The giddy financial headlines of the past decade have been dominated by massive profits for investors in technology stocks, social media influencers and opportunistic purchasers of distressed property portfolios. However, the stories in the world of shipping have been less cheerful. Years of over-supply of freight capacity killed pricing in a global fleet of over 10,000 ships which doubled in size from the early 2000’s. The dry bulk sector has possibly been worst hit with benchmark shipping rates falling by up to 98% from previous highs in 2015-2016. Needless to say investors in publicly traded dry bulk shipping stocks have experienced share price implosions of 95-99%.
As China’s economy and global manufacturing slows with an increasingly fraught geopolitical environment one could be forgiven for thinking the chances of a shipping recovery would be certainly dead and buried. Welcome to the risk of certainty and the explosive results of almost everyone being caught out at the same time with the same wrong view.
Events in recent weeks in the crude oil carrier sector have been mind-blowing. And, we are not talking about the Donald’s latest attempt to blow up the Middle East with his Syrian gift to Turkey’s Erdogan. Yes, the Saudi refinery bombings and general US-Iran tensions have contributed to a squeeze on the pricing of rates for very-large-crude-carriers (VLCCs) but crude oil prices have subsequently settled back to pre-bombing levels. Not so VLCC shipping rates. What if we told you VLCCs are currently on daily charging rates of $300,000? For context, as recently as mid-August daily rates were as low as $25,000.
The purpose of this article is not to explore the exact combination of factors contributing to a ten-fold increase in freight pricing and an 80% increase in the value of certain shipping stocks in a matter of weeks. We’d rather use this event as a cursory reminder that a relatively minor combination of events can, in certain circumstances, create a violent reversal in market behaviour and views. More specifically, be very wary of an asset class displaying symptoms(pricing) of an extremely certain view. Think of crude shipping and a strong consensus view that the sector was nowhere close to recovery. Now think of a much larger asset class…
How about the sovereign bond market where $16 trillion of debt currently carries negative yields? In lay person’s terms that is an overwhelmingly benign view of inflation over the coming years, ie bond yields would have to rise significantly(and bond prices fall at the same time) to counter the destructive effects of inflation on capital currently delivering no compensatory income. In contrast to the shipping sector, the cheery consensus view on bonds feels a little too one-sided and allows for very few surprises. A world without surprises just doesn’t feel like the right call in the current bizarre geopolitical environment.
Finally, to complete our shipping journey it is worth highlighting it is only the VLCC sector(fleet size of 800 ships) which is experiencing stratospheric rate inflation. The larger dry bulk sector remains incredibly depressed in terms of asset values – barely 2 x annual cash flows – but has a couple of interesting drivers over the next few years. Firstly, there is no bank lending appetite and stricter regulatory rules which ensure excess capacity is being whittled down rapidly. Second, recall our mantra that every investment should now consider climate change. The shipping industry is in clean-up mode with global regulations now requiring costly installation of ballast water treatments plus engine re-calibrations for lower-sulphur content fuels by 2020. That means there will be further temporary capacity hits next year.
Now, also consider shipping as a sector typically non-correlated with other financial assets which are currently trading across the board at close to all-time highs. In fact, shipping is considered a ‘geopolitical hedge” – shipping rates benefit from wars, conflict, canal closures and the odd lunatic leader. The world is currently well supplied on the “leader” front so don’t be afraid to ship in some protection from madness.
Of course, the Greeks have been the ultimate shipping nation which has hit hard times. Up until recently, it was assumed Greece would never be able to access bond markets for a decade. Now they are borrowing at cheaper rates than the Land of the Donald. Whoodathunk!
Certainty, in transport terms, can be laden with risk and emotional biases. Aristotle Onassis put it quite well…
“I made a big mistake. I never believed in the world that we live in, emotions can overcome every logic in business”
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