Are We There Yet?

In May, it seemed like whenever we listened to contributors on CNBC, we would hear someone say, it is the bottom, and it is time to buy. We are reminded of our children when they were young on a car trip, and they would start asking after 30 minutes, “Are we there yet?” Bottoms and tops are visible only in retrospect and picking such spots doesn’t fit into our investment process. We focus instead on different factors, especially risk/reward. In the current environment, we remain especially vigilant. On the other hand, the outlook for most shipping segments continues to be positive.

We should get much news about shipping in the next 30 days, too. Posidonia Week begins in Athens for the first time in three years on June 6th, with exhibitions from Monday June 6 to Friday June 10, 2022. Marine Money Week follows in New York from June 21 to June 23, 2022.    It is hard to believe that the last time the industry met, the big debate was over scrubbers. Given that the spread between HFO/VLSFO today is $287 per metric ton and the break even for scrubbers at the time was $50 per metric ton, in retrospect, owners didn’t need to worry. One big question currently – will shipyards located in the Far East further delay the delivery of ships contracted at lower levels or cancel existing orders? TradeWinds News reported on May 20th that South Korean shipyards indicated they are struggling to come to terms with the recent doubling of steel and the other shipbuilding costs. We would expect Chinese yards to have similar issues. In the same article, DSME reported that prices on LNG carriers have increased to $224 million from less than $200 million a year ago. No matter what happens, in the short term, the existing fleet will be worth more, and the day of reckoning – when dry bulk and tanker owners start ordering new ships again – is postponed

We continue to like the risk/reward on offer in product tankers. Let’s begin with the UK. We are stupefied by Boris Johnson’s energy policy. His government has just instituted a windfall profits tax on energy companies. The UK’s fundamental energy issue is that they have moved too quickly to decarbonize, without having the necessary renewable or nuclear power in place. It has been exacerbated by their dependence on Russia for 25% of their distillates. The windfall tax will likely mean less North Sea oil exploration, exacerbating shortages over time and increasing the need for distillate imports. In the US we see similar policy challenges. The Northeast has insufficient diesel stocks, currently at 40-year lows. Distillates are also in backwardation, which means it is more profitable for a refiner to put diesel on a boat to Europe or Latin America and get the price immediately than send it from the Gulf Coast to New York on the Colonial Pipeline to arrive 18.5 days later. If the Administration were to suspend the Jones Act temporarily, it would improve distillate availability in New York and New England. However, such a move would be opposed by shipyards, US flag shipowners, and organized labor. The Administration would rather request that OPEC increase production or explore reopening closed refineries, which would take years. It means that there is no easy fix globally unless the EU starts buying distillates from Russia again. In the US, we expect to hear solutions such as windfall profit taxes in the US and calls to ban US oil exports. It should mean demand for product tankers will continue to be high, favoring shipping companies with product tanker exposure.