Tag: shipping stocks

Hello, goodbye: Shipping’s latest entries and exits on Wall Street

The lineup of shipping stocks is in flux. There are multiple new listings as well as notable departures.

The post Hello, goodbye: Shipping’s latest entries and exits on Wall Street appeared first on FreightWaves.

Shipping stocks are having a good run, generally outperforming the S&P 500, Dow Jones Industrial Average and NASDAQ 100 during the past three years amid the pandemic and Russia-Ukraine war.

For those looking to place more bets on U.S.-listed shipping stocks, the lineup is in flux. There are new listings on the New York Stock Exchange and NASDAQ. There are also continued departures as more public players go private.

Latest listings and exits

CoolCo (NYSE: CLCO) began trading on NYSE on March 20. The company has a fleet of 12 LNG carriers with multiple charters expiring this year and next, providing exposure to potentially rising rates.

CoolCo CEO Richard Tyrell

“I describe CoolCo as Flex LNG [NYSE: FLNG] with upside,” said CoolCo CEO Richard Tyrrell at the 17th Annual Capital Link International Shipping Forum, held in New York this month.

Himalaya Shipping has filed a registration for a share sale and NYSE listing under the ticker HSHIP. The company owns 12 dual-fuel, 210,000-deadweight-ton dry bulk carriers.

Heidmar — a well-known manager of tanker and dry bulk commercial pools — announced on March 20 that it will list on NASDAQ via a reverse merger with the SPAC Home Plate Acquisition Corp. under the ticker HMAR.

Tanker owner Toro Corp. (NASDAQ: TORO), a spinoff of Castor Maritime (NASDAQ: CTRM), began trading March 8.

Delta Holding Corp., a ship manager and logistics provider for dry bulk, announced plans in late September to merge with Coffee Holding Co. (NASDAQ: JVA), with the combined entity to trade under the ticker DLOG. (The deal was supposed to close in the first quarter but there had been no announcement as of Wednesday.)

On the exits side of the ledger, formerly NYSE-listed Atlas Corp., parent of Seaspan, the world’s largest lessor of container ships, was delisted Tuesday. The company was taken private by a group of insiders including Fairfax Financial Holdings and the Washington family, together with ocean carrier ONE.

Hoegh LNG Partners was delisted from NYSE on Jan. 2 after being purchased by its private sponsor, Morgan Stanley-owned Hoegh LNG.

GasLog LNG Partners (NYSE: GLOP) looks like the next to go. On Jan. 25, it received a take-private offer from its sponsor company, GasLog Ltd., which was itself taken private by insiders and BlackRock in June 2021.

Aggregate loss of market cap due to entry-exit mix

Shipping companies leaving Wall Street over recent years have boasted strong long-term cash flows that attract large institutional buyers.

In contrast, several of the shipping companies arriving on Wall Street have been very small companies with shares that, by the companies’ own admission, pose high risks to investors and traders. 

In addition to the take-private deals for Atlas, Hoegh LNG Partners, GasLog Ltd. and GasLog Partners, Golar LNG (NYSE: GLNG) exited shipping by selling its LNG fleet to CoolCo in December 2021. Container-equipment lessor CAI was bought by Japan’s Mitsubishi in November 2021. Seacor was taken private by American Industrial Partners in April 2021. Teekay LNG was delisted and bought by Stonepeak in January 2021. DryShips was taken private by its founder, George Economy, in October 2019.

The aggregate market caps of all the shipping companies taken private in recent years (or in the process of privatizing), calculated as of the day prior to their take-private offers, was $10.5 billion.

Among the Wall Street arrivals since 2019, the largest was ocean carrier Zim (NYSE: ZIM), which IPO’d in January 2021. The second largest among the newcomers, Flex LNG, listed in June 2019.

The other entrants have had dramatically smaller market caps.

United Maritime (NASDAQ: USEA), a spinoff of Seanergy (NASDAQ: SHIP), began trading last July. Imperial Petroleum (NASDAQ: IMPP), a spinoff of StealthGas (NASDAQ: GASS), began trading in December 2021.

OceanPal (NASDAQ: OP), a spinoff of Diana Shipping (NYSE: DSX), commenced trading in November 2021. Castor Maritime began trading on NASDAQ in February 2019.

As of Wednesday, the aggregate market cap of companies listing since 2019, from Castor to CoolCo, was $5.9 billion. That’s roughly half the pre-take-private-announcement market cap of the companies that have delisted from NYSE or NASDAQ or exited shipping over the same time frame.

