Note: This article is an abridged version of a more in-depth report published on Value Investor's Edge on January 5th.
Making predictions in shipping is often a sketchy endeavor. 2017 saw quite a few surprises that caught many off guard. But if one looked closely enough the seeds were planted for these surprises long before they emerged. Here we will try to read the tea leaves in order to make five predictions for 2018. Some might be bold, others not so much. But if they come to fruition they should have an impact on their respective segments.
One major theme of 2017 was a massive consolidation effort in the container shipping segment driven by low (loss-making) rates brought on by a massive influx of vessels.
The end of 2017 saw the beginning of what could be a growing trend in 2018 for the crude tanker segment; On December 21st, Euronav (ERB:EURN) and Gener8 Maritime (NYSE:GNRT) officially confirmed their merger agreement creating the leading independent large crude tanker operator.
This merger may be the first of several to come according to Frontline's Chief Executive, Robert Macleod. On the November 22nd Q3 conference call he noted that the industry would benefit from consolidation and that move may be driven by several factors.
Environmental mandates/regulations including the Ballast Water Management Convention and the 2020 Sulfur Cap may take their toll on poorly capitalized companies and consolidation could provide some assistance.
Additionally, some companies are trading well below NAV, which was likely a main factor behind Euronav's selection of the significantly undervalued Gener8. Additionally, these assets are trading at significantly depressed prices, and since shipping is a heavily cyclical business, these downturns make for prime acquisition opportunities.
We previously cited Gener8 as a top takeover target and covered this development extensively via Value Investor’s Edge.
Several companies and nations are beginning to make significant investments in LNG bunkering facilities with the expectation that LNG fueling is the way forward.
The Maritime Executive spoke with Tom Strang, Senior Vice President Maritime Affairs for Carnival Corporation (NYSE:CCL) to get an in-depth view of why Carnival is making LNG its fuel of choice for the future. One part of the interview that stuck out for me is below.
What was the thinking behind the LNG project?
LNG is an economic, clean and safe marine fuel with increasing global availability that also complies with existing and scheduled emission requirements. By building new ships that will be powered by LNG both while in port and at sea, we believe we are setting ourselves up to take advantage of these benefits and future-proofing our fleet.
The idea of future-proofing a fleet is an important consideration going forward. Recently we have seen the IMO introduce new mandates regarding sulfur emissions. Now there is talk about addressing carbon dioxide, of which maritime trade was left out in the Paris Agreement, and particulate matter. A switch to LNG would basically address these issues which look set to dominate the environmental side of maritime trade over the coming years.
So just how fast is LNG bunkering projected to grow? A couple reports out recently seem to have similar outlooks. One suggests CAGR of 64.7% through 2023. Another suggests CAGR of 52.4% over the forecast period (2017–2025). Yet another one projects 63.6% CAGR through 2025.
Much of this early bunkering outside of NW Europe will actually come from ship-ship transfers. In fact, some believe that ship-ship LNG bunkering will be the fastest growing segment in the coming years.
For 2018 I expect we will see a rapid expansion of port developing LNG bunkering facilities, a rise in purpose build bunkering vessels, a growing LNG powered orderbook, and an influx of LNG conversions for newer vessels already on the water.
A Surge In Newbuild Orders
For the last few years newbuild prices have been quite low by historical standards. But as 2018 progresses we may see a return to the shipyards in a big way as owners perceive the window of opportunity for these low prices as closing. Let's review why this may be the case.
Shipyard capacity has tightened. There was a total of 358 active yards, defined as having at least one unit under construction, as of July 2017, a 62% reduction in capacity when compared to 934 from 2009. In October of 2017, Clarksons predicted a further 20% decline by the end of the decade.
Charter rates for several segments are forecast to rise. As rates rise owners react in a sort of collective manner by ordering newbuilds in an effort to place the most tonnage on the water to capitalize on an improving environment.
Steel prices are rising. The main costs for building a ship are steel and labor. Most reports I have seen view this rise as a sustainable long term move based on the supply/demand outlook.
Finally, as the global economy recovers and many areas of investment are seen as saturated, shipping is one such area that hasn't been completely flooded with investment capital. That may change as those seeking to keep the high return train chugging along are forced to areas they once deemed too risky.
On December 31st, Yonhap News reported:
South Korean shipyards have sharply raised their order targets for next year on expectations that the shipbuilding sector will improve.
Dry Bulk Dividends
This one is a bit of a long shot here and won't be realistically possible until the back half of 2018. But let's go over why this might be on the radar.
So if rates were up to profitable levels in recent quarters why wait till late 2018 to consider dividend increases?
Dry bulk shipping follows a seasonal cycle. Q1 typically sees the lowest rates of the year, with February representing the trough, while Q3 and Q4 typically see the highest charter rates. Therefore, Q1 of 2018 will likely see lower rates than those of Q4 of 2017 and may dip again into unprofitable territory one last time. However, it is expected that Q3 of 2018 will present a likely starting point for a sustainable return to profitability and sustainable dividends. We’ve already positioned ourselves in many of these names at Value Investor’s Edge.
During the Q3 2017 conference call, Citi’s Christian Wetherbee and Angeliki Frangou of Navios Maritime Partners L.P. (NYSE:NMM) discussed a return of distributions which were ended in late 2015. Angeliki noted the recovery in dry bulk and stated “there is clearly a path towards dividend.”
Now, as I said in the beginning, this may be a bit of a long-shot even for the back half of 2018, but it wouldn't be out of the question.
India could be the place where we see quite a few shifts in various trade flows over the course of 2018. Let's tackle them by segments as they relate to shipping.
