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Hamish Norton, President of Star Bulk Carriers (NASDAQ:SBLK), Co-CFOs Christos Begleris and Simos Spyrou, and SBLK Head of Research Constantinos Simantiras joined J Mintzmyer's Value Investor's Edge Live on Nov. 19, 2020, to discuss the dry bulk markets and forward prospects and capital allocation priorities into 2021. Star Bulk Carriers is the largest US-listed dry bulk company with 116 vessels on the water.
This interview and discussion is relevant for anyone with dry bulk investments or interest in the overall sector, including Diana Shipping (DSX), Eagle Bulk (EGLE), Genco Shipping (GNK), Golden Ocean (GOGL), Navios Maritime (NM), Navios Maritime Partners (NMM), Safe Bulkers (SB), Scorpio Bulkers (SALT), and Seanergy Maritime (SHIP).
Topics Covered
- (<1:05) Intro/Disclosures
- (1:05) Current state of the market? Encouraging vs. challenging spots?
- (4:30) Any noticeable impact from VALE exports yet? Offset vs. Australia?
- (7:30) FFAs are pricing in forward weakness, thoughts on that?
- (11:00) Plans to add any charter cover or remaining heavily spot exposed?
- (12:30) Capital allocation priorities into 2021? Is liquidity sufficient now?
- (16:15) Impact to cost interest costs with rates falling this year?
- (18:45) How are the scrubbers performing? Current fuel spreads?
- (24:15) What is the daily cost savings for scrubbers today?
- (27:20) Long-term leverage target/vision?
- (29:20) Commentary on dividends, sticking with same payout formula?
- (31:00) Biggest concerns and challenges in the market?
- (35:15) Any visibility on propulsion tech? Impact of climate regulations?
- (43:00) Any impact on agricultural flows due to containership backhaul?
- (45:00) What differentiates SBLK from peers? Why invest here?
Full Interview Transcript Below
J Mintzmyer: Good morning, everybody. Good afternoon if you're joining us from Europe. We’re hosting an iteration of Value Investor's Edge's live. We’re recording on the morning of 19 November at about 9:00 A.M. Eastern Time. Today we’re hosting Star Bulk Carriers, stock symbol SBLK, to discuss the overall dry bulk markets, as well as their capital allocation priorities and market expectations into 2021 and beyond. 2020 was a challenging year, a lot defense with the COVID situation, but we’re now hopefully turning the corner and we’re excited to see what they have to say. Today we’re hosting Hamish Norton, the President of the company; as well as Christos Begleris and Simos Spyrou, the Co-CFOs, as well as Constantinos Simantiras, Head of Research. Welcome to the full Star Bulk team. We’re glad to have you on the line today. Thanks.
Hamish Norton: Thanks.
Christos Begleris: Hi, J.
Simos Spyrou: Hi, J.
JM: Excellent. So, disclosures before we begin. Nothing on the call today constitutes official company guidance or investment recommendations in any form. I do have long exposure to Star Bulk Carriers. This is being recorded on the Morning of 19 November, so if you are listening at a later date, just make sure you look for those latest disclosures. Again, welcome, let’s just jump right into it. So, let’s talk about the current state of the dry bulk market. 2020 was of course a challenging year, different than most. What is the current sort of balance of the market? And what sort of areas are encouraging and bright spots of the market versus areas that are still challenging and being held back?
HN: This is probably a perfect question for Constantinos Simantiras, our Head of Research.