What’s driving privatizations

Many of the take-private deals have involved LNG shipping companies with extensive long-term charter coverage. The most recent exit, Atlas Corp., is a container-ship lessor that also has long-term coverage.

During the Capital Link forum, Stifel analyst Ben Nolan explained, “What differentiates the LNG segment relative to tankers and dry bulk is that you can get long-term cash flows. Infrastructure funds — which are by and large the ones buying these companies — are not making spot plays.”

Nolan also pointed out that many of the companies that were privatized were master limited partnerships (MLPs). “The MLPs were structurally a challenge, with valuations struggling to get back to reasonable levels. If there’s a structural reason your stock’s trading [low], going private is a valid way to think about it.”

According to Christian Wetherbee, shipping analyst at Citi, “It’s about duration and cash flow and predictability. That’s the reason we’ve seen private capital come in and withstand the leverage needed for those types of transactions. I don’t know that it lends itself to something closer to spot or shorter durations, like you see in some of the other shipping subsectors.”

What’s driving (some) new listings

Many of the new listings over recent years — as well as their subsequent follow-on offerings —  are being handled by investment bank Maxim. These include Toro, Delta Holding, United Maritime, Imperial Petroleum, OceanPal and Castor.

Larry Glassberg, co-head of investment banking at Maxim, said during the Capital Link event, “IPOs in this market are going to be very challenging. But I think you will see people opportunistically do things, particularly around reverse mergers and utilizing SPACs … as a mechanism to get public and scale post-closing of those transactions.”

Shipping companies working with Maxim have been very active in the follow-on market, raising cash for vessel acquisitions. These Maxim-linked follow-on offerings account for the vast majority of equity capital raised in recent years by U.S.-listed shipping companies.

Maxim’s Larry Glassberg (Photo: Capital Link)

Maxim says it has been involved in $1.2 billion in shipping transactions since 2015. Marine Money has referred to Maxim deals as “the fountain of funding” and “shipping’s answer to Venmo.”

These equity sales feature discounted shares and warrants purchased by hedge fund intermediaries, who then flip those shares to the retail market.

In mid-2020, Top Ships (NASDAQ: TOPS) — a serial issuer of equity in deals handled by Maxim — was by far the most popular shipping equity on retail stock-trading site Robinhood. Top Ships ranked 37th among all stocks traded on Robinhood, ahead of Starbucks, Pfizer, ExxonMobil, GM and Sony.

According to Glassberg, “From a growth point of view, the U.S. capital markets for maritime companies are an incredible facilitator for capital raising.” He advised, “If there’s an opportunity to go out and raise capital, you want to take advantage of that … [to build] a stronger balance sheet.”

Buyers beware

But buyers beware. As reported by Tradewinds, share sales by Maxim-linked microcap shipping companies are highly controversial due to losses suffered by retail investors.

Unlike larger shipping companies that are generally not selling equity now and whose shares go up when market fundamentals improve, shares of microcaps doing follow-on offerings through Maxim are falling over time as a result of continued dilutive equity sales (and the threat of future sales) — a risk that is fully disclosed in prospectuses.

During Imperial Petroleum’s quarterly call last month, CEO Harry Vafias was asked how long equity sales that have “destroyed a lot of capital” would persist. The company’s share price has sunk 89% over the past year.

Vafias openly admitted equity sales will indeed continue. “We are still, in global terms, a very small shipping company. Ten ships is obviously not a big fleet by global standards. We have money to expand. But even with this money, we cannot really double or triple the fleet. For the time being, we will continue with the [equity offerings] until we have enough cash for a fleet that is large enough to be competing with the global players.”

a chart showing shipping microcap stock pricing
Share price performance of four shipping stocks doing equity offerings handled by Maxim: Performance Shipping (NASDAQ: PSHG), Imperial Petroleum, OceanPal and Top Ships. (Chart: Koyfin)

Share price performance of four shipping stocks doing equity sales facilitated by Maxim: Performance Shipping (NASDAQ: PSHG), Imperial Petroleum, OceanPal and Top Ships. (Chart: Koyfin)

Click for more articles by Greg Miller 

The post Hello, goodbye: Shipping’s latest entries and exits on Wall Street appeared first on FreightWaves.

In search of shipping’s next supercycle: Are tankers next?

Container shipping just experienced a record boom. Some believe crude and product tankers are poised to follow suit.

