Rising Oil and the Future of Globalization: Implications for Transport Stocks
As oil continues its upward trajectory, so have the costs of transporting goods and materials across oceans. In a globalized world reliant on shipping raw materials to one place to be made into finished goods and sent someplace else, this trend in costs is bound to make the economics of manufacturing in far off places questionable. This is especially true for low value to freight ratio products such as raw materials, furniture, apparel and machinery.
At $200 a barrel, shipping a container from Shanghai to New York will cost $15,000, compared to $8,000 today and a mere $3,000 in 2000, when oil was $20 a barrel. This portends a fundamental realignment of trade which has, to some degree, already been set in motion--a number of US manufacturers have regained their footing and have restarted their production lines in the South East.

How much of manufacturing comes back from China remains to be seen. During the 1974 OPEC oil shock, consumers bore the brunt of the additional costs, but in time markets adjusted to substituting for goods that were sourced closer to home. In some capital intensive sectors such as steel, the US already has a competitive advantage as the cost of labor is a small part of the process.
Rather than finding the cheapest labor, producers are going to have to find places within reasonable distance to their markets. This may be a second opportunity for Mexico having earlier lost some of its maquiladora production to Asia.
As an unintended consequence, shippers, just as the airlines, have reduced ship speeds to save fuel. Consequently there is less cargo space available at any given point in time--more ships are at sea rather than in port. The changing winds have also impacted the exporting of agricultural products from the US (California grows 80% of all worldwide almonds), leading to lower revenues to growers.
While liberalization and technology have facilitated globalization, transportation costs may once again change the economic landscape, and although shipping companies are in a sweet spot today (Alexander & Baldwin (ALEX), Danaos Corporation (DAC), Horizon Lines (HRZ), Seaspan Corporation (SSW), Diana Shipping (DSX), DryShips (DRYS), Eagle Bulk Shipping (EGLE), Excel Maritime Carriers (EXM), Navios Maritime (NM)) , there are long term risks to consider.
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This article has 15 comments:
Seaspan charters long term (at least 8 years) to major shipping lines sch as Maersk, Cosco, etc. If part of the lease they will aso operate the ships for the line. They have contracts for new buildings and lease outs for the next two plus years. I have two concerns.
First is there an opt out for existing leases, and opt outs and provisions for cost escalations on new buildings. It is assumed that the shipping line wll pay for any escalation in operating costs (fuel, wages, port charges, etc.)
In the case of EGLE they have a new buildings program to increase their current fleet by about doube. The new buildings program goes out about 3-1/2 years. Their charters as far as I can tell are bare-boat charters, typically 1 to 2 years.
For the present I plan to hold SSW to the end of this year and see if they can raise their dividend again. However, also monitor their forward looking statements when they report 2nd Q resuts.
I agree with 163888 & beezebufo that bulk carriers are going to have a long play. EGLE is my preferred play not only because of the current yield, but as old charters on the current fleet expire they will be able to get higher day rates on new charters. Further their dividend policy is based on free cash flow so that one can expect significant dividend increase.
At what point do we say, 'enough is enough', and start to cut back on our consumption., to some extent even to change our food habits. !!...
the main idea is that individual investors dont have to act like institutional investors and this market and may be better holding cash than trying to beat the market.
www.greenfaucet.com/sh...