Constantinos Simantiras: Perfect. Hi, J. Thank you for having us on the call. So, as you said, 2020 has been a challenging year. Fortunately, during the last quarter, we've seen that the cargos that have over-performed, have been iron ore and grains, they have actually done much better than expected. China has been leading the recovery. They have been producing record high steel and importing record high volumes of iron ore, bauxite and grains, soybeans as well. However, the rest of the world is not doing great. We are seeing a gradual recovery, but it's slow. At the same time, COVID-19 led to various supply disruptions on the fleet due to crude changes. And this has led to various regional shortages of vessels with spikes that benefited the Capesize market, June, July, and October, when rates increased up to 35,000 per day. However, the cargo that has been underperforming the most and still lagging is coal. And without coal the market is difficult to remain at sustainably high levels. The reason behind it has been obviously the reduction of consumption due to COVID-19. China has also had like a record high hydro power season that trimmed their requirements for coal. And then there's also the tension between the Chinese and the Australians. That has also affected the imports of Chinese coal of international coal and the ongoing disruption in other sources like Columbia where there are strikes, and this has led to depressed levels of coal trade. Overall, you know there is hope, however, because the rates have recovered to levels that much – rates have done much better than what we expected back in the beginning of the pandemic and we are gradually seeing, like, an interesting supply and demand balance developing for the next couple of years.
JM: Yes, it's been a certainly an interesting transition throughout 2020. I think, you know, March and April kind of played out, as, you know, the market feared as we expected, but there's a very nice, you know, pop in rates in the early summer. And then, you know, we thought maybe we'd see something this winter with this sort of the normal seasonality, but that doesn't seem to have showed up much at all. But at the same time, we're seeing optimistic news with VALE, you know, reaffirming very high export targets, growth expected in 2021, 2022 for iron ore. Have you noticed any of that Vale export in the market yet? It doesn't seem to be driving up rates this fall this winter. What about, how does that offset because you mentioned the China, Australia tensions, how did those two factors kind of play in especially as we lean into 2021?
CS: OK. So, VALE has been recovering in volumes. We have seen between May and September, mid-October, their volumes have gone up significantly. Actually, exports from Brazil during the third quarter were up 11%, compared to last year, obviously, last year was affected from the Brumadinho dam disaster, but we are seeing a gradual recovery. During the last month, we did see lower export volumes, but this was a combination of plan maintenance and less VLOC arrivals in Brazil. So, they they didn't have the capacity to export that much. However, the last couple of weeks, we are seeing a rebound. And recently, you know, Vale has mentioned that their target for 2022 is at 400 million pounds, versus less than 320 this year. This is actually very positive for ton miles. And as you said, with the ongoing Australia Chinese tension, we should see a gradual substitution of Chinese imports from Australia with Brazil and this is very positive for ton-miles generation.
Then, talking about the Aussie China tensions, these also affects other types of cargoes like coal, some barley grains, and bauxite, which will also have a beneficial effect ton miles. However, during this weekend, we saw a new free trade agreement being signed with 15 Pacific nations, led by China, and within this nation is also Australia. So this, you know, in a way contradicts the tension and we believe that this will, you know, in a way ease the overall tension between the two countries?
JM: Yeah, I noticed that as well. You know, I'm studying international relations, of course. So, it was extra interesting. But, you know, the RCEP deal that was just signed. And, you know, that's been something China's been working on for basically a decade. And, you know, to see all the headlines about Australia tensions, but then to see them included in that major trade deal was, like, you mentioned, conflicting signals, and it suggests that, you know, there's a lot of politics and posturing going on, but hopefully, we'll see a normalization to the market. And of course, it's in China's best interest, you know, to diversify their supplies, right, for coal and other cargoes?
CS: Correct. Correct. Absolutely correct.
JM: So, yeah, I think I think that's a pretty good rundown of the current market. I do want to pivot a little bit on that and talk about the FFAs. Right, that's something that, I know the volumes are a little bit lower, but that's something investors look at sometimes they look, you know, to 2021 calendar levels or the next quarter, you know, to see what sort of the derivatives or freight derivatives are showing. Right now, they're very low, they're quite weak. What do you think is driving that? And do you think those FFAs are reasonable, are fairly accurate or do you think there's sort of a dislocation there?
CS: I think that we are definitely seeing a lower volumes traded on, especially on the forward contracts. There is a lot; actually the levels have been extremely weak, even during the spikes. I mean, at some point the Capesize market reached 35,000, and the forward calendar year never moved above the 13,000. In the past, we've seen the calendar years moving higher. I think one of the reasons is that there is a gradual exit for various private equity and less market participants and so the liquidity is drying up on those. And then definitely there is a shift away from shipping due to being not as green during the last year. During the last year, there's a lot of focus on that topic. And, and obviously, the market has been really weak, especially during the first half. There's a lot of uncertainty with COVID.
