A few months ago, I published an article to this site discussing what were at the time the conditions in the shipping industry, primarily the dry bulk shipping industry. As we have now seen an entire quarter pass, it seems like an appropriate time to proceed with a follow-up to that original report so as to keep people aware of the changes in the market environment and of course the impact that these changes may have on your portfolio. Overall though, the industry has continued to improve over the past few months, which should prove beneficial to shipping companies such as Golden Ocean Group (GOGL).
One indication of the strength in the shipping market comes from looking at spot charter rates. This may also be the indicator that has the greatest overall impact on shipping companies because it has a direct impact on their top-line revenues. This is because there are two ways in which shipping vessels are compensated. Either the vessel can be under a long-term contract in which it makes multiple trips carrying dry bulk goods for a single entity or it can be chartered for a single voyage, in which the ship will carry goods between two points with no promise of additional business. In this second case, the company that wants the bulk goods moved will pay a rate that is set by the spot rate market and is constantly changing. As we can see here, average spot rates in the second quarter of 2018 were broadly higher than in the corresponding quarter of last year and were generally higher than in the first quarter of 2018 (with the exception of Panamax vessels):
Source: Golden Ocean Group
One reason for the uptick in prices was fleet utilization, which is the percentage of the global dry bulk fleet that is actually engaged in revenue-generating activities. According to Maritime Analytics, global dry bulk fleet utilization was 85.1% during the second quarter of 2018. This compares quite favorably to the levels where it stood in the first quarter of 2018 and second quarter of 2017, which were 84.5% and 83.6% respectively. This also represents the continuation of a general trend that has been going on for the past two years. The reason for why this affects prices is one of supply and demand. In short, the higher the utilization rate, the lower the excess supply of ships and therefore the more competition to obtain those ships that are needed to transport goods. This has the effect of pushing prices upward.
Over the past few months, we have seen an increasing number of media headlines regarding a trade war between the United States and China. Indeed, the increasing amount of tariffs that the two nations keep imposing on one another would seem to support this assertion. As might be expected, many have been predicting that this will have a negative impact on the shipping industry but thus far this has not been the case. Maritime Analytics states that a total of 1,143 mt of dry bulk goods was transported in the second quarter of 2018, representing a slight increase from the 1,134 mt of goods that was transported in the first quarter of 2018. It might be surprising to learn, particularly with the trade war talk, that both of these figures were larger than the 1,112 mt of goods that was shipped during the second quarter of 2017. This is in fact a more or less continuation of a steady growth in shipping volumes that has been going on over the past few years:
As we can see in this chart though, not all commodities increased the volumes of transported goods. One of the weaker commodities lately is iron ore, which saw a quarter-over-quarter reduction in total shipped volumes. The primary reason for this comes from China. This nation has been decreasing its imports of iron ore despite a decrease in its own domestic production of iron ore. The country has been increasing the recycling of scrap steel which, when combined with the closure of older steel mills in 2016 and 2017, has reduced the amount of iron ore that needs to be consumed in the production of new steel. With that said though, China has been seeing its stockpiles of both iron ore and steel decline and this will likely force the country to increase its imports at some point.
Perhaps somewhat surprisingly, shipments of U.S. agribulk products increased substantially during the second quarter. This may have been caused by the growing trade tensions as importers in Asia and other regions sought to secure their supply of products before retaliatory tariffs took full effect. One piece of evidence that supports this theory is the fact that shipments of these goods usually do experience a seasonal decline in the second quarter, which did not occur this year.
The various companies that own dry bulk ships also appear to be noticing and reacting to an improved industry environment. This is most obvious when we look at scrapping rates. During the second quarter, only 0.6 million dwt of vessel capacity was scrapped, which is a much lower rate than what was scrapped during previous periods. This is an indication that ship owners expect that the market during the second half of the year will be strong enough for them to secure business for their existing shipping capacity. In addition, the average age of the vessels that have been scrapped this year was 25 years, which is much older than what we saw a few years ago. This is further evidence that dry bulk shipping companies believe that the current market is strong enough for them to secure business for their current units.
In conclusion, the dry bulk shipping market is actually quite strong and is apparently improving despite all the trade war fears. This could provide investors with some opportunities as firms such as Ship Finance International (SFL) and to a lesser degree Golden Ocean Group have seen their share prices pressured by these concerns.
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Disclosure: I am/we are long SFL.
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.