Shipping Up?

With all the talk this week of exciting, hot technologies, social media and the waves of the future, I’m going to add to it by talking about something dry and boring:

Shipping.

This actually happens to be an area of interest for me, because there will always be a need to carry stuff by water (at least until they invent that teleporter they keep talking about).

One of the key numbers used to gauge the health of the shipping industry is the Baltic Dry Index (BDI), which offers a measure of how expensive it is to move dry bulk freight across 23 of the busiest shipping routes in the world. BDI focuses mostly on dry bulk carriers, which carry raw materials and commodities such as iron, coal, and grain.
You can see how this would be useful—it directly measures demand for this type of shipping and by extension indirectly measures demand for commodities. If you believe the global economy is headed for a strong rebound, it would be a good sector in which to go long.

Here’s the thing you need to watch out for, though: dryship capacity is extremely inelastic, because it takes two years to commission a new ship, and excess capacity can’t just be stored somewhere (the way airlines can park extra planes out in the desert when they aren’t in use). For this reason, the index reacts strongly to relatively small changes in demand; the all-time high was in 2008 (11,793 points),and it closed Tuesday at 1,130.

As recently as February of this year it was at 647 after a big glut of new ships came online and orders for iron and coal slumped. The floods in Australia the year before that also caused some price swings.

What do you guys think? Is there any promise for this industry going forward? Is it just a safe, boring investment, or does it make sense as an alternative to all the tech hype?

(In the interest of full disclosure, I do have a personal long equity investment in a shipping company, Navios Maritime Partners [NMM]).

 

I like boring stuffs like this. I do have interest in shipping companies and they will still be viable down the road. There are a few companies who actually only deal with the logistics. They do not own ships, they rather lease them. They also get 5 years commitment from clients to deliver goods. Last year, I went to investor lunch for this company: http://www.seaspancorp.com/.

"I am the hero of the story. I don't need to be saved."
 
Best Response

Don't have an opinion on shipping today, but I do have a short story from back in 08 when the DBI was on fire. Back then (08) I was still a student and took part in bi-weekly investment meetings as part of a student-run fund in college. There were about 10 of us who had put together whatever capital we could and would deploy it (again, we were all students in debt, so getting the capital was pretty fking tough). One day some time in May 08, one of the guys comes to the meeting and gives us an incredible pitch on the DBI and why it will continue going up. We were all impressed by both the pitch and the DBI's actual performance. Long story short, we put a lot of money into shipping. This was literally right at the top that you referred to in your post. We then watched as shipping fell off a cliff. Fun times.

 
ihatebanking:
Don't have an opinion on shipping today, but I do have a short story from back in 08 when the DBI was on fire. Back then (08) I was still a student and took part in bi-weekly investment meetings as part of a student-run fund in college. There were about 10 of us who had put together whatever capital we could and would deploy it (again, we were all students in debt, so getting the capital was pretty fking tough). One day some time in May 08, one of the guys comes to the meeting and gives us an incredible pitch on the DBI and why it will continue going up. We were all impressed by both the pitch and the DBI's actual performance. Long story short, we put a lot of money into shipping. This was literally right at the top that you referred to in your post. We then watched as shipping fell off a cliff. Fun times.

ouch. but entertaining read, thanks for sharing

 

I have always thought about working in operations strat for a shipping company. Seems like that would be extremely interesting.

If I had asked people what they wanted, they would have said faster horses - Henry Ford
 

I agree that shipping is a very interesting industry, though I have a comment from a personal anecdote on the supply and demand of the industry.

Post 2008 there was a lot of excess capacity which drove shipping rates to rock bottom levels ( have a close personal friend whose business is directly tied to this; he personally ships over 50 containers a month). A year or two after the crash, because shippers were getting hammered, shippers did something quite outrageous, they colluded an took all of the excess supply offline (i.e. parked ships in the middle of the ocean) this caused a tremendous price spike on shipping rates which affected many import/export dependent businesses; basically it killed everyone's margins. Obviously businesses protested and slammed the carriers for collusion, it took a while but finally carriers had to increase supply. This all happened locally don't know how rates were affected world wide though.

Moral of the story: Although illegal; in times of great stress people do what they have to do to save their companies. Shippers at the time were bleeding tremendously because of the rock bottom rates and excess supply so they did what they had to do and took the excess supply of the market, hence engaging in price manipulation and cartel like behavior.

Its an interesting story just wanted to throw it out there for your benefit

 

I find this industry interesting as well but don't know much about it. I've had lots of deailngs with railway companies, and they are tough to deal with. Would shipping companies be the same? ie: are they long established oligopolies? Lots of bureaucracy etc?

As an investment the idea seems quite attractive and I see lot of similarities behind rail companies and railcar manufacturers. I'm curious which shipping companies are based out of Vancouver? Given that it's a hub for a lot of shipping I'm just curious to know what opportunities a city like that has to offer in such an industry. I do think shipping could be extremely interesting as you get exposed to a wide variety of commodities and international movements.

