We are in a surprisingly dangerous period for shipping investors. From reopening to congestion to high bunker prices – the wind is to our backs. Demand for most sectors is up, while ship speeds are slowing, decreasing capacity. Healthy order books for container and LNG ships, as well as no clear strategy for clean power, means that new ordering responses to potentially higher rates in tankers or dry bulk are unlikely. It sounds wonderful, but in such environments, frequently lie the seeds of future destruction. Simply put, when rates ultimately surge, managers feel empowered to make terrible decisions such as over-ordering. That is why character is so important. JP Morgan once said, “The first thing is character…before money or anything else. Money cannot buy it.” It is especially true in shipping.
Today’s blogpost is inspired by a story of a sell side analyst’s negative opinion of a tanker company in TradeWinds News. The analyst holds the sole remaining sell recommendation out of 14 analysts on this business. The story did not mention the value destructive strategy of the tanker firm’s sister company. They diversified out of dry bulk into wind, at what turns out to have been close to the bottom of the dry bulk market. In the last 12 months the sister company’s stock price is down 72% while competitors who stayed in the dry bulk sector are up over 80%. I understand why, looking forward, the tanker company will benefit from rising markets. It makes sense that many short-term investors are tempted. As a long-term investor, I have done better choosing management teams that make shareholder friendly decisions and where there is little doubt that my interests and management’s are clearly aligned.
Within the last weeks, I have increased my exposure to the dry bulk industry. Although late last year I had thought the stocks were fully valued, clearly, I was wrong. I now see significant opportunities for rates to continue to be strong. Clearly, ton miles will increase as Europe restructures its supply chains for coal and minor bulks. The worst may be over in Chinese housing and steel production. Better yet, there are excellent management teams among the publicly traded names with good character. Despite rumors to the contrary, in shipping, there are plenty of companies in all segments whose policies are shareholder friendly – and profitable ones to own at that.