CB: Yeah, and if I may add from my side, this is Christos, basically, the forward market is pricing, a weak Q1 and Q2, because of the seasonal weakness that we have seen in the past years that coincides with the Chinese New Year holidays, as well as maintenance of lines in large mines, but I think that what the market fails to price is basically a strong rebound during the second half of 2021, when also COVID, hopefully should have been resolved, and economies should be coming back. And it's basically the second half of 2021 that we believe is seriously being discounted right now from the forward curves.
JM: Yeah, there certainly seems to be a difference between, you know, the level of expectations and optimism and some of the stuff we're seeing, of course, like with Vale, and maybe with some cold normalization, versus the FFAs. And I think, you know, you brought up an excellent point. You know, I'm sure most in the call today realized this, obviously, your company realizes this, but maybe for those listening to the recording later, dry bulk rates always, almost always, I think, like nine out of the last 10 years, they tend to peak around November, December. And then they sort of crash into, you know, maybe like February or early March with that Chinese New Year. And so, it's funny, because you always see, you know, articles on certain blogs, you know, stuff like Zero Hedge is a popular one in the United States. They say like global trade is crashing every February because like the Baltic Dry index goes down. And they say that like, you know, global trade is surging in like the fall because it's seasonal. But anyways, with that said, it sounds like you're more optimistic than the FFA curve. Last year, you secured a lot of charter coverage early on in the year. And that turned out to be a very smart decision. Are you doing any of that now? Or are you basically just going like 100% spot, because of your more optimism?
CS: Right now, we have very little coverage for mainly the first half of the year, although we are trying to build this up, especially for the smaller vessels. So, right now we have covered for approximately 15% of our fleet for the first quarter at quite reasonable levels. And wherever we find the opportunities, we're trying for the physical market to increase this. We haven't done through the FFAs, just because as you said before, J the forward curve is extremely low, and therefore didn't make sense to look at these very low levels, which are even at a discount to what you get on the physical market for the equivalent period.
JM: Yeah, that certainly makes sense that you want to sort of match those with your expectations. And, you know, at a level that's somewhat attractive, it probably doesn't make sense to hedge at these very low levels. That that provides a decent segue to talk about capital allocation priorities in 2021. During 2020, you played a lot of defense, you raised a lot of liquidity, you took the balance sheet, liquidity at least from a position that in my opinion was challenging maybe in Q1 to a position today, which seems quite strong, at least in terms of liquidity. Is that sufficient for pretty much any market as we head into 2021? And can you speak a little bit more about your capital allocation priorities for next year?
HN: Yeah, well, I guess, you know, I'll comment and maybe then pass to the CFOs. Yeah, I mean, basically, we think we've got enough cash for pretty much any market. And, you know, that was our goal early in the year, you know, in, you know, February, March the world looked pretty terrifying. And so, we resolved to try to lever up some of our less leveraged chips in order to put cash on the balance sheet, and that succeeded quite well. And in fact, in the course of refinancing our lower leverage ships, we actually reduced the interest expense and stretched out the amortization.
So, in fact, our total debt amortization not is actually lower than it was before, even though we've increased the total debt on the balance sheet, because of the stretching out of the amortization times. And, you know, at the moment with our share price well below net asset value, we're not inclined to use cash to buy vessels on, but you know, I wouldn't be surprised if you know, with next year, being a strong year, we expect it to be a strong year, we would possibly put ourselves in a position to pay a dividend, let's hope. If it's a better market, that would be the hope. And Christos, Simos, I don't know, if you want to expand on that.
CB: On the liquidity front, I mean, just to put some numbers into perspective, in a very, very weak quarter, like Q2 of this year, I mean, our own all-in breakeven rate is at 11,000 per day. And that also pays down our debt at a rate of about 200 million per year. So, in a very low quarter like Q2 this year, when we generated rates close to 10,000, we essentially lost about 11 million in that single quarter. Therefore, a cash balance of 225 million today gives us plenty of room in order for us to have loss making quarters, like Q2 this year, a quarter when essentially the global economy is sold.