The post In search of shipping’s next supercycle: Are tankers next? appeared first on FreightWaves.

There have been two historic shipping booms since the turn of the century. Could a third be around the corner?

The first, in 2003-2008, was driven by a surge in Chinese demand as that country came onto the world trade stage. All shipping sectors benefited, with dry bulk the big winner, and secondarily, tankers.

Greek dry bulk owner Aristides Pittas said at a ship finance conference in 2013, “If you look at the fantastic times we had in 2003 to 2008 and the money that was made, and you think that this will be happening again, I can tell you: This will not happen again.”

Then it happened again. In 2021-22, container shipping experienced a historic spike in profits, driven by a surge in consumer-goods buying during the pandemic. COVID played the demand driver role that China did in the prior shipping boom. One shipowner who owned dry bulk vessels in 2003-2008 as well as container vessels in 2021-22 told FreightWaves that the container shipping supercycle was actually the stronger of the two.

The focus now is on crude and product tanker shipping. Optimism is being fueled by an unprecedented shortfall in new capacity coming online, growth in global demand and trade dislocations caused by the Russia-Ukraine war.

The phrase “supercycle” is once again being bandied about. The 2003-2008 and 2021-22 booms were unpredicted and demand driven. The predicted tanker boom, if it happens, would be largely driven by vessel supply constraints.


‘I can’t poke holes in it’

The mood on tankers was ebullient at the 17th Annual Capital Link International Shipping Forum held in New York this week, albeit with an undercurrent of “is this too good to be true?”

Navios vice-chairman Ted Petrone (Photo: Capital Link)

“This happened 15 years ago and was not supposed to happen again but here we are. Everything’s flashing green,” said Ted Petrone, vice chairman of Navios Corp. (NYSE: NMM).

“What happened in the container market completely encapsulates this [tanker] market,” Petrone continued. “Containers didn’t make a dime for 10 years, then in two years they made a decade’s worth of money. That’s shipping. You have to control your risks and control your costs and be in position to make money when you can. That’s where we are now.”

According to Ben Nolan, shipping analyst at Stifel. “With tankers … I can’t poke holes in it. It feels more obvious now than in any of the last 20 years I’ve been trying to do this, which makes me really nervous. It seems too obvious.”

Ridebury Tankers CEO Bob Burke (Photo: Capital Link)

Bob Burke, CEO of Ridgebury Tankers, said, “I’ve been doing this since the ’80s. I have never seen it so strong. I think the next two years are going to be great, just like they are now. But I also think something will happen that is one in a thousand.

“There are a lot of things that are one in a thousand, so the chances are actually more than one in a thousand. So, I would say something will change, nothing that we can predict right now. It could be strongly to the upside or to the downside.”

Anthony Gurnee, CEO of product tanker owner Ardmore Shipping (NYSE: ASC), said, “I think what’s really at play here is recency bias.” Recency bias gives greater importance to more recent memories. “I think we’re all scarred from 10 years of weakness. You can almost hear it in our voices as we’re talking about the market and the outlook. I think there are psychological factors in play.”

According to Clarksons Securities analyst Frode Mørkedal, “When I look around, people don’t seem to be willing to take a bet on next year yet. So, I think there’s a lot of upside potential.”

Look to tanker customers, not tanker execs

What panelists say at shipping conferences is often suspect, because shipping executives generally overemphasize the positives, whether because they believe it’s their job to promote their company’s future profit potential or because — via career “natural selection” — shipping executives are inherently optimistic.

Shipping supercycles are extremely rare; even moderate upturns are uncommon and often fleeting. False starts are frequent. Commodity shipping executives spend most of their careers putting on a brave face amid multiyear cyclical downturns, clinging to whatever crumbs of good news and glimmers of hope they can find.

“I’m permanently optimistic,” said Robert Bugbee, president of Scorpio Tankers (NYSE: STNG), during a luncheon speech in New York in January. “You have to be optimistic in this industry to remain sane and keep going at times.”

All of which leads to many false alarms on impending upturns from shipping executives speaking on conference panels. More important is what tanker customers do, not what tanker owners say.

James Doyle, Scorpio Tankers’ head of corporate development, said at the Capital Link forum, “Rather than all of us up here saying we believe in this market, it’s [more about] when you have Exxon, Shell and BP coming out and saying ‘we agree and we’re willing to put our capital toward it.’”

