at very attractive prices. Regarding the underperformance versus index in Q1. Again, it is just comparing apples and bananas, right. So it's a bit wrong to call it underperformance, but mathematically, yes, it is. But when rates shoot up, when index rates shoot up as strongly as they did in the first quarter, and we are counting those high index rates in the first quarter index, and then we're comparing them with the first quarter earnings. Those earnings are a result of fixtures done 45 days earlier on average, right? It really becomes apples and bananas. So do we expect that to come back? Yes, we do, but it depends on how the market develops. We tend to outperform in weaker markets, and that's when our outperformance expands and in stronger markets, our rate -- our outperformance is lower there's a second reason for the difference, right? One is the lag. The second reason is that we do have these cargo contracts that are taken during periods when rates were significantly lower. So if rates just continue to go up. And if they go up so much as they did, right? It's tough to beat the index when you have 25% of your days covered at significantly lower rates from before. But we have give us a bit of time, you need to compare over longer rate periods, we tend to outperform also in strong markets. But that takes a period of some ups and downs. So far, we have only had up, so to speak, right? So then we're kind of always lagging or having a bit of a handicap from contract rates. But I know a lot of colleague shipowners who have all their ships on time charter outs for 3 years. They have 0 exposure to this. We have 80% exposure to these stronger rates, right? So we are in a very fortunate position. Are we more optimistic now than we were at the annual results call, I would say that we're equally optimistic I think we were optimistic then as well. It's not that long time ago. But again, it's very encouraging to see definitely not more bearish, if anything, more optimistic now. And that is supported by the cargo data that we see coming out of our sources not only China but also elsewhere, right? And this GDP forecast adjusted upwards, the green signals in most places for our market right now. Peter, do you want to add to that?

No. I mean, we have another 6 weeks of evidence that the market is finally balanced and height. Even if it's come off a little bit. But as Mats said before, it's finding a floor. And we're still not reading in trade wins every week that people are ordering ships let Triton center and that they are keeping the discipline. So yes, I mean, I think on balance, things are evolving the way we expected at our full year announcement.

Okay. And then final question on dividends. If you're unable to identify that much -- that many more secondhand vessels, right? Is there a level of cash that you need? And then also I'm trying to get a sense is, would you raise your dividend payout ratio above 50% if you hit a certain number -- certain level of cash?

If we have no -- I mean, first of all, the key thing for us now is a good market. We have to obviously delever and pay back our loans and these things, right? We still have capacity to buy good ships we can find them just as Mats said. But should the market continue up and ship values continue, maybe we will find it more difficult to find these really good opportunities. And should the market continue to develop, and we start to have a significant excess cash position then what can we do with the cash, right? And obviously, distribution is the most obvious thing to do. At the moment, you should expect us to follow our dividend policy, which is at least 50% of net profits. But should the market continue to develop very positively, then, of course, we would consider amending our dividend policy to distribute more. If we feel we are deleveraging, if we feel there are no massive opportunity to visits, et cetera, et cetera. We will keep the open mind on this. Absolutely.

Your next question comes from Steve Wong of BlackRock.

Hello. I got 2 questions. So on the container side, you mentioned that there's some tell the effect due to the fact that the container shipping is also super crowded at the moment. So some of the demand goes to bulk. Is it possible to quantify that a little bit, like just roughly speaking, how many percent of demand boost? Do you think it would come from that? That's my first question.

Yes. Very difficult to quantify. There's been some broker reports of mentioning a couple of percent. But I doubt much. It's very difficult to quantify actually. But it is -- we are identifying it as a positive, but exactly how much is very difficult is breakout type of commodities right cement some logs on steel, aluminum, sometimes goes, but it's just hard to quantify. Maybe we can find a more specific number after doing more work on it after a couple of months and so on, but it's too early to say. The good news is that container rates continue to go, right? Similar size ships to ours are making 40,000 container ship price while we are making 20 or 16. So maybe that trend will only continue and increase, which is good for us.

Yes. Interesting. Second question is regarding IMO. So you mentioned that the EOI route will dictate the speed of the ships. So they are forced to slow down. That's my understanding. Can you also share a little bit more about like the timing of the implementation, like when the ships need to be slowed down as a result.