JM: Yeah, it's been a pretty impressive transition in terms of you know, as Hamish noted, you know, Q1 was – the market was a lot scarier and the balance sheet, maybe not scary, but definitely challenging. And it's really encouraging that you're able to, you know, increase the level of nominal debt, but your actual, you know, debt amortization levels went down. And then can you talk a little bit about the actual cash interest cost as well, I imagine that was similar or actually maybe went down as well with the lower rates? How did that impact it?
CB: Yeah, we've seen interest costs being significantly reduced; (indiscernible) our interest cost during the third quarter was at 15 million, down from a figure of 18 million during the second quarter. And this is projected to basically go down to a level of 13.5 million, as of next year, as basically all the refinancing (sneak in). And that's a very large decrease. During the first quarter of this year, we had an interest expense of 20 million. So, from 20 million we go down to 13.5 next year. This is down 33%. And that's a result of both having more competitive financing on the margin, as far as their margin interest costs are concerned, but also a factor, obviously off LIBOR being significantly lower today than what it was about a year ago. And to that front, we have actually fixed, we think there is rate swaps, the base rate exposure on more than 1 billion of debt, at an average rate of 45 basis points for the next four years.
SS: 20 million to 13.5 million that Chris has mentioned was on a quarterly basis. So, it's 6.5 million reduction on a quarterly basis from the first quarter of 2020 to the first quarter of 2021.
JM: Yeah, it's a remarkable savings and not only is it you know, savings for now, as you mentioned, you've locked it in for four years. So, very, very happy to see that. And of course, you know, 45 basis points for four years is just, it's unbelievable, compared to anything we've seen before. So, I mean, obviously LIBOR can go zero or whatever, but I mean, at this point, we're (splitting hairs). So, we appreciate you locking that in. One little caveat on terms of earnings potential while we're still on that topic. What about the VLSO fuel spreads because you invested heavily in scrubbers, you have 114 of them, but fuel spreads have been quite poor in 2020 because of the collapse in jet fuel demand and other things. So, do you think those spreads are going to increase back into 2021 and normalize a little bit?
HN: Well, OK, so let me give some context for that and maybe hand over to Constantinos Simantiras. You know, basically, the spread between high sulfur and low sulfur fuel, which is a profit generator for us because we have scrubbers that allow us to burn the high sulfur fuel, which had historically been quite a bit cheaper than the low sulfur fuel everybody without a scrubber is required to burn you know, that spread is basically generated by a shortage of capacity in the refining industry to remove sulfur from fuel. And unfortunately, the other low sulfur fuels that refineries produce have been in reduced demand. So road diesel, train diesel have been reduced to some extent. And jet fuel, of course, has been reduced to a tremendous extent with the result that there is no shortage at the moment of capacity in the refining industry to remove sulfur. And so the price difference between high and low sulfur fuel, as you noted, has collapsed.
Now, we're still getting actually a pretty decent return on our scrubber investment. You know, the payback period is, you know, four or five years at today's spread on, and you know, four or five years payback on a shipping investment is not bad. In fact, it's quite good. But it's nothing like what the payback looked like, you know in December, for example of 2019, which was well under a year for the scrubber investment. So, you know, I would expect that when air travel resumes after the vaccines get distributed? You know, we'll see a boom, but you know, Constantinos what would you have to (add).
CS: I think, yeah, I think Hamish has made an excellent summary. What we are seeing the last couple of months is that cracks of diesel are slowly increasing, which is supportive of a wider spread. The reason is that the winter demand is expected to support slightly the diesel prices. And at the same time, what has been extremely strong has been the price of HSFO. As a lot of HSFO is being absorbed by power plants in Saudi Arabia, for example, and at the same time, we are currently at a seasonal high period for consumption of HSFO because the larger vessels that have scrubbers and consumer HSFO are currently operating at higher speeds. So, the daily consumption has gone up.
