Kentucky Derby Meets Ocean Freight Markets

Early May is usually fun- I enjoy the Kentucky Derby (for those non-U.S. readers, it’s a major horse race, one of three leading to a potential “Triple Crown” if the stars align, the track is not too muddy, etc.). Not far from my home, a group of neighbors gather at one of the locals with a big screen TV, and place small wagers on the winning horse; readers please cheer for me as I cheer for “Tawny Port”- a vaguely maritime named entrant, sort of. At 30 – 1 odds, that’s a big payoff…maybe.

In the real world, handicapping freight markets is always challenging; however, certain trends are beginning to play out. More than two months ago, when the terrible events in the Ukraine were beginning, I hinted here that disruptions would beget a bump up in hires and time-charter equivalents, as trade flows in tanker and drybulk are re-jiggered (containers- not so much). In a recent article, the folks at Bloomberg have said: “Now Russia’s invasion is hastening a fundamental rewiring of the global economy that’s reinforcing existing trade ties among geopolitical allies and incentivizing new ones. It’ll play out in the months ahead through business decisions about supply chains and government deal-making.”

Though they are writing about trade in broader terms, it is clear that the tanker market, in an 18 month slump since its pandemic and contango-fueled glory days of Spring 2020, has seen a positive shift. And unlike the almost standard “flash in the pan” type jolts usually seen for tankers, the present moves might have some staying power, as European embargoes on Russian oil and refined products (I would add “blends”) take hold. Also, Class societies and P&I insurance interests (many tied to the U.K.- it’s complicated) are also going to be pulling back on Russia business.

Then- we get into real cargoes. News headlines have already seen dock workers in northern Europe refuse to discharge tankers that have loaded in Baltic ports. Later in the year, if the embargoes truly come to pass, there will be more voyages to India and farther to the east from the Baltic (and some from the Black Sea- if the vessels can successfully dodge debris and floating ordinance). Two companies that have seen run-ups amidst a tottering overall stock market are International Seaways “INSW”- in the crude sector- and also in products (as a result of a big acquisition last year), and Ardmore Shipping “ASC”- among those taking products and chemicals. Scorpio Tankers “STNG” – with a large fleet in the products sector, has also seen improved pricing. Tsakos Energy Navigation “TNP”, spread among a variety of tanker sectors, has also made solid pricing gains- and held on to them.

A horse race of a different sort, the amalgamation of “EURN” into “FRO”, maybe is also worth watching- this battle may drag on- however. Interestingly, a large shareholding group from the target’s founding family is looking at the company’s social profile. In terms of numbers and cash flows- the merger makes sense- consolidation can only help in a business where fragmentation works against pricing power. Elements beyond hires and asset values have previously not entered into pricing of shipping deals- but if these companies do indeed get together- ESG metrics may be part of the final valuation and pricing.