Please Read The Headlines

I have been writing my bi-weekly blog post now for two years.  I thought it would be a worthwhile exercise to go back to my early columns of May and June 2020. Then I emphasized that conditions presented a wonderful buying opportunity. I advocated ignoring most if not all the negative headlines and statements by the pundits. It was indeed a bottom. Today, I am recommending the opposite behavior – read the headlines, for they contain potential factors to drive further value upside in the dry bulk and tanker segments. I have often spoken of analogies between the 1970’s and current economic environment. It seems to be, as the great Yogi Berra said, “Déjà vu all over again.”

It is really a convergence of events, some transitory, others more fundamental in nature.  For dry bulk, there is congestion in China that should lift whenever authorities decide to open the economy. More long term, new trade routes driven by the rejection of Russian coal are lengthening ton miles. Ship speeds are slowing due to high bunker prices. Usually, favorable cycles collapse due to owners over ordering.  Currently shipyards are booked out until 2025 and 2026 for large orders, with prices that are 20% higher than the existing fleet. The order book is consequently at historically low levels. For tankers, there are many similar dynamics. Europe needs to replace roughly 50% of its distillates which come from Russia, and we are going into the summer driving season. If China was to conquer Covid-19, demand for oil would be even higher. Like dry bulk, new tankers are not readily ordered and delivered. For both dry bulk and tankers, starting in 2023, new regulations go into effect that would potentially limit or reduce the ton mile capacity because older, less energy-efficient vessels may have to reduce power to be approved.  Effectively, it would take out transportation capacity from the market.

There are still minefields. Dual fuel LNG container ships may be problematic since LNG has gone from plentiful to scarce. They are more expensive than conventionally powered traditional vessels to purchase and operate, and in today’s environment, it may be substantially cheaper to burn high sulfur fuel oil. This vaunted new technology has created in the short-term, white elephants. Those managements that bet heavily on new technologies without long-term contracts are likely to be worse than better off. There is a lot that can happen to change dynamics, from good to bad and vice-versa, but today the outlook is positive. That being noted, I write with humility with the Yiddish proverb in mind, “Man plans, and God laughs. “