Shipping Update 3
Combining both Dry bulk and Tanker updates
A quick update.
Supply growth remains muted for both dry bulk and tankers, across all segments. I won’t belabor the point brought out in the previous articles. There is no shipyard capacity and little ordering through 1H2026 as of now.
What’s more interesting is the current rates and where demand is headed in the coming months.
Current rates
Dry Bulk
The dry bulk segment remains very weak (Figure 1).
Tankers
Dirty tankers have been very strong as late, with rates catching up to previous super cycle levels (Figure 2).
Likewise, the clean tanker index continues to remain strong (Figure 3).
Tanker demand outlook
The main factors that have been driving tanker strength are SPR releases (Figure) and rerouting of trade routes from the Russia-Ukraine war. SPR releases have been going to Europe and Asia, especially since the SPR releases are of a particular type of oil that cannot be refined at a sufficient rate in the US.
Going ahead, the bullish factors for tankers are:
The rerouting of Russian oil the EU will continue (Figure 4). The EU will ban Russian oil by Dec 5 and oil products by Feb 5. VLCCs will be needed to transport the crude towards Asia for refining, and from other regions to Europe. Product tankers will be needed to move product to Europe as well. For the crude to Asia route, due to limitations at the Baltic ports, VLCCs will not be able to be properly filled. It is likely smaller ships will be needed to extract the oil and then transfer it to the VLCCs, an extremely inefficient process that will create massive ton mile demand across segments. This will be exacerbated in the winter as the frozen Baltic sea can only be traversed by ice class vehicles, which are in the smaller segments. VLCCs are not generally ice class. The product will also find it’s way back to Europe, as the EU has not banned products that are derivative from Russian crude, creating more ton miles from the round trip. Increased Chinese import and export quotas are prepared for this trade, and has translated into rates.
Gas to oil switching in Europe will continue and increase oil demand and exacerbate the above. Although it is unclear how much switching is left to be done.
A recovery and reopening of the Chinese economy.
IMO2023, which will disproportionately hit shipping segments in shortage as well supplied sectors will low rates will already slow steam to save fuel.
The bearish factors are:
SPR releases will stop.
In 1H2023, a 650k bpd refinery in Nigeria is expected to startup, which will dramatically cut short the Russia-Asia refining route.
The war could end
OPEC+ production cuts
Global recession could negatively impact oil demand.
My take:
I wish I could give a definitive take on where tanker equities are headed from here, but I am afraid I cannot. Predicting equity movements relies on predicting rates, then the reaction of the market to those rates. At this point, rates have already moved up, and while there are bullish factors going ahead, especially with respect to full EU sanctions on Russian crude, there are bearish factors as well, such as the stopping of SPR releases and a global recession. Some bullish factors may not materialize as quickly as we think as well (e.g. Chinese reopening could be delayed and muted due to a weak economy). I would lean bullish simply because I think there’s a high probability of Chinese reopening and continued inefficiencies from EU sanctions (which I consider the main factors), and because oil demand is rather robust to recessions, but I set my base case as more of a maintenance of rates rather than a significant increase. My gut would say that some level of bullishness has been priced in, and drastic, short term upside from here would require a drastic bullish catalyst, something which I don’t see happening (I can be wrong - who saw the Russia-Ukraine war coming?). I would not be looking to enter at this moment, but I am not selling either. I expect shareholder value to be organic going ahead, with companies cleaning up balance sheets and returning value from their windfall profits. If rates and equity valuations move significantly up this winter (a strong quarter for tankers), I will likely trim my positions significantly and look for a pullback to add.
Dry bulk demand outlook
Dry bulk has been weak because economic weakness globally, especially in China, have lowered cargo demand, and because congestion has lowered. Only 30% of the Capesize fleet is now stationary, similar to pre-pandemic levels and significantly below the peaks ~40% in 2021/22. This helps explain why the strong Brazilian iron ore exports from June to September failed to ignite a spot rate rally (Figure 5).
Going ahead, the bullish factors for tankers are:
A recovery and reopening of the Chinese economy.
IMO2023
Excess commodity inventories from exporting countries and falling inventories in importing countries. Vale in brazil currently has significant above ground inventory it needs to ship (Figure 6). Chinese steel (Figure 7) and iron ore (Figure 8) inventories are low and falling as domestic consumption has caught back up to prior year levels while steel output still lags (Figure 9). They will likely restock going ahead.
Bearish factors:
Continued global recession
My take:
To me, the dry bulk segment looks far more attractive for an entry point now. Most of the negative factors are already priced in, with rates back to lows and equity valuations stabilizing at extremely low levels. A global recession could worsen things, but let’s not forget that the dry bulk fleet is aging as well and this would only push the orderbook further out (even further than tankers) and lead to increased scrapping. Meanwhile, any bullish catalyst here (particularly Chinese reopening, but also short term inventory clearing by major iron ore producers to replenish stocks) could lead to a significant recovery. This was in fact the set up when I initially entered into my tanker positions (no imminent catalyst in sight, weak rates and negative developments priced in). I consider the market antifragile now and I will be adding to NMM and EDRY on further weakness.