 

Obviously the best known investor on railway companies is Warren Buffett with Burlington. Don't know how he feels about shipping or if he sees any similarities there.

And now that BDI is trading less than one tenth of its 2008 high, that still looks pretty cheap to me. Plenty of room for upside; upsetting that some of it is through manipulation by the companies.

Metal. Music. Life. www.headofmetal.com
 

I have done a fair amount of work in looking at Asian Shipping companies in my present job

The sector is definitely interesting from a learning pov but imho there is a mismatch of demand and supply to make the industry viable at present. There is a glut of available carrying capacity in the market and owing to the decline in global demand for both bulk and crude cargo; the price per DWT has settled at an un-viable level except for the very biggest players with large economies of scale

Smaller players will either have to become far more efficient operationally [I don't see much scope of that happening] or the economy has to recover significantly to pre 2007 levels for the shipping prices to rise.

So in short term I would stay away from this sector at the moment as there are better investment options out there

Simplicity is the highest form of sophistication ~ Leonardo da Vinci
 

Despite the fact that BDI is near all-time lows and negative TCE rates, there is massive oversupply in the industry esp. in the dry bulk (commodities) and containership (driven by world trade) side of things. Shipping is very different from the railroad industry. The industry is highly commoditized as it is extremely fragmented with few barriers to entry and the oversupply has resulted in huge competition over price. Normally you'd expect that supply / demand would stabilize over time but the larger shipping companies have a strong incentive to continue to build larger TEU ships because of the economies of scale which delays the return to a profitable supply / demand balance for the smaller players as well as reducing the underlying asset value of smaller ships.

To make it more complicated, most of these companies are highly levered so the equity could easily get wiped out if an investment is not timed correctly.

From an equity perspective, there were some interesting opportunities a couple months ago. A lot of the shipping companies have their ships on long-term contracts and when prices were distressed, companies such as Seaspan were trading below the PV of the expected cash flows from their contracts. However now, unless you have a near-term view on shipping prices, it`s difficult to find interesting equity investments.

There have however been a couple of investors who have been dabbling in the space but mostly on the credit side of things. The majority of ships are financed by European banks so reduced lending has created opportunities for investors such as WL Ross, Fairfax and First Reserve to take part in the senior side of the capital structure.

As mentioned earlier in the thread, there are specific tankers that cater to LNG and given the increase in demand, they have done very well over the last twelve months.

 

My secret dream is to own a shipping company, even though the operation of a shipping company is utterly nightmarish. In the late 90's I considered founding an onboard security firm, because piracy was just then starting to get really bad (and was mostly in Indonesia at the time). Believe it or not, your average container ship uses fire hoses to fend off pirate attacks. As you can imagine, that's rather less effective than a cadre of well-armed, pissed off former Marines.

Anyway, one of the best books you can read on the shipping industry is The Outlaw Sea: A World of Freedom, Chaos, and Crime. So much more goes on out there than people realize. You won't be able to put it down.

Nice job, ITF. +1

 

Thanks for the input, Eddie! I think you've given me my next Monkey's Review.

I think LNG has its own special tanker for transport, no? Could existing excess capacity be used for that?

Metal. Music. Life. www.headofmetal.com
 

Funny that this is being posted here... part of my thesis is related to shipping.

Anybody know where I can get a list of actual rates of shipping routes? Im trying to get historical prices for my thesis but the only thing I can find is the BDI. I know PLATTS has a kick-ass database but I dont have access to it....

I just would like to have an estimate of the price per DWT to ship dry bulk from asia to europe.

 

I know that this is an old post, but can't resist to comment... sorry in advance.

First of shipping is compose of mainly three sectors, dry, container, and tankers... comparing them together is like comparing the failure of retail banking in the IB world... makes no sense.

There are great company in shipping today to invest in... Seaspan, for one, the owner who also have a PE fund call tiger.

The fluctuation of the BDI tells very little on the surface, don't read into it. The BDI price of a Cape was about 4K a few weeks ago, but only excuted deal is with a 15+ year old ship. Owners with new modern ship, especially operating in a pool, would just hold off and wait.

Over capacity is a bit of bs in definition. What is oversupply, too many ships? If we slow down all ship by 30-40%, we will get 30% less capacity on the supply side. This is a common practice within the industry. However, over the past 5-7 years, the Dry fleet increased by over 100% and still have 30% to be delivered, along with high bunker prices which is the main driver for the poor market.

Containers are dominated by like a group of 15 players, with most of the state backed. Best of best is Maersk in my opinion. Operation and culture in that company is just amazing! The late Mr. Moller (son of founder) was over 90 years old, and still run to the office a week before kicking the bucket.

... anyways... i will stop ranting now... let me know if you guys are interested in anything more....

 

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