Not All Segments Are Created Equal

By Richard Diamond

One of the many challenges for investors is determining what is temporary and what is permanent in today’s environment.  There was the belief among some investors in 2020 and 2021 that food delivery would permanently change restaurants, with dark kitchens replacing the actual ones.  Today, we can confidently quote Yogi Berra, who once was asked about whether he wanted to have dinner at a highly regarded restaurant, replied “Nobody goes there anymore, it’s too crowded”.  We find analogous issues in shipping, especially in equity and rate weakness so far in 2023.   

We look at various segments with different conclusions.  We believe that container shipping is weak near term because at least in the case of the United States, consumers who stayed at home in 2020 and 2021 ordered enough goods to last until 2024.  Now they seek experiences such as travel and dining out, negatively impacting furniture and apparel demand.  Given the large order book of new ships ordered during the pandemic, there may be structural overcapacity for many years to come.  Product tanker equities have started the year poorly.  Some of the weakness is likely driven by tax driven equity sales, shifting gains from 2022 to 2023.  On the other hand, rates have been weakening, too.  Some of it is seasonal, some of it may be due to unusually warm weather in Europe, and lastly, there may have been over-ordering of distillates in anticipation of Russian sanctions.  These changes are temporary. Demand will likely increase as refinery capacity in developed nations is insufficient.  The imposition of Russian refined product sanctions on February 5th may potentially increase ton mile demand by as much as 5%.  Meanwhile, the order book remains low.

The largest differentiators will be the reopening of China and changes in economic policy.  No one knows how China’s abrupt relaxation of zero Covid-19 will play out.  We suspect it won’t be smooth, but it will occur, which will positively impact dry bulk, tanker, and LNG demand.  Another major change is news from China. Bloomberg reported on January 5th that China will be dialing back the “Three Red Lines” that exacerbated the current real estate meltdown.  It is a 180-degree policy reversal.  Unfortunately, being right too soon is the same thing as being wrong, so an investor may want to manage position size to have capacity to buy if equity markets look to short term conditions while Chinese demand returns.  Not all shipping segments are created equal.  That makes shipping difficult for the generalist and presents significant opportunities for those that are well-informed.