Now looking forward, we expect that during the winter, we will see support for these prices. And as we enter the first half of 2021, we will see some downward pressures on HSFO prices and the combination should be positive for the spread. Having said that, we do need the return – we will need the return of jet fuel and the end of the pandemic. So, we that have more gasoline demand and an overall recovery of crude oil prices in order to see higher spreads. So, we are optimistic, and the latest signs are with the vaccines and the treatment of COVID. As the world gets out of this situation, this will also be positive for our earnings.
JM: Yeah, certainly we hope so. And, you know the spreads that we've been seeing today or in the $50 to $60 a ton range and as Hamish noted.
HN: It's a little more than that now. It's crept up to, you know, 70, 80.
JM: OK, certainly, yeah, I appreciate you correcting me. We just use, you know, shipping bunker or whatever the latest quote is and look at the global for global 2020. But, yeah, so it's closer to 70 to 80 at this point, which is a significant improvement then, from what was quoted literally just weeks ago, right? It was closer to 50 and 60. So, point being, you mentioned, you know, in January, it was – spread was like $250, which was unbelievable, right? Totally unsustainable.
HN: Well, well, well, well, it would have been sustainable. It would have been sustainable, if there had been no pandemic for you. It would have been sustainable for a while.
JM: Well yeah, with no COVID-19 and with oil, I guess the oil prices remaining elevated, right? Because the spread is probably a function of more of a percentage to, right, then not just a nominal, you know, dollar amount, right?
HN: Yeah. I mean, it's sensitive to oil prices. It's very sensitive to sulfur removal capacity in refineries.
JM: Yeah. I mean, I suppose kind of on this point, you mentioned payback periods and yeah, five years is not terrible. We like one year better than five? Of course who doesn’t, but I mean, at this point, it's already been expensed right. It's a sunk cost. So, you know, whether or not the payback is one year or 10 years, I think what matters to investors today is like the daily cash profit spread between (indiscernible) because I mean, the money that was spent is here nor there. So, what is kind of, say at $70 or $80 a ton, what is kind of the dollar per day differential across your fleet?
HN: Well, you know, a cape that burns 40 tons a day is going to have a differential, very nearly, you know, call it 40 times 70. You know, which is basically $2,800 a day. So, it's more than pocket change. It's actually quite significant.
CS: And maybe a more illustrative way to show this is basically in a mediocre to weak market, our fleet today has an annual consumption of about 800,000 tons. And at 800,000 tons add a spread of around 80, which is the forward 2021 spread. Right now, for VLSFO and HSFO is basically an income of 64 million. And then if you basically assume because you would have to assume that we basically managed to get the spread at 90% to 95% of these consumption, then this basically reduces to high 50s to around 58 million per year.
JM: Yeah, so, you know, you mentioned high 50s. And then I think, if you take, you know, that scrubber premium that you can expect to make based on that forward curve, which is just the average of what folks expect. And you also add in those interest rate savings that you have year-over-year. I mean, we're talking about $1 a share in total, right, differential more or less?
CS: Yeah, yeah, that should be right.
JM: Yeah, I mean, it's significant. I mean, that's just an earnings, you know, EPS potential, basically year-over-year. So that's pretty noticeable, and maybe not, I guess the scrubbers started in early 2020. So maybe not year-over-year from like, Q1 to Q1, but maybe, you know, five or six quarters of shift, basically dollar and earnings per share potential. So, I think that's a pretty interesting, let's talk about, we're kind of circling back a little bit now. But I think a question I probably should have asked earlier. Let's talk about your overall leverage. Obviously, you've stabilized the balance sheet, you've got liquidity where it needs to be. But what is your longer-term target leverage? And what are some of your liquidity targets for Starbuck, what can investors look for? I know, before the pandemic, you had talked about reducing debt getting as low as possible on that curve, is that still the target?
