- October 4th saw a massive selloff in the shipping industry.
- This seems to have primarily been in line with broader market trends and short term fluctuations in container rates.
- Given the season nature of the rate selloff and insulation of many companies from these fluctuations, this steep drop in share prices presents a great buying opportunity.
Overview of the Market Selloff in Shipping
Monday saw a steep selloff in the shipping sector, amidst a broader drop in the market, with shipping names dropping even harder-some in excess of 10% for the day. This comes amidst a drop in some shipping rates, which we will examine later in the article. For some background, here's what happened in different segments of the industry:
The most pronounced decline was in the container shipping industry-specifically in chartering companies. Danaos Corporation (DAC) and Global Ship Lease (GSL) were some of the hardest hit, tumbling 13.42 and 13.49% respectively. Other charterers also dropped, Atlas Corp. (ATCO) losing 5.18% and Costamare Inc. (CMRE) 9.7%.
The selloff was least pronounced in the tanker industry: Frontline Ltd. (FRO) lost 4.66%, Scorpio Tankers Inc. (STNG) 3.55%, Nordic American Tankers Limited (NAT) 3.47%, and Teekay Tankers Ltd. (TNK) 4.11%.
Euronav NV (EURN) stands out among shipping names, having gained 0.51% amidst the surrounding selloff. Kirby Corporation (KEX) also gained 0.29% for the day, which makes sense given their more-insulated domestic-focused nature.
Dry bulk shippers also sold off: Diana Shipping (DSX) dropped 7.23%, Grindrod Shipping Holdings Ltd. 5.06%, Safe Bulkers, Inc. (SB) 8.33%, Euroseas Ltd. (ESEA) 9.22%, Golden Ocean Group Limited (GOGL) 7.26%, Eagle Bulk Shipping Inc. (EGLE) 3.98%, Seanergy Maritime Holdings Corp. (SHIP) 11.89%, Castor Maritime Inc. (CTRM) 6.4%, Navios Maritime Partners L.P. (NMM) 8.17% (this company has dry bulkers, container, and tanker ships and has entered into a merger agreement with Navios Maritime Acquisition Corporation - (NNA)), and finally Genco Shipping & Trading Limited (GNK) 7.57%.
What Provoked it?
A broader market selloff on Monday seems to have been largely driven by debt concerns originating both from Evergrande in China and the ongoing-and stalled-debates surrounding the debt ceiling in the United States. This is combined with a recent jump in bond yields and a drop in tech shares that pulled the market lower. But even this only pulled major indexes down a few hundred points, with the NASDAQ's drop the most pronounced, falling 2.14% while the ETF that tracks shipping companies, SonicShares Global Shipping ETF (BOAT) dropped 5.66%. Which begs the question: why did shipping fall so heavily on Monday?
The answer to that is multifaceted. First and foremost, a drop in container shipping rates triggered by China's Golden Week holiday and a production drop there, driven by an energy shortage, seems to have rippled across the industry. The pronounced drop in rates seems to have largely been driven by an offloading of extra capacity before the Chinese holiday, suggesting we might see rates return in a strong fashion at the end of the week. The drop across the tanker and dry bulk sector seems to have been driven by shipping's generally more volatile nature and aided, especially in dry bulk's case, by their ties with container shipping.
Why This Overdone Selloff Presents an Excellent Buying Opportunity
Primarily, this selloff was largely driven by fluctuations in short-term spot prices. Most shipping companies have longer-term charters that limit their exposure to these rates, and with rates even expected to come back strong in a few weeks-if not days-it's hard not to justify buying at these discounted prices. Additionally, even post-selloff, we're seeing shipping rates higher than we've had for many years. The macro-conditions surrounding the US debt ceiling and the Chinese economy are important to watch but don't fully justify the extent to which shipping companies have dropped.
The drop in container rates is primarily related to normal off-season trends and longer-term rates, though lower than the recent and sky-high spot rates, have held mostly steady. We can also expect rates to climb again as we hit the peak season before Christmas and the Chinese Lunar New Year. Additionally, for charter companies, demand for ships remains largely unaffected by short-term rate fluctuations-especially as individual retail companies have begun to charter their own vessels because of the supply chain chaos in dealing with liners at the moment. Just three weeks ago, we saw a ship lease at $200,000 per day on a short-term charter, showing demand is still sky-high. With companies like Danaos and ZIM selling off more than 12%, now may be the time to get in on the action before sentiment returns.
Tankers also look to be positioned for a good fourth quarter-with an energy crisis appearing in both Europe and China-coupled with the normally higher demand for fuel in the cold months of the year. Projections for higher tanker rates abound, and even though the selloff was least pronounced in the tanker sector, a 5% drop could still be an attractive entry point for a fourth-quarter play on the growing energy crunch, especially in the natural gas area. One potential cause for concern may be OPEC's decision to hold production steady, meaning less volume will be hitting the water that could have driven increased tanker demand.
In dry bulk, the biggest concern is old news at this point: Chinese demand for iron ore has dropped, as steel production has fallen. As a result, a large driver of demand for dry bulk services is no longer pushing rates. Nonetheless, we're still seeing record rates for the industry, as container prices push companies to look to dry bulkers to fill missing capacity. Selloffs of nearly 10% offer some attractive entry points for this rally.
This article was written by
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