Dry
bulk shipping, is it worth a punt?
BDI’s recent rally caught a lot of people’s attention,
and we start hearing chatters about a global dry bulk shipping recovery. I
believe going long names in this sector is essentially a high-beta bet on China’s
urbanization continuance into 2015 and, to a lesser extent, short on shipbuilding
innovation and long on global industrial recovery. There could be a small 6-12
month window after Chinese New Year if one wants to play (in my opinion). Let
me lay out a quick case:
1.
Delivery
of dry bulk ships into 2014 is estimated to be 5-6%
Folks were a bit overexcited ordering new ships starting
in 2007 when the time was good, leading to a 6-year glut of delivery in tonnage
between 8-15% increase per annum. We know how the rates (BDI for example) had
crashed and stayed at its lowest point in 25 years thanks to this oversupply.
As ship owners go bust and investors became depressed in late 2012, the order
for building ships to be delivered in 2014 became low enough that, various
sources project 4.5-6% growth in tonnage supplied in 2014. This is instrumental
to the recovery of rates.
Another
source: Page 17: http://hugin.info/135378/R/1745769/587587.pdf
2.
Demand
for shipping may grow 6%+ in 2014
In the past 10 years, we got 5.5% CAGR in global seaborne
dry bulk trades in tonnage. You see the problem here – for the past 8 years supply
had far outstripped demand. We have a few things going for the seaborne trade
into 2014 that can push demand above 6%:
- Iron Ore (25% global volume):
China is the biggest importer here due to its domestic producers’ low fe
content and high cost (standard is 62% and Chinese producers run @ 20-40% ave).
As Vale, BHP, Rio Tinto, and Fortescue ramps production on their low-cost, highe
fe-content mines into 2017 (and they control 70-80% of iron ore trade), I
hypothesize that they are not only betting on China’s economic growth, but also
trying to capitalize on this urbanization trend before it runs out of steam.
Regardless, as these big 4 flood the market, standard economics dictate that
not only the volume of trade should increase, but the ton-mile shipped should
increase further given Vale’s location in Brazil. The resources I have seen are
chanting 8-10% growth in volume.
- Coal, Grain, and minor bulk:
Not an expert here; but with increased steel production in China and global
economic recovery, the trade on these frontiers will ideally ink 5-7% growth.
The industry sill has massive over shipping capacity, but
as supply-demand somewhat balances out in 2014, we can have a cyclical and
potentially violent upturn. As the seasonal low of Chinese New Year comes along
this late January. The sector may be worth a punt – it’s by no means a lay-up
though, see below for the risk.
Risk:
aplenty.
- Ship Supply: The
boys are at it again. Ordering lots of ships in later 2013. If you add in China’s
subsidy, we are looking at pretty robust delivery of tonnage in 2015. Even if
seaborne trade growth remains strong, rates can come under heavy pressure.
- Another point on supply: Tons of latent supply can come online
in 2014. Ships in lay-up may come back, plastic ships may be built in China (w/
6 month build-time), and ships can run 25-30% faster from the current 12 knot
they are running if the time gets good. Pricing power may not go vertical as
many expect.
- China: Not to beat this
thing to death, but the massive spike in iron ore price and global seaborne
trade circa 2003-2008 is single-handedly funded by China. The urbanization
trend has some leg left into 2017 and hopefully India can take over given its
low steel consumption per capita, but if China cracks as Chanos suggests, this
trade is dead.
- On Urabnization: The 3rd party plenum’s tone
marked a shift on how China will tackle GDP growth: not only “GDP growth”
recedes in importance as a metric to measure gov. official performances, but
there is increasing emphasis being placed on quality of infrastructure build.
Whether consumption can grow @ 4% clip like before is a good question.
And here
is the Credit Suisse view: “Based on his estimates, demand to move
seaborne dry bulk commodities should grow 6% y-o-y this year, overtaking an
expected 5% rise in vessel supply over the same period. The gap between demand
and supply is expected to widen even more next year. That is because dry bulk
shipping is a bet on growth in the emerging markets, where iron ore is needed
for steel mills and coal, to generate power. “These commodities are the
cornerstones for industrialisation, demand for which is likely to continue to
grow,” says Ross. “Emerging markets are still growing much faster than
developed markets.”
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