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.

Comments

[MCHEAL]

The rising cost of fuel is one of my many concerns about transport, not just shipping...trucking is also suffering, whereas rail should win out, air cargo should decrease...seaborne transport will continue to be need for the raw materials of infrastructure...other items may, in time, if fuel continues its upward move, as you say, be produced closer to market or at some other place where cost of transport, labor, and production allow a profit. Good hunting...MM

[guliamo]

I'm out of this stock. It's a new shipping company based in Singapore and I thought it would be a good international play. I'm not sure how the shipping industry will react to the increase in oil prices which my strategy is based on, so I'm aligning my strategy and ditching this baby with a small loss..

[Chinstrap]

What stock are you out of?

[beezlebufo]

I'd not throw the drybulk crowd in with the container ship crowd. If shipping costs get high, what is an importer of coal, ore, grain going to do? Sure, it might encourage exploration or more agricultural development in the long run, but for the most part there are very limited sources for dry bulk commodities.

[163888]

Yea, yea yea, I dont see how switching around where products are made helps China and India power is growing consumsion needs. It takes a lot of electrc power and steel to bring well over 2 billion people out of the dark age into the 21st century. We are talking about Dry bulk, not container ships right. The point being China and India are going to have enough trouble keeping up with their own peoples demands. much less worrying about everyone else. I have some news, auto companies are not trying to build factories in China to build cars there for the US, they are more concerned about the 2 billion cars China will want.

[mariposa]

I have been concerned about this long term, and long term may arrive sooner than I thought. Agree it is much worse for container than dry bulk. Had been thinking of selling my Seaspan, and just take the small loss, which is about 0 with dividends, and either keep in cash or convert to DRYS. Long DSX and EGLE, TNP and SFL also. I wonder about TRN and its barges -- might be more market there.

[greenjacket]

I own both Seaspan & Eagle and have a profit on both. They both charter out the ships they own.
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.

[rds1955]

It's my understanding that most of the Contractee's bear the brunt of the fuel costs... not the shipping companies themselves... this was addressed in the last conference call of Eagle Bulk shippers a bit ago I do believe...

[greenjacket]

rds1955 - thanks

[seabrook]

I do agree that the contractee's(traders/e... bear the brunt of the fuel costs...but they too pass these on to the final consumers through the chain of the trade. So it is you and me who finally pay for the increasing Oil price.
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. !!...

[User 219693]

Just because OIL prices go up another 40 some percent, does NOT mean that their costs go up 40 some percent. There are other things involved in their cost and its not a direct correlation at all. If you haven't noticed, the BDI has skyrocketed in the past year. If costs go up, so will the index. Plus there is always the chance they the price of OIL will drop, especially if the dollar rebounds. I completely disagree with your idea that High Oil Prices will negatively affect Dry Bulk Shippers. Have you not watched the BDI and shippers appreciate as OIL shoots up?

[User 219693]

Just because OIL prices go up another 40 some percent, does NOT mean that their costs go up 40 some percent. There are other things involved in their cost and its not a direct correlation at all. If you haven't noticed, the BDI has skyrocketed in the past year. If costs go up, so will the index. Plus there is always the chance they the price of OIL will drop, especially if the dollar rebounds. I completely disagree with your idea that High Oil Prices will negatively affect Dry Bulk Shippers. Have you not watched the BDI and shippers appreciate as OIL shoots up? Shippers trade with the BDI and on momentum, not oil prices.

[User 219693]

didn't mean to send that twice, sorry.

[GFS]

Bulkers report daily cost at $6,000 to $9,000. That includes crew, insurance, prorated maintenance, etc,etc,etc. The ships mostly burn bunker fuel, literally the bottom of the barrel. Higher crude cost is a factor but not a big one. Shipping rates are controlled by negotiated charter rates and supply and demand of ships. Actual fuel cost is a smallish factor

[blink0404]

Enter your comment hereAs the market continues to go down, shipping, which used to be a safe haven, now looks like it may be subject to a downward trend. Here's a pretty good podcast that discusses what to during this down market and what's going on with coal, steel, bulk shipping, and agriculture.

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...