Spot rates are highly volatile. The big test of whether an upcycle is sustainable is whether charterers bite the bullet and sign multiyear charters to protect themselves from future pain in the spot market, at period rates that are highly profitable to shipowners.

“What drives the period market is pain in the spot market,” said Petrone. “We’re now seeing major oil players talk about doing more longer-term deals, because they see the same numbers we do.”

3-year charters: Still a long way to go

If and when the current tanker upcycle reaches a sustainable level, oil companies will book many more charters for three years in duration or longer at high rates.

Listed owners that have had their fleets almost entirely in the spot market over the past decade will evolve into companies with heavier time-charter coverage, supporting hefty dividends, the pattern seen in 2003-2008.

Panelists’ comments on the three-year charter market were mixed. Most of the positive comments focused on product tankers, not crude tankers.

Spot rates for very large crude carriers (VLCCs, tankers that carry 2 million barrels of oil) are hovering around $100,000 per day. But charterers do not yet seem to be worried about being on the losing end of a multiyear spot-rate boom. They’re not yet covering their exposure to future spot exposure in a significant way.

“I don’t believe we have seen real liquidity, particularly for VLCC time charters of three years-plus,” said Lois Zabrocky, CEO of International Seaways (NYSE: INSW). “We haven’t seen that yet. I think it has to continue to build before that market develops and has the liquidity that would be more reliable for owners.”

According to Petrone, “I think going forward that oil companies that have said for the past 10 years, ‘I’m going to put 5% of my portfolio on long-term deals and I’ll probably lose money on those, but I need them just in case something blows up,’ are going to say, ‘I need 20% covered on a long-term basis.’ We’re seeing a lot of calls come in.”

The three-year charter market on the product tanker side sounds further along. According to Doyle, the three-year market for product tankers is “active and liquid.”

Scorpio is in the process of shifting more of its fleet from spot to long-term charters. It now has 15 of its 113 tankers placed on charters of three to five years. The rates it’s getting are rising.

Among its three-year deals, Scorpio chartered the first LR2 (a long-range product tanker with capacity of 80,000-119,999 deadweight tons) at $28,000 per day last summer. It booked another in December for $37,500 per day. It announced a new three-year LR2 contract on Tuesday at $40,000 per day. (In comparison, Clarksons estimates current spot rates for modern-built L2s are $59,500 per day.)

What happened in 2003-2008

The 2000s supercycle generated unprecedented returns for dry bulk shipping. It was more mixed for tankers, with ups and downs.

The years 2004, 2005 and 2008 were exceptionally strong for crude and product tankers. In 2006 and 2007, the Baltic Clean Tanker Index was around the level it is today. The Baltic Dirty Tanker Index was below current levels in 2006 and 2007.  

Analyst reports and financial filings from that earlier era portray a tanker market at a much different stage in the cycle than today’s. Long-term charter coverage was much higher.

Charterers did not move fast enough to protect themselves against the initial spot rate surge in 2004. In January 2005, brokerage and consultancy Poten & Partners published a report on how much more charterers paid as a result of their delay.

(Chart: Poten & Partners weekly report, Jan. 12, 2005)

“As term chartering managers approached the end of 2003, they were facing a three-year term market with rates around $31,000 per day for a VLCC and a spot market at just over $87,000 per day.

“What is amazing is that very few three-year charters were concluded despite numerous owners who expressed interest in doing term business,” said Poten.

Poten estimated that a charterer would have paid $20 million less per VLCC in 2004 if it had signed a three-year charter versus continuing to play the spot market.

“Most charterers were fighting to get the owner to lower the [three-year] charter premium another $500 per day. Rather than paying this additional ‘premium,’ charterers in effect said, ‘We do not want to pay the $182,500 additional charter hire per year — $500 times 365 days. We will face the risk of high [spot] rates.’”

Eventually, charterers capitulated and took cover in the period market. Tanker owner General Maritime had 28% of its ships taken on time charters at the beginning of 2004. By 2007, according to an analyst report from Dahlman Rose, General Maritime had 73% of its operating days covered by time charters.

Dahlman Rose put three-year time charter rates at $70,000 per day in mid-2008, more than double three-year rates at the end of 2003.

By mid-2008, Frontline (NYSE: FRO) had 43% of its capacity on long-term charters, with Teekay Tankers (NYSE: TNK) at 44%. As of last month, Teekay Tankers had only one of its 45 ships on time charter. Frontline had only seven of its 70 ships on time charter.

