Shipping Markets - Trends & Outlook

A Discussion with Ben Nolan, Head of Maritime Research, Stifel

In this week’s Analyst Updates webinar, hosted by Capital Link, Nicolas Bornozis CEO of Capital Link, sat down with Benjamin Nolan , Head of Maritime Research at Stifel Financial Corp., to discuss the current trends shaping the maritime industry. Their conversation ranged from recent port strikes to the ongoing Middle East tensions, and how these are affecting tanker rates, container shipping, and dry bulk commodities. With the fourth quarter now in full swing, Mr. Nolan provided an enlightening analysis of what lies ahead for the remainder of the year.

To watch the full analysis please visit the following link:

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An Inconsequential U.S. Port Strike, for now.

Mr. Nolan started his analysis by talking about the recent port strike in the U.S., which lasted three days but could have longer term repercussions. According to Mr. Nolan, while the strike didn’t have an immediate significant impact on the economy nor shipping, it brought forth the complexity of labor issues and port automation. As he mentioned, the U.S. lags significantly behind the rest of the world in terms of automating their ports, largely due to opposition from organized labor. Although the parties involved were able to agree on substantial wage increases, the topic of automation remains unresolved.

This pause could be temporary, "I’d be surprised if we did not see this topic resurface in a few months,” he warned, noting that the issue has been effectively postponed until January. In the short term, the strike’s effect on shipping was minimal, with only minor trade front running to avoid disruptions. However, Mr. Nolan worries that future strikes could pose more significant challenges if automation issues remain unaddressed.

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Moderate Tanker Market Gains Amid Geopolitical Shifts

Turning to deep sea shipping, Mr. Nolan shared his outlook on the tanker market, specially as the winter months approach. Historically, the fourth quarter is a strong period for tankers, and tensions in the Middle East have provided an additional boost. Evidently, Mr. Nolan anticipates a similar rate uplift this year, although not as dramatic as in previous peak periods. While VLCC rates are unlikely to reach astronomical highs, such as $200,000 per day, he does appear to be expecting a moderate improvement.

Similarly, the geopolitical landscape is contributing to higher tanker demand as well, as vessels are rerouting around Africa because of the Middle East tensions, and Russian oil shipments have to travel longer distances due to sanctions. While Panama Canal delays have subsided, the underlying issue continues to be oil demand. Mr. Nolan pointed out that though oil prices remain above $70 per barrel, there's no indication of a substantial seasonal uptick in oil consumption this year.

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Container Shipping: A Strong Year, but Is the Peak Over?

When the conversation turned to the matter of container shipping, it was duly noted that containers have experienced an unexpectedly strong year following a downturn in 2022. Much of this improvement can be attributed to the de facto closure of the Red Sea route, thus forcing container ships to take longer journeys around Africa. Mr. Nolan estimates that this has effectively shrunk supply by 8-10%, leading to more than a doubling of box rates earlier in the year.

Despite this, rates have started to decline over the past few months, and Mr. Nolan indicated that the peak may already be behind us. He did observe that this has been a really good year, but unfortunately we’re starting to see some softening. The combination of the aforementioned geopolitical disruptions, a potential East Coast port strike, and the unquestionable inventory build ups in the U.S. have contributed to these fluctuations. As inventories are drawn down, Mr. Nolan expects box rates to continue falling, reducing pressure on shipping lines to charter additional vessels.

Still, with the Red Sea issues unresolved, the market is likely to perform better than last year. Although, Mr. Nolan did caution that it may take time to absorb the current excess capacity.

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Dry Bulk Sector Faces Uncertain Growth Prospects

Admittedly, Dry bulk has been less affected by geopolitical factors like the Middle East tensions compaired to its counterparts. Therefore, no major changes have been noted in the sector and of course, no monumental rise is to be expected either.

As Mr. Bornozis noted growing concerns about Chinese demand, specially as the first quarter of 2024 approaches, a typically softer period for dry bulk, Mr. Nolan agreed that Chinese demand remains a crucial factor for the sector. China has shown a willingness to take steps to stimulate its economy, and coal imports have been relatively strong this year. While iron ore inventories are somewhat high, they have plateaued, which Mr. Nolan interprets as a positive sign. However, he admitted that the upcoming first quarter could see some drawdowns, particularly as the country gears up for the Lunar New Year.

Looking further ahead, Mr. Nolan pointed to promising developments, such as the opening of a major iron ore mine in West Africa, which could increase demand for Cape-size and Newcastlemax vessels. Though the dry bulk market is well-balanced going into 2024, Mr. Nolan predicted that it's unlikely to see a dramatic rise given the current state of the global economy. Nonetheless, the sector's favorable supply side dynamics, like its low order book compared to other categories, should help support the market in the medium term.

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Supply Concerns for LNG and LPG

Mr. Nolan noted that with respect to the gas sector, and in particular LNG and LPG, the high oil price can be helpful, since that tends to have a knock-on effect on these markets, given the substitutability between natural gas, LPG, and oil.

For LPG, much of the market is driven by arbitrage opportunities, particularly in moving propane from the U.S. to other markets. However, the LNG market remains relatively soft, largely due to delays in new projects and high natural gas inventories in Europe resulting in a decrease offloating storage demand.

Mr. Nolan concerns lie in the potential of timing mismatches between the delivery of new cargoes and ships. There are a lot of ships on order, and while there will be more cargoes, delays could lead to oversupply in the near term, he explained. It’s important to mention, that despite the fact that ships are usually delivered on time, cargoes tend to appear later than expected. Though the gas sector is in decent shape, it lacks the strong seasonal uplift seen in previous years.

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Environmental Regulations and Fleet Renewal

As environmental regulations tighten, Mr. Nolan expects to see a divergence in the market between older and newer ships but does not see any reason a fleet wide slowdown should happen. It is true that the IMO has set stricter emissions targets, and newer vessels are generally better equipped to meet these standards. Mr. Nolan believes that older vessels, and more specifically those over 15 or 20 years old, may need to slow down to comply with regulations, reducing their competitiveness and profitability.

In spite of this, he doesn’t foresee a mass exodus of older ships from the market unless the industry enters a prolonged downturn. "In a strong market, people can always find a way to keep vessels in the water," Mr. Nolan noted.

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Challenges in Raising Equity

Mr. Nolan also addressed the difficulties shipping companies encounter when raising equity in today’s capital markets. Many public shipping companies are currently trading well below their NAV, some as low as 70-75%. This valuation discrepancy makes it tough for new entrants to compete, as they have to contend with companies that are already undervalued, making the high cost of equity financing hard to justify. While cash flows are strong in many segments, there is little incentive to tap public equity markets when other financing options are available. "The public equities for shipping have not been cheap for a few decades now, really, or at least a decade and a half," ?Mr. Nolan remarked.

Mr. Nolan warned that the high cost of capital for shipping companies is likely to persist, as equity markets continue to undervalue companies in this space. He suggested that unless a company can create a strong narrative to differentiate itself from competitors, it will struggle to break into public markets at favorable terms. One could argue that, in an era where shipping remains the backbone of global trade, it's paradoxical that such a vital industry is often undervalued by the market.

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