HN: Yeah, our, you know, our strategic target is to reduce net leverage, you know, as low as we can get it on, because basically, in the dry bulk business we have fantastic operating leverage. We have more than enough operating leverage to drive really good returns in a good market. We don't need the financial leverage, frankly, to do that. And since we don't owe income taxes because the income is earned on the high seas, we don't get a tax deduction for the interest we pay on our debt. So, it doesn't give us that benefit. But, you know, in terms of the progression of reducing leverage, I'll maybe pass over to the CFOs.
CB: I mean, right now on a net leverage basis, we are in the mid-50s. As Hamish said, the target would be to lower this to as low as possible, taking also into consideration priorities for capital allocation, including dividends, as we reach certain cost thresholds, as well as when we have excess cash flow repaying the more expensive debt in order to reduce further our all-in breakeven cost.
JM: Yes, certainly makes sense. Hopefully we can get back to that in 2021 if earnings pick up. We can see that split between, you know, a healthy focus on deleveraging, and also, of course, a dividend potentially, I know you have a very methodical sort of rigorous rules based formula for paying the dividends. Is that formula that you put out, I think about a year ago, is that still valid into 2021?
HN: Yes, it's still valid, it unfortunately became a bit more confusing on when we refinanced a bunch of our lower leverage ships and put a bunch of cash on the balance sheet, essentially, through extra borrowings. And the way the dividend policy is formulated, there is a board discretion as to how to treat that cash from on re-leveraging the ships that we put on the balance sheet this year. So far the board has decided to not treat that as part of the dividend pool, for, you know, reasons that I would imagine you would find quite understandable since we had just borrowed that money, but, yes, that dividend policy is still in place. And, you know, as we generate more cash, cash in excess of the thresholds will be dividend it out.
JM: Yeah, we look forward to that and hopefully, of course, we got to see the market rates first. But it is good to be able to look at that formula. And, you know, it can be a little confusing, but it makes sense. I mean, the target of based on that formula is to reduce leverage over time. And then if you're already hitting those reduction targets, then you distribute basically the remainder, right. Definitely, definitely makes sense once you look through it. What are some of the, you know, as we enter 2021, we did broad picture of the market, what are some of the risks? What are some of the biggest concerns? I mean, I suppose COVID is a big one, but are there anything else, maybe regional concerns or things that are popping up as we enter 2021?
HN: Well, you know, basically, we're tied to the global economy. So the risks are the risks to the global economy. And, you know, with COVID, frankly, we did better than the global economy, which was great. You know, but in the future it's anything you look at that would have an impact on world trade generally. And of course, it's trade in, you know, commodities rather than finished goods on. So, you know, that at the end of the day is why we outperformed the economy, the world economy this year, but you know, it's any one of a million things that could go well or badly. You know, Constantinos or Christos or Simos, I don't know if you have anything to add.
CS: Yeah, I agree. I think that the COVID has created the major opportunity going forward. We didn't mention as much that the supply is extremely low. With the order book staying at – having decreased to approximately six percent, and with minimal ordering during the last two years, and with minimal ordering expected for the next couple of years due to the environmental regulations on future propulsion, and uncertainty about future propulsion actually. So, the supply side is really positive and probably more positive than ever, as we expect the fleet to grow by less than 1.5% over the next two, three years. And if we had to say a risk might be increasing dependence on China now. However, we'll have the rest of the world that has been underperforming and the world will come out of this pandemic next year and let's see how this will play out.
HN: Yeah. And Constantinos makes an excellent point about ordering ships. I think this is something that's not really well appreciated by many people in the United States. But, you know, outside the United States focus on global warming is – has never been higher. And, you know, the shipping industry is looking at a political situation in which older ships. You know, burning fuel oil may not be able to keep trading for a long time. And if you ordered a ship this year, that was legal this year, there's great worry that it may not meet regulations in 5 or 10 years from now.
So, people are terrified about ordering ships. And that's a really good thing. Because we think that even if we have an excellent market in the next, you know, 1, 2, 3, 4 years, which, in fact, we expect, we think that people will not be ordering ships until it becomes clear what kinds of ships they'll be allowed to operate, and that's probably a four-year period where there will be too much uncertainty. You know, it's not going to be clear for a while, for example, what sort of fuel is going to be the, you know, carbon neutral alternative. And it's a very big deal.
