Shipping is an enormously complex sector as we need to understand what all the different classes of boats do, how their demand patterns work, to understand how the supply of new and old ships will affect prices, while overlaying everything with an understanding of global trade to work out likely returns. And even then, you will be swimming in an investment pool of players who will know far more than you, reports nxtmine.
Yet, the numbers are enticing
The returns from owning ships have gone skywards – charter rates have risen dramatically, ship values have trebled in some cases, and even the older ships are commanding high resale values. Funds set up to manage vessels have done exceptionally well.
Be warned: shipping can get very messy. In the past it’s been an easy way to lose money quickly – and always there will be some very clever Greeks just waiting to scoop up the bargains. Typically, it’s a boom/bust industry – every time the global economy booms there is a shipping shortage, new vessels are ordered leading a glut of capacity just as the next downturn starts.
But, shipping is absolutely critical to making the global economy function.
Global economy
Two of most interesting leading indicators of how the global economy is really performing are the Shanghai Export Container Freight Index and the Baltic Dry Index. The first measures the all-important freight rate and volume of Containers being sent from China around the globe, while the Baltic Dry measures the flow and price of transporting raw materials. I’ve been watching the Baltic since I was a tiny wee banker back in the 1980s.
Since May 2000 – when global trade began to anticipate Covid recovery – the Shanghai leapt from a low of 836 to peak in January this year at 5094. Now the container index has fallen to 4163 – suggesting, perhaps, that global container costs are beginning to moderate. The Baltic Dry spiked from a May 2020 Covid low of 350 to over 5500 in Oct 2021 as the global economy re-opened – it fell below 1500 earlier this year but has recovered to 2831 reflecting slowdown in China.
Inflation
Both indexes correlate to inflation – which is hardly surprising as they are leading indicators of global trade. The fact both are weaker than their peaks might suggest moderating inflation and increasing recessionary conditions. Both are probably better indications of the real economy than stocks.
Why shipping values have risen so much since 2020
It’s all been about blockages as the economy reopened. The price of shipping basically depends on the availability of ships. I am told the global fleet of handy-size freighters is over 5000 vessels, but there only 5-6 actually available for charter at present!
When freight costs are so high, it infers demand must be high, therefore it’s an inflationary signal – people willing to pay more to get goods.
Things are never that simple
However, the current energy/oil shock means the price of bunker fuel is pretty much at an all time high. As a result, ships are slowing down. Slow steaming requires considerably less fuel – it’s called the “cube-rule”: slow a boat by half, and it will use 1/8th the fuel it would at full speed. In the past there has been a pretty close correlation between the speed of boats and the cost of freight. When its high, ships slow.
Slowing a boat down means it takes longer to sail from A-B. That means it costs more to hire a ship as the rental is a daily charge – and charter rates have risen between 20-35%. This is where friction comes in; shipping costs have become a compromise between rising demand, the higher cost of fuel and crew, plus the rising costs of hiring ships.
That is great news for ship owners. First it means they get paid more because their boats earn a higher rental on longer voyages. Second, its reckoned for every 1 knot (a knot is the speed of boats, its not quite the same as miles per hour) global shipping slows, about 6% of the global fleet is taken out as not available – meaning slower ships mean fewer ships for hire, further pushing up charter rates. Shipping earns more, but goods reach markets slower, thus generating inflation!
Global ports
From Shanghai, Long Beach and Harwich global ports were swamped by the post-Covid reopening. This was exacerbated by shortage of lorry drivers, stevedores, and now renewed lockdowns in China. While Western Ports are full of empty containers, there are practically no empty TEUs (Twenty Foot Equivalent Units) anywhere in Asia. The result is massive delays unloading vessels. About 20% of the Global Shipping container fleet is currently queued waiting for entry to the big ports – again creating scarcity and pushing up charter prices.
All of which is great news for the owners of smaller Handysize vessels – we’re even seeing smaller bulk carriers carrying containers to smaller ports (many have their own cranes on board). It’s not particularly efficient, but it solves the immediate transport crisis.
Other problems
About 3% of the global merchant marine is Russian flagged, but Russian sailors make up 10% of the 2 million odd global merchant sailors. Following the pandemic its clear many sailors have retired or have given up – many were effectively trapped on board for the duration of the crisis. There is a massive shortage of crew and officers building – by 2025 we could be short over 90,000 officers, particularly in engineering – a long term problem for the whole global economy.
Did you subscribe to our daily Newsletter?
It’s Free! Click here to Subscribe
Source: nxtmine
