The Mother of All Recoveries
"Sell in May and go away" is the truism in stockbroking but with the pandemic turning the world upside down, is this the year to "Buy in May and make 'em pay"?
A kind of vaccine giddiness has already spread through financial markets with analysts and traders salivating at “The Mother of All Recoveries” in spite of the colossal mountains of debt that governments are building to keep economies from imploding. The March US federal budget deficit hit USD 660 billion, the third largest on record. Don’t get too shocked by that number because April’s will be larger as only one third of the USD 1.9 trillion American Rescue Plan money has been spent.
The upshot of all this new dollar denominated cash in circulation is a weakening US dollar. Investors take that as a signal to pile into all kinds of non-share market dollar denominated assets. Ships have become more fashionable than at any time since the boom markets of 2005 to 2008.
Ship owners must have been infected with this giddiness because they have been reaching for their chequebooks and signing orders for new ships in significant numbers, perhaps with an eye on the bucketloads of cash swilling around the financial markets. Institutional investors have short memories. Few remember the effects of the global financial crisis on shipping investors. Fewer still remember the junk bond car crash of the 1990s.
The recent dash to the shipyards has been led by the container liner companies and their tonnage suppliers. Together they have ordered over 100 newbuildings since the start of the year, spending around USD 5.5 billion, more than in the previous four years combined. It’s the same old story for shipping…years of being in the doldrums due to oversupply and weak demand growth, then for reasons few could have forecast, freight markets go crazy, the owners think they are geniuses and spend their newfound riches on more ships, guaranteeing the eventual downturn that will lead to more years of oversupply and weak returns.
Still, the liner companies have some excuse, given the stellar performance of the freight markets over the last twelve months. It turns out that people in lockdown who can’t spend money on going out to see friends, films, or food, stay in and buy furniture, homewares and electronics. These all get shipped in container ships, so there was an exemplary V-shaped recovery in container shipping demand in 2020 which is still driving freight markets today.
Global TEU lifts for 2020 were 166.1 million, down from 169.1 million the year before. However, monthly TEU lifts bottomed out at 11 million in Feb 2020 before recovering to a record 15.3 million in November 2020. Chinese New Year has imposed its usual seasonal effect in the first quarter of the current year; monthly volumes fell to 12.4 million TEU for February, usually the weakest month in the liner almanac. That’s a pleasing 16 per cent more than in February 2020 which gives one an indication of the strength of the demand acceleration.
This all happened at a time of low newbuilding contracting, bunker price adjustments for IMO 2020, slow
steaming and blanked sailings. Accordingly, freight rates reacted extremely positively, booming over the last year to set new records. In January 2020, the Freightos Baltic Exchange global freight index stood at around USD 1,500. In January this year, it reached USD 4,100 and on 10 April at the time of writing it stood at USD 4,233. The Ever Given incident barely lifted rates in the end – it was really a storm in a teacup latched onto by a hungry media ever eager for rolling news to report.
Everyone wants to know how long these freight rates can be sustained. The honest answer is ‘we don’t know.’ If the western world’s office workers decide to work from home one, two, or three days a week they can’t buy a desk and laptop for each separate day, so was the demand spike only a spike or a new level? Will peak consumerism really happen? Will middle income, middle aged, childless couples after the Covid baby bust just spend more money on stuff? By the time we have the answers, hundreds of new container ships will have delivered and the market will be on the slide.
Unlike the container ship owners, tanker owners have little excuse for the recent splurge on newbuildings. Oil demand remains low, oil prices are range bound in the low USD 60’s per barrel. Opec members continue to bust quotas, and only in China is oil demand rising at pre-pandemic rates. Spot tanker rates have moved in a narrow trading band interrupted only by the Ever Given incident driving sentiment briefly upwards, though the hangover resulted in lower rates than before the incident. Benchmark time charter rates for a VLCC remain stuck in the high USD 20,000 range where they have spent most of this year. That is only around half the rate needed to cover the paid-up capital costs of owning and operating a VLCC.