JM: Yeah, I'm glad you mentioned that Constantinos and then Hamish coming back and kind of hammering a little bit more, because that really pivots into some of the closing questions I had here. And I think you pretty much covered some of them, but, you know, there's so much uncertainty, right, and that's clear. There are two things I wanted to discuss as part of that one is sort of any visibility on what those propulsion systems might be. I know, LNG was touted as a potential option, but it seems to have lost a favor. I think (Maris) came out just yesterday or a couple days ago, saying they're basically rejecting LNG as an option. So, I'm just curious on any sort of use, you might have on LNG? And then secondly, the IMO came out with sort of this headline regulation, saying that by 2023, all vessels need to perform similarly to new builds in terms of emissions. So what does that mean for Star Bulk? So, I guess kind of a two part there.
HN: OK. So, first of all, LNG, it's very uncertain what the regulations will look like around LNG, because while LNG burned in a ship emits, you know, on the order of 20% less CO2 than burning fuel oil with the same energy content. The actual methane, you know, LNG itself, is a greenhouse gas. And, you know, first of all, it leaks from ships that burn it. It doesn't all get burned in the engine, some of it goes up in the exhaust pipe, and that leads to direct greenhouse warming.
Also, there's a lot of leakage of methane between the well, and the ship. And that leakage is hard to control, hard to measure, but it's significant. And that leads to direct greenhouse warming. And so, you know, the European Union is as expressed concern about LNG. And, you know, others have expressed concern about LNG, and so we don't really know where that's going to shake out on, you know, apart from methane leakage, you know, a burning LNG does have advantages in terms of nitrogen oxide emissions. And of course, there are no sulfur emissions.
You know, if you're not going to use LNG, the next most logical fuel is ammonia, which is made from hydrogen and nitrogen. And the hydrogen you would get from electrolyzing water with presumably renewable electricity. And the nitrogen you would get from the air and you would combine that again using some more renewable electricity. And you create a fuel that can be liquefied at atmospheric temperatures, but a high pressure, but still manageable pressure on board a ship, and it can be burned in an engine that should be available in three or four years on an experimental basis.
So that's one possibility. And you know, then there's at least one company that's looking at molten salt nuclear reactors to power large ships, which you know, may have regulatory issues at first, but in fact, it seems to be a fairly safe and practical method if it gets regulatory approval, which you know, who knows? So, you know, we're watching the market, and you know, seeing what will happen. Now in the meantime, what we have to do is continually improve the fuel efficiency of our ships.
So, how is that going to happen, it's going to happen through basically a number of things, route and speed optimization, which actually can probably save a lot of fuel if it's done properly through modification to the ships. So, for example, there are projects that were looking into, around changing the rudder configuration using something called gate rudders, which you can Google, which seemed to save a lot of fuel bubblers, which reduced friction with the (whole robotic hole cleaning), which can basically clean fouling off the hole at every port stop, which makes a huge difference.
Ultrasonic anti-fouling, which is another way of cleaning the hole, which operates continuously, and you know, there are just, you know, a large number of things we can do on to say, if you will – you know, the cheapest probably being route and speed optimization. And then, you know, we can also get points for limiting the engine power, which maybe is the single most powerful thing you can do to increase the fuel economy of your ship. You know, basically a ship burns fuel in proportion to more or less the cube of the speed.
So, if you slow down a little bit, and you use a lot less power, the flipside of that is if you limit the power of the engine, to you know, three quarters of its design power, you only slow down just a little bit. And yet you get credit for burning three quarters of the originally designed fuel consumption, which is a big deal. So, you know, between all of those, you know, we shouldn't have too much trouble complying. And, you know, we have been spending a lot of time and attention on our plans.
JM: Yeah. Hamish, you certainly have a better grip on the science. So, I don't want to dive into that too much. I understand you have some academic background in some of those things. But, you know, you mentioned the cube sort of ratio. So, I mean, simplifying, of course, but more or less, maybe like a 10% reduction in speed, you said would be basically maybe a 25% reduction in emissions, is that (indiscernible)?