Despite ups and downs in freight rates during the 2000s supercycle, tanker values continue to rise. According to Dahlman Rose, the value of a 5-year-old VLCC rose from $60 million in late 2003 to $165 million in mid-2008, a surge of 175%.

And then, everything collapsed. By mid-2009, 5-year-old VLCCs had shed half their value. One of those one-in-a-thousand events that Burke warned about had happened — the global financial crisis — and the supercycle was over.

(Charts: Dahlman Rose Marine Transport Weekly, Dec. 7, 2009. Chart data: Clarksons)

Click for more articles by Greg Miller 

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Could future supply chain crisis hit diesel shipping, not containers?

Tanker capacity for diesel is already tight amid war fallout. With very few ships on order, future transport capacity could fall short.

The post Could future supply chain crisis hit diesel shipping, not containers? appeared first on FreightWaves.

Global trade in diesel and other refined petroleum products is evolving exactly as predicted. European Union and G-7 sanctions targeting Russian exports are forcing product tankers to sail longer voyages and sucking more ships into the “shadow fleet,” reducing effective transport supply in Western trades.

What comes next for already tight transport supply is also completely predictable.

The number of new product tankers on order is historically low. Given construction lead times and shipyards chock full of orders for container ships and LNG carriers, the world has no choice but to make due with roughly the same ocean transport capacity for diesel, gasoline and jet fuel until 2026, no matter what happens to global fuel demand.

If demand stagnates, problem solved. If it doesn’t, the world could conceivably face a replay of the supply chain crisis it just went through with containerized goods, only this time, with fuel.

It’s an ominous scenario for those worried about energy security. It’s a potential goldmine for owners of product tankers and investors in their stocks.

Russian invasion fallout ‘center stage’

“Clearly the EU ban on Russian oil products has been the most important driver [of the current market],” said Jacob Meldgaard, CEO of  product tanker owner Torm (NASDAQ: TRMD), during a conference call Thursday.

According to Eddie Valentis, CEO of product tanker owner Pyxis Tankers (NASDAQ: PXS), “The Russian invasion of Ukraine continues to take center stage.”

The EU banned imports of Russian petroleum products on Feb. 5. With Russia now finding more distant buyers for its diesel and Europe finding more distant sources to replace Russia diesel, Torm estimates the “trade recalibration” will increase ton-mile demand by 7%. (Ton-mile demand is a measure of volume multiplied by distance.)

“This trade recalibration has already begun,” said Meldgaard.

It’s far from complete. Current volumes are deceiving, because the EU prepped for the Feb. 5 ban on Russian imports by loading up on diesel early.

“The EU started to prepare for the ban ahead of the final deadline by importing higher volumes from non-Russian sources, especially the Middle East and India,” explained Meldgaard. ”At the same time, the EU continued to import high volumes from Russia, basically until the very start of the ban.”

Europe filled up its inventories and as a result, “import needs are currently lower,” Meldgaard continued. However, “inventories will need to be rebuilt again, increasing import demand over the coming months.”

Valentis said during a conference call Wednesday, “Inventories have been built up in Europe. This pull-forward of demand is viewed as temporary and high inventories should be unwound in the second quarter.”

Shadow fleet keeps growing

Meanwhile, Russian diesel exports continue to flow. Cargoes are moving on Russian tankers and vessels in the so-called shadow fleet, comprising ships with opaque ownership that operate outside Western financial and insurance regimes.

According to Meldgaard, “Russia has been quite successful in redirecting its clean products to markets in North and West Africa, Turkey, the Middle East, and lately, Asia. Considering that around two-thirds of Russian petroleum products originate from Baltic Sea ports, these changes have resulted in solid ton-mile increases.”

The shadow fleet continues to expand as older tonnage is purchased and redirected to the Russian trade. According to Cleaves Securities, “The tanker S&P [sale and purchase] market was dominated by MR [medium-range] product tankers. There were more sales this week than we could count. As usual, mostly older tonnage is being sold.”

With more product tankers pulled into Russian trades, fewer are available to serve non-sanctioned trades, tightening the supply-demand balance in those markets.

Meldgaard pointed to another factor reducing effective ship supply. “Owners that are willing to do Russian trades are also willing to wait for these higher-paying cargoes, which is, again, tightening vessel availability.”

Spot rates high despite EU pause

Product tanker rates are now highly profitable despite the impending effect of high EU inventory. This raises the question: What happens when Europe needs to refill its tanks again?