On a cumulative basis, India’s crude oil production in the first seven months of 2017-2018 remained almost flat at 21,063 metric tonnes, decreasing 0.24% as compared to the corresponding period a year ago.
But crude oil demand has been increasing significantly, and the country's import dependence is significant at around 82%. Almost all of that is brought in by crude tankers.
By 2040, India's oil demand will rise more quickly than any other country's, according to the International Energy Agency, soaring from 6 million bpd now to 9.8 million bpd.
Getting the much-needed oil as cheaply as possible will be an important goal as to limit the impact of inflation on this red-hot economy. This could bring the price differential between WTI and Brent into play leading to even more trade between the USA and the subcontinent in 2018. Greater volumes along the USA/India route would also contribute heavily to ton mile demand growth.
India imported about 19 million tons of LNG in 2016, up 30% year over year, making it the world's fourth-largest consumer, behind Japan, South Korea and China.
Petroleum and Natural Gas Minister Dharmendra Pradhan told The Nikkei on a recent trip to Japan that LNG imports are set to surge even further by 2020, to about 30 million tons, a roughly 60% increase from last year. "Ultimately, gas is the cheapest commodity" when taking the environmental impact into account, Pradhan said.
This is part of the government’s target to boost the natural gas portion of India’s primary energy mix to 15 percent by 2030, up from 6.5 percent now.
With limited domestic natural gas resources, international pipeline connections, and investment much of this new demand will be satisfied through seaborne imports.
India’s LPG purchases have surged from just 1 million tons a month in early 2015 to approximately 2.4 million tons in December.
Ted Young, chief financial officer at Dorian LPG told Reuters:
The growth in India is amazing. The fact that they have grown from 140 million subsidized household connections in 2015 to 181 million now is very impressive.
China, India and Japan together make up about 45 percent of global LPG purchases. December saw India overtake China for the first time in LPG imports by 0.1 million tons. India's average monthly imports have surpassed that of Japan which stand at about 1 million tons.
The majority of LPG imports into India originate from the Middle East but recently LPG from the United States has started finding its way into the subcontinent. In fact, from January to December of 2017 trade between the two quadrupled moving from 50,000 tons to more than 200,000 tons. Those numbers should continue to rise leading to increasing ton mile demand for LPG vessels.
Over the past several years India has been a wildcard when it comes to the coal trade. 2018 will see an extension of this uncertainty brought on by a tug of war between increasing met coal imports and potentially waning thermal coal imports.
On one hand, growth in the Indian steel industry will contribute to a hefty increase in seaborne met coal imports over the coming years.
In just a couple years, they may even exceed that of Japan according to analysts at Macquarie. They project that next year India could take in 56 million mt of seaborne met coal, from 47 million mt this year, in a report published in October.
But on the other hand, there are plans by Coal India to expand production significantly by 2019, representing an approximate 50% increase in domestic supply to 1 billion tons annually, the vast majority will be thermal.
This move would all but wipe out the need for imported thermal coal. If this proves to be the case, then the relatively small increases in met coal imports will be nowhere near enough to offset the declines.
But a few things need to be taken into consideration here. First, the fact that those production goals might not be achieved. Second, that coal produced domestically is lower quality than that which can be imported. Third, a ban of petroleum coke around the Indian capital of New Delhi could raise demand for coal. Finally, Indian coal plants are running a very low capacity, currently around 60% and coal fired power generation is forecast to increase for several more years.
As these issues play out, India may be one of the more interesting markets to watch in terms of shifting appetites for coal.
Bonus Item: USA Exports
So this has been discussed to death by me I feel like, but just to make things complete, I wanted to throw in the fact that energy exports out of the USA are poised to contribute heavily to ton mile demand in 2018.
LPG, LNG, product, crude, and even coal exports all gained ground in 2017 and with a very pro-energy export administration in office, it stands to reason that policies hindering trade or regulations pushing up prices of exploration and production will likely be reconsidered.
But, of course, this sort of thinking is hardly a surprise since 2017 was the year that established this trend. It stands to reason that 2018 will likely be an extension of this trend, possibly of a greater magnitude, and should provide a tailwind to a variety of segments.
So there we have it. Some factors to watch in 2018 which could play a role in maritime trade. Now, not all of these are guaranteed, in fact, most are pretty speculative. But the groundwork appears to be laid for many of these to come to fruition.
Here comes my favorite part of my articles, the comments section. What do you think 2018 holds for maritime trade? Thoughts?
Thank you for reading, and I welcome all questions/comments.
If you would like to stay up to date on my latest analysis, I invite you to follow me on Seeking Alpha (click the "Follow" button next to my profile picture at the top) as I continue to cover all aspects of maritime trade.
Value Investor's Edge
Value Investor's Edge is offering limited free two-week trials through January 10th. Sign up to lock-in our lower current rates (grandfathered for lifetime of service) before the dues increase substantially at the conclusion of this free trial.
Value Investor's Edge is a top-rated Seeking Alpha research service, which focuses primarily on the volatile, and therefore potentially very profitable, shipping industry. Members receive a two-week lead time on all reports by James Catlin, alongside exclusive content by J. Mintzmyer, a top-tier deep value analyst. This platform offers actionable trades and strategic income opportunities through Mr. Catlin's data-driven macro analysis, which often complements Mr. Mintzmyer's company-specific analysis. This winning team has developed a dedicated following of highly knowledgeable investors and industry professionals who also share their own thoughts and ideas on Value Investor's Edge.
Disclosure: I am/we are long NMM, GNK, SALT, GOGL, STNG, GLOP, TGP, GLNG.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.