HN: Yes. Exactly. Exactly or to put it another way, if we limit the engine power to 75% of its design power that only causes a 10% speed reduction, more or less?
JM: Certainly, certainly. And, of course, that sounds like, you know an amazing scenario for market balance. Right. I mean, it really removes 10%.
HN: That’s a lot.
JM: So, yeah, hopefully, that would be an amazing rebalancing of the market. So, I don't know if that'll happen, but if it did happen, that would be fantastic.
HN: No look, I think the truth is that the shipping industry owes a debt of gratitude to Greta Thunberg.
JM: Yeah, yeah, certainly, maybe make those targets even higher than, and that would be a win-win in all reality, right, for the global markets as well in terms of (indiscernible). So, excellent. I think that is just a good spot to sort of pivot. And I think folks got a lot of information on that. One little nice question I came up, you know, we have a bunch of folks live on the call and some questions that came in, the containership markets are screaming hot right now. And one of the weird little things about container markets is we're hearing they're refusing to do any sort of backhaul cargoes, just because the containers are in such demand. I know it is a very nice question. It's probably just like 1% of the market or less, has that had any sort of impact, the rejection of backhaul cargoes of agriculture products of paper products, forestry stuff? Is there any sort of impacted dry bulk from that or is that just kind of lost in the noise?
HN: It's beyond lost in the noise. There's really no impact. Things that move in containers really don't move in dry bulk carriers. You know, basically we carry goods that you drop into a huge holds and you know, our 210,000 ton ships have nine holds. And each hold, therefore, you know holds more than 20,000 tons. And a container you know holds 20 tons in a, you know, eight foot by eight foot by 20 or 40 foot box. It's really for finished goods or you know, agricultural commodities that are carried in bags on, you know, so there's no real, no real influence of one on the other.
JM: Certainly, I appreciate you entertain the questions that were I think, it was pretty funny, I was on your – one of your conference calls a couple quarters ago and there was an analyst who asked you, I couldn't tell if he was joking or not, but he asked you about whether you could convert your dry bulk vessels to tankers?
HN: Yes, yes.
JM: So, we won' convert them to tankers, and we won't convert them to container ships either.
HN: Correct.
JM: All right, fantastic. Just as we close out, thank you again, for the full team for jumping on. Last question for you to end on sort of a optimistic, upbeat note here. What differentiates Star Bulk Carriers from, I mean, there's like 10, dry bulk companies, right that investors can pick from on the market? What differentiates Star Bulk Carriers and why should folks be picking you over peers?
HN: OK, so, you know, look, we have serious corporate governance. All of the people on the call are employees of Star Bulk Carriers. The people who manage our ships are employees of Star Bulk Carriers. We don't pay commissions to affiliates. We have real institutional investors on our board. We have a real comp committee who believes in paying management when the shareholders make money. And you know, as a result, management is incentivized to think like a shareholder. We are shareholders.
And, you know, as a result of that, basically, we've worked to get our operating expenses down to the lowest in the industry, and our overheads per vessel per day to be, you know, basically the lowest in the industry. And our chartering, performance is excellent on, you know, there are some other companies that have similar governance, but it's far from universal in this industry, and that's probably – probably if I were an investor, that would be the main thing I would focus on would be what are the incentives of management? Are management incentivized to think about things like I think about things are they incentivized to work for my benefit?
JM: Certainly makes sense. You know, we won't comment on other firms here, but yes, governance and overall operating efficiency are two very strong selling points. I thank you again for the full Starbuck team for joining us today. I think it was very useful. Thank you. Hamish, Simos, Christos, and Constantinos.
HN: Thanks.
CB: Thank you.
JM: This concludes another iteration of Value Investor's Edge Live. We just hosted Star Bulk Carriers, stock symbol SBLK, to discuss the dry bulk markets and forward plans into 2021 and 2022, along with capital allocation and market dynamics. We're recording on the morning of 19 November, 2020. I do have long exposure to Star Bulk Carriers. As a reminder nothing on a call constitutes official or company guidance nor investment recommendations of any form.
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