According to Clarksons Securities, spot rates for modern-built, fuel-efficient LR2 product tankers ( with capacity of 80,000-119,999 deadweight tons or DWT) averaged $62,500 per day on Thursday.

Spot rates for LR1 tankers (55,000-79,999 DWT) averaged $46,600 per day. Rates for MRs (40,000-54,000 DWT) averaged $37,800 per day.

Spot rates have not been this high at this time of year for MRs, LR1s and LR2s in the past five years. Current rates are double or more the five-year average.

Historically low orderbook

Looking longer term, the product tanker market is in the same situation as the crude tanker market. The orderbook for new vessels is historically low. Stifel analyst Ben Nolan called the tanker orderbook numbers “shockingly small.”

There is no possible way to materially increase the product tanker fleet size until 2026 at the earliest. Yard slots are already full of orders for container ships and LNG carriers.

A side effect of the COVID-era supply chain crisis was that it enriched container shipping lines, which used a portion of their windfall to order a tidal wave of new container ships. That inflated prices for newbuildings in other segments like product tankers and simultaneously soaked up available yard slots in Asia.

Clarksons puts the current ratio of product tanker tonnage on order to tonnage on the water at just 5.9%. Valentis at Pyxis Tankers expects net fleet growth to be under 2% per year for the next two years.

According to Meldgaard, “Very few product tanker positions [yard slots] are available by the end of 2025. And in China, even the 2026 orderbook is being rapidly filled up [with orders for other ship types].

“We have our own view on what the realistic shipyard capacity is in 2025, 2026 and 2027,” he explained. Torm believes that even in the “extreme case,” where product tankers took all the slots available given ordering in other shipping segments, “there would still be a very manageable orderbook.”

“I think it is totally plausible that the additional fleet growth will be subdued up to and including 2026. Then, when you get past that point, the portion of the fleet that needs to go to recycling increases dramatically.”

Earnings roundup

On Thursday, Torm reported net income of $228.9 million for the fourth quarter of 2022 compared to a net loss of $8.1 million in Q4 2021. Adjusted earnings per share came in at $2.83.

Torm’s LR2s earned an average of $58,889 per day in Q4 2022. It has 90% of Q1 2023 available days booked at $62,950 per day.

The company’s LR1s earned $48,067 per day in Q4 2022. In the first quarter of this year, 86% of available days are booked at $44,135 per day.

Torm’s MRs earned $45,029 per day in Q4 2022, with 89% of days booked in the current quarter at $37,730 per day.

The historically low orderbook and the potential for future windfall profits is no secret to shipping investors. Shares of Torm and other product tanker owners have performed exceptionally well.

Torm’s stock has more than quadrupled over the past year, surging 334%. The stock closed up 9% on Thursday.

(Chart: Koyfin)

Click for more articles by Greg Miller 

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How much will container lines ‘earn’ in 2023? It depends on the metric

Quarterly net losses could be around the corner for container lines, but EBITDA will stay high even if carriers dip into the red.

The post How much will container lines ‘earn’ in 2023? It depends on the metric appeared first on FreightWaves.

Berkshire Hathaway’s Charlie Munger once famously said, “Every time you hear ‘EBITDA,’ just substitute the phrase ‘bullshit earnings.’”

Public shipping companies in different segments highlight different earnings metrics. Tanker and dry bulk owners focus on adjusted net income. Listed container shipping lines often highlight adjusted earnings before interest, taxes, depreciation and amortization.

EBITDA has been criticized for decades — Munger’s quote is from Berkshire Hathaway’s 2003 annual meeting — but it has become an even more problematic metric for container shipping lines due to accounting and industry-specific changes over the past four years.

IFRS 16 followed by COVID boom

The International Financial Reporting Standards implemented Rule 16 (IFRS 16) on lease accounting in January 2019.

Since then, vessel charters with terms exceeding one year that are considered “right-of-use” assets have been accounted for in shipping lines’ income statements under depreciation and interest expenses, mainly depreciation.

Prior to IFRS 16, carriers’ lease expenses were accounted for under operating costs. EBITDA takes operating costs into account, but not depreciation.

A year after IFRS 16 came into play, the pandemic ensued. COVID changed consumer buying patterns, sparking a boom in freight rates. That, in turn, led to a surge in demand for chartered vessels, an unprecedented spike in lease rates, and ultimately, a dramatic increase in charter durations.

