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Shipping

Out of the doldrums

July was a very good month for bulk shipping, with freight rates up sharply (the Baltic Dry Index gained 26%). Bulker share prices moved in the opposite direction, most probably due to investor fears of a full-fledged trade war between the US and China.

evolution capesize graphs(Source : BanqueThaler; Bloomberg)

Freight rates for Capesize vessels reached ca. USD 25,000 / day TCE (Time Charter Equivalent), their highest level since 2014. Brokers expect the uptrend to continue, at least until the Chinese New Year, and break the USD 30,000 mark during the fourth quarter. Freight rates for Panamax vessels are trailing at ca. USD 11,500 /day TCE but should soon also move up, given that it has now become cheaper to charter two Panamax vessels in lieu of a single Capesize.

The main reason for ever higher Capesize freight rates is China’s insatiable appetite for Brazilian (and Australian) iron ore to replace their locally-mined lower grade ore, so as to be able to produce more top quality steel – and thus better compete with European, Japanese and American steel producers.

Bulk ship-owners have not been impacted (so far) by US tariffs against China and retaliatory measures. Not only is Chinese demand for bulk transport not weakening at all, but some routes are changing (e.g. soybeans are now being imported from Brazil rather than from the US), resulting in greater ton-miles. There are still more tariffs to come if President Trump follows through on his threats (which he will certainly try to do), but they stand to hurt container shipping more than bulkers (the new taxes will mainly hit consumption goods, car parts and the IT industry). Investors do not seem to be making that distinction for now, sending all shipping stocks down – albeit on very low trading volumes.

Bulk shipping industry fundamentals remain very strong, indeed the best in years. Bulk shippers are now net earnings positive and out of their financial worries. We see no reason for the shares of some companies to be trading at a 30%+ discount to their current fleet value. It is only a matter of time before this aberration will disappear. Patience is a virtue in shipping.

Update : August 2018

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