Any lingering doubts on the effect of trade-war rhetoric on U.S.-listed ocean shipping stocks should have been laid to rest in the first half of August.
Trade politics is clearly moving these equities – which begs the question of whether shipping stocks can break out of their lows until the conflict is resolved.
On August 13, after the U.S. Trade Representative announced tariff delays on certain Chinese containerized goods, ocean shipping stocks bounced, even equities of ship owners that don’t transport containers.
This followed sharp downward share moves in early August. Shipping stocks posted a strong July on improving rates, but that reversed after the August 1 tweet by U.S. President Donald Trump announcing a 10 percent tariff on $300 billion of Chinese goods starting September 1. On August 4, China confirmed that it would halt purchases of U.S. agricultural exports.
Between July 31 and August 5, the stock price of dry bulk owner Star Bulk (NASDAQ: SBLK) fell by 14 percent, shares of Golden Ocean (NASDAQ: GOGL) dropped 13 percent and stock of Scorpio Bulkers (NYSE: SALT) declined by 11 percent.
Shares of container-ship lessor Seaspan (NYSE: SSW) declined by 10 percent between July 31 and August 5, those of liquified natural gas (LNG) carrier owner GasLog Ltd (NYSE: GLOG) by 11 percent, and stock of liquefied petroleum gas (LPG) carrier owner Dorian LPG (NYSE: LPG) by 10 percent.
Shipping equities again moved roughly in parallel, in the other direction, following the August 8 move by China to stabilize its currency. Gains were in the low- to mid-single digits on that day.
On August 13, after the U.S. tariff timetable for some Chinese goods was pushed back to December 15, shipping stocks rose almost across the board in the low- to high-single digits, with Star Bulk up 8 percent and Golden Ocean up 7 percent. (However, early on August 14, stocks suffered a sharp downward reversal.)
Ocean shipping stocks are likely being moved by U.S.-China trade developments due to broader stock-market momentum, which stems from investor sentiment toward global economic growth and Chinese GDP and how trade relates to these risks.
Lower global growth would impact almost all vessel owners, regardless of their individual exposures to U.S.-China trade. Declining world GDP growth would also temper oil consumption, a negative for tanker demand. To the extent this affects oil pricing, it could extend OPEC production cuts, yet another negative for tankers. Meanwhile, Chinese GDP is a particularly important indicator for dry bulk.
Frode Mørkedal, managing director of research at Clarksons Platou Securities, addressed the stock sentiment issue in a client note on August 12 (prior to the U.S. tariff delay decision). He said that “with global commodity prices in a tailspin, demand fears are overcoming shipping equities.”
He said that stock losses in the first half of August “wiped out the year-to-date gains for the sector,” and added that “given the drop in commodity prices, investors are starting to look at what happens to vessel demand should, for example, OPEC cut output further.”
“We have also gotten more [investor] questions on LNG,” Mørkedal continued. “Here too, the main worry is the weak commodity prices, with spot LNG in Asia down 54 percent year to date. Such low natural gas prices are a worry for new investment activity in the sector, and arguably could delay FID activity [final investment decisions on new export projects].”
The bigger picture for shipping stocks
Trade-politics-related moves of ocean shipping stocks must be viewed in a longer-term context.
Over the five-and-a-half years since January 2014, the Dow Jones Index has risen 67 percent. In contrast, the largest listed tanker company, Euronav, is down 28 percent over the same period. The largest dry bulk company, Star Bulk, is down 84 percent. The largest container-ship lessor, Seaspan, is down 55 percent. The largest LNG carrier owner, GasLog Ltd, is down 42 percent, and LPG carrier owner Dorian is down 51 percent.
Investors have obtained drastically better returns by opting for non-shipping stocks, which will make it all the more difficult to re-attract them to this sector.
Shipping analysts have highlighted two main arguments in favor of listed shipping companies. The first involves supply/demand fundamentals. The vessel supply side of the equation is becoming much more attractive for crude tankers, product tankers, bulkers, LPG carriers and container ships, given a lack of newbuilding orders (overcapacity fears persist for LNG carriers).
The second argument is more situational, related to the IMO 2020 rule, which will cap sulfur content of marine fuel at 0.5 percent starting January 1, 2020 for ships that are not equipped with exhaust gas scrubbers.
This regulatory change is expected to reduce available vessel capacity due to scrubber installations and simultaneously bolster seaborne tanker volumes. However, there is yet to be evidence of new cargo demand in either the product tanker or crude tanker sectors, and the only sector showing evidence of higher charter rates due to ship removals for scrubber installations is container-ship leasing.
The question ahead is whether these potential tailwinds for shipping stock sentiment will be offset by broader market headwinds from trade tensions and fears of a global slowdown.
From a timing perspective, there has been considerable speculation that China will hold off on resolving the trade dispute until after the next U.S. presidential election in November 2020. If so, this could conceivably dampen or threaten shipping stock sentiment for at least the next 15 months.
Effects of prolonged stock weakness
If shipping stocks continue to bounce along the bottom for a further lengthy period, there are several possible implications:
Capital market proceeds – To the extent that stock pricing remains below net asset value (NAV, the value of ship assets and cash minus debt and other liabilities), capital market activity should remain muted.
Through August 13, U.S-listed ocean shipping companies have raised only $589 million. Only 2 percent of that total has been raised through sales of common equity, with 20 percent raised via the offering of convertible bonds and the remaining 78 percent from debt securities. By this time in 2018, U.S.-listed companies had raised $3.2 billion, over five times the current tally.
New public listings – Continued depressed equity pricing would likely prevent additional ship owners from listing on NYSE or NASDAQ through an initial public offering (IPO), because such an offering would undervalue fleets in comparison to pricing that the vessels could obtain if sold in the physical second-hand market.
Newcomers would likely continue to debut through so-called ‘direct listings,’ in which no money is raised, a path taken earlier this year by Flex LNG (NYSE: FLNG) and Diamond S Shipping (NYSE: DSSI).
Ships for shares – A prolonged shipping IPO drought could also spur more ships-for-shares consolidation deals. Private equity firms that ordered newbuildings in 2012-15 expected to exit their positions through IPOs, but they cannot. Instead, they’re selling their fleets to already listed companies in return for shares. The caveat is that these transactions don’t work if the public company’s shares are trading so far below NAV that they cannot be realistically used as acquisition currency.
Buybacks – Several ship owners with stock trading well below NAV have opted to buy back their own shares in 2018-19, a trend that should persist if pricing remains weak. The downside of this behavior is that buybacks reduce the public ‘float.’ The float is the number shares available to non-insiders. One of the reasons shipping stocks are unpopular with investors is their lack of trading liquidity. Reduced floats lower trading liquidity even further.
Capacity growth – Lack of access to capital markets implies less money available for fleet growth, whether through newbuilding contracts or second-hand vessel purchases. With the exception of the recent convertible deal by Eagle Bulk (NASDAQ: EGLE), very little growth capital has been raised in 2019.
Money raised in capital markets by U.S.-listed owners is more likely to be used for debt refinancing than for fleet expansion. The dearth of growth capital availability and a continued lack of newbuild ordering should be a positive for future freight and charter rates – making ocean transport more expensive for cargo owners – assuming cargo demand remains firm and fears of a global recession are unfounded.