It may come as a surprise then that already this year, around 90 oil and chemical tankers have been ordered at a cost of over USD 3.5 billion, compared to around 70 ships for the whole of 2020 and around 90 in 2019.
Newbuilding prices have been rising in response to the higher demand as well as to the higher added value of some dual-fuel vessels. Shell-sponsored, LNG dual-fuel VLCCs have contributed 13 of these orders, part of the nearly 300 LNG fuelled ships now on order, comfortably outnumbering the 200 already on the water. Still, many orders are for conventional vessels, suggesting that tanker owners are following their usual herd mentality rather than taking the lead on alternative low-carbon propulsion systems. The relief among the shipyards is palpable as newbuilding prices ease gently up to their long-term averages.
Oil traders are still looking for signs of demand recovery from the pandemic; oil tanker owners perhaps are considering the 18 to 24 month delivery delay for a newbuilding and are betting that if they order now they will reap the benefits of a rising tanker market in the latter half of 2022 and into 2023. Ever the gamblers, tanker owners know that one good season can pay off a mortgage and make a tanker investment profitable. They may have one eye also on the proposed merger of Hyundai Heavy Industries and DSME – South Korea’s two biggest shipbuilders. The proposed new Korea Shipbuilding and Marine Engineering would have more pricing power due to the reduced competition.
Some tanker operators take the long view. In the mid-2000s, I was asked to present my tanker market outlook to John Angelicoussis in his offices in Victoria in central London. He had recently ordered two VLCCs at then-record prices in excess of USD 100 million. I asked him why he had taken this bold step. In his measured way he explained, ‘Mark, I have 50 VLCCs in my fleet. Each lasts 25 years, so to maintain fleet numbers I have to acquire two VLCCs every year. I dollar average the prices over the cycle. So I don’t think about what I have paid for these ships, but about what my fleet has cost me on average and what it earns on average over several cycles.’ Mr Angelicoussis’ wisdom and humanity will be sadly missed by our entire industry and I offer my condolences to his family, colleagues and countrymen.
Mr Angelicoussis was not averse to shopping in the sales, as his Maran Dry Management has demonstrated this year when it acquired a 210,000 Dwt Newcastlemax ex-yard with prompt delivery for USD 53 million. That’s around USD 3 million more than most brokers rated a resale at the turn of the year but could still represent a bargain as the bulk carrier market appears to have some real momentum despite some 110 bulkers of 9.5 million Dwt delivering just in the first quarter of this year. Granted, some of those were due in Q4 last year and were delayed by a few weeks to make them a year younger. This happens every year and will be smoothed out in the annual numbers. Second hand deals are running at three or four times their levels of a year ago reflecting real confidence among owners.
Bulker owners have so far held off on investing in newbuildings. Only 36 new ship contracts were signed in Q1 this year, a laudable display of restraint given the positive freight market conditions of the last nine months. Meanwhile 42 bulkers of 1.5 Mn Dwt were sent for recycling in Q1 compared to 43 tankers of 1.1 million Dwt and only ten container ships of just 8,900 TEU. The bulk carrier fleet has – ahem – bulked out to nearly a billion Dwt and the restraint is welcome. We think that the message is getting through and that bulker owners will remain cautious about ordering conventional ships, preferring to wait and see what happens to demand for the main cargoes – iron ore and coal – being so dependent on continuing Chinese economic miracles.
The bulk carrier freight market remains bubbly despite being least influenced by the Ever Given sentiment boost. The BDI stands over 2,000 points, levels rarely seen since the global financial crisis. One year time charter rates for the geared ships remain sporting with Handies available for no less than USD 14,000 per day and Supras fetching over USD 15,000 a day around Easter with Panamaxes around USD 20,000 and Capes at more like USD 22,000 a day. If bulkers can maintain this momentum through the traditionally firmer second quarter, then the newly firm third quarter, the seasonal peak of Chinese industrial output, should create conditions for 2021 to be a standout year for bulk carrier operators.
A version of this commentary appears in the April/May edition of BunkerSpot magazine.