Yes. It's individual for each vessel design, so to speak. And it's simplified and it's not -- again, I repeat, this is not finalized yet. It will be clarified at the next IMO meeting, I think it's in June. So gradually coming out estate. Yes. And it was -- it's planned to kick in January '23. And it is to coincide with this trajectory of reducing CO2 emissions with 40% by 2030 from 2008 levels. We have a graph in our sustainability report, which kind of shows this trajectory. And that the industry is already kind of well underway there, and that is because of speed reduction to start with. But we need to follow that trajectory to eventually 2030 and that is in our annual report, is it as well, Page 6. You can get a feel for it, right? So it's in the appendix on Slide 17, sorry. So it's kind of -- it's going to map every ship on this graph, and you're going to have to continue towards that target arrow of 2030. And the only practical way to achieve it is to slow down. But so it won't be a speed limit that ships can only go 12 knots that year and then 11.5% to next year. It will be by -- more likely by power limitations. And again, a CO2 emissions, it will force the ships. It will be a system of rating ships: A, B, C, D and E, et cetera. And if you're a certain this is below this trajectory, you will be rated as ad or an E, et cetera, and then you have to start to take action to get back up again. On top of this trajectory. This is kind of a simplified explanation. It's not fully done yet, but that's the way it looks to be designed. It's a rating, and it will be assessed each year. And you have to follow this trajectory towards reduced the CO2 reduction of 40% by 2030 compared to 2008.

Understand. If I got time to ask a follow-up question regarding the new ships. So you mentioned that the incentive to buy new ships is not very high at the moment. Trying to summarize the reason. First of all, second-hand ships seems to be cheaper, i.e., more attractive so -- and then on the other hand, 2 years later, you don't know where the rates are. So it's not very competent to make the order yet. But regarding the technology or IMO, how does it impact the incentive to buy ships at the moment? Is it the technology is not ready yet? Or is it more expensive?

Yes, the technology is not ready yet. We simply can't order real new technology ships because there are none. You read about 1 or 2 new technology ships, and they are kind of showcase prototypes by either ferry companies or container lines, which operate on 6 lines so they are experimenting with prototypes, and that's great. And we are all for that, and we are contributing in work groups with the industry to develop new fuels but it's really ships with new engines, new fuels that we are waiting for. So it just makes a lot more sense than to order a ship with a fuel oil engine. Fuels that are being looked at is methanol, ammonia, hydrogen LNG is what you can order today, you can order a dual fuel engine ships that can run both on LNG and conventional fuel oil. But LNG also emits CO2. It doesn't emit sulfur, but it does emit CO2, right? So we don't think LNG engines is a long-term solution. It's just kind of a bridge solution. It certainly sounds a lot better kind of, right? But it's a fossil fuel, and you hardly reduce CO2 with an LNG engine. So it's some of these other fuels, but there's a lot of work to be done. You've got to produce these fuels in a green way, right? So theoretically, you would use solar or wind to produce electricity, from electricity, you would make hydrogen but it's very difficult to have hydrogen on your ship because you have to cool it to 253 degrees below Celsius. It's highly explosive it's more than 4x less energy-efficient and regular fuel oil. So very complicated to use that as the onboard fuel. But you can go from hydrogen, you can synthesize into ammonia or methanol and ammonia or methanol is slightly easier to accommodate on board, but it's still a lot less energy-efficient than fuel oil. And it takes much larger bunker tanks, et cetera, right? Then ammonia, you also have to to pressurize and cool down, et cetera. So there's a lot of work to be done, and you have to produce the bunkering infrastructure worldwide before we can go out and order a ship like this, right? So even if we could order a ship which had an ammonia engine, there is no ammonia to fill up your tank with on our tankers and bulkers are the 2 large merchant chips types, and they operate in what we call the tramp trade. You never know where you go next and you go up the rivers, you go to every country in the world, and you need to have the fuel available, and there's no such fuel available now. But between 2 coastal cities in Norway, you can maybe run a ship like this as an experiment. And that's all positive and all good. And we all support that. But it's difficult for us in the Tramp trading Handysize segment to do something on this now other than to track the development very closely and to do everything we can on improving our existing ships. And we're doing so much. There's a very good graph in our report and the sustainability report on Page 17 that image of a ship and all the text around it with things we're doing from propeller, fins and newest ducts and LED lighting and shaft generators and all kinds of things that we're doing, right? That's what we can do now and we're working very hard on that. But the new fuel and the new engine ships will be practically we think available 6, 7, 8, 9 years from now, and we can't buy them today even if we wanted to. So better to save your money and make as much money as we can on these existing ships. And we are -- we prefer to buy a 10-year-old ship, which we can comfortably repay and make a very good return on before we get to 2030. Rather than to order a new one, right? Because the new ship will not be kicked out by these A, B, C, D ratings, but it will be kicked out 15 years from now, maybe by rules saying, yes, you can't have any if you launch ships more period. This is only moving in 1 direction, right? So much better to wait. That's our thinking and most people's thinking.

Yes. So the key is really the tightening of the emissions that is clear. Like 10 years down the road, how it looks like? So the technology of these ships are not ready to significantly reduce those CO2 emission. So it's rather safer to wait and buy the secondhand ships instead.

Correct.

As there are no further questions, we will now begin closing comments. Please go ahead, Mr. Berglund.

No. Just to thank you again for your interest in our company and for being with us today. And again, we look forward to speak to you. In any time, don't hesitate to come back to us. But if not before, we will be back on July 29 with our interim report. Thank you very much.

Thank you. This concludes our conference call. Thank you all for attending. Goodbye.