Nonoperating owners (NOOs), the companies that lease ships to liners, held all the power. Freight rates reached stratospheric heights, and liner companies needed chartered ships to secure the historically high freight income.

By March 2022, the Harpex index, which measures container-ship charter rates, was eight times higher than pre-COVID levels.

Not only were liners forced to pay NOOs historically expensive leasing rates — inflating liner leasing costs — they were also forced to accept longer charter durations, with ships being locked up for five-year terms at the peak.

As a consequence, shipping lines have even more lease payment expenses counted as depreciation and interest on their income statements. And because of longer charter durations, the accounting effect of higher leasing rates on EBITDA will persist for years.

The problem with EBITDA for container shipping is that it includes the positive effect of freight revenue earned by liner companies from their leased ships, but excludes the negative effect of charter payments carriers make to NOOs for the vessels that allow them to earn the freight revenue.

Not surprisingly, container liner EBITDA has skyrocketed.

EBITDA vs. EBIT

Israeli carrier Zim (NYSE: ZIM) is the most extreme example. Most carriers own roughly half their fleet and charter the rest. Zim charters 94% of its fleet, according to its annual report filed Tuesday.

Almost all of Zim’s fleet is chartered. (Photo: Shutterstock/Faraways)

Not only have Zim’s leasing costs increased due to higher rates charged by NOOs, but it has also significantly increased the number of ships it charters, from 106 qualifying as right-of-use assets at the end of 2021 to 136 at the end of last year.

Another metric, earnings before interest and taxes, shows the effect, as it covers the lease cost effect of long-term charters on depreciation (although not on interest).

Zim’s adjusted EBITDA exceeded its adjusted EBIT by $1.4 billion last year. The carrier’s depreciation jumped 81% in 2022 versus 2021, “primarily due to an increase … related to right-of-use assets, mainly vessels.”

Zim forecasts its adjusted EBITDA for 2023 will be between $1.8 billion and $2.2 billion. In contrast, it estimates adjusted EBIT will be $100 million-$500 million. The difference between the midpoint of these ranges: $1.7 billion.

Other shipping lines show the same divergence between EBITDA and EBIT, but to a lesser degree due to their lower reliance on chartered ships than Zim.

Maersk’s 2022 adjusted EBITDA was $36.8 billion, its adjusted EBIT $31.2 billion. Depreciation of right-of-use assets increased $1.1 billion year on year, according to Maersk’s annual report.

Hapag-Lloyd’s EBITDA in 2022 was $20.5 billion, its EBIT $18.5 billion.

Hapag-Lloyd said in its annual report that depreciation and amortization increased by 16% in 2022 versus 2021 “primarily due to the year-on-year rise in the percentage of vessels chartered in on a medium-term basis at simultaneously higher charter rates.”

The real earnings: Net income

Beyond EBIT, the next level of accuracy for shipping line financial metrics is net income, which includes the bottom-line effects of interest and taxes.

Taxes are generally not a major issue for most international shipping companies, although Zim, once again, is an outlier.

Shipping expert John McCown explained in his latest quarterly review of container shipping earnings: “International shipping companies normally pay to the flag state in which their vessels are registered a fixed annual fee related to deadweight tonnage in lieu of income taxes.

“A noteworthy exception is Zim, as most of its vessels fly the Israeli flag, which does not have a tonnage tax regime. As a result, Zim has a more typical income tax expense, which is a function of pretax income.”

Zim had $1.4 billion in income tax expenses last year. As a result, it shows a wide disparity between net income and EBIT, and an even wider disparity between net income and EBITDA.

Zim posted net income of $4.6 billion last year. Its adjusted EBIT was $1.5 billion higher than that. Its adjusted EBITDA was $2.9 billion higher than its net income.  

*2023 projected. 2023 EBITDA and EBIT are midpoint of Zim guidance range. 2023 net income is Bloomberg consensus as of Thursday. (Chart: FreightWaves based on data from Zim and Bloomberg)

In the back vs. in the red

How much will container lines “earn” in 2023? It depends on the metric.

Sometimes, press reports loosely refer to EBITDA as earnings. The latest guidance from Zim led to a headline stating that the company “expects to earn a cool two billion this year,” referring to the midpoint of its adjusted EBITDA guidance.

In contrast, Bloomberg consensus as of Thursday was for Zim to earn net income of $58.6 million. That’s still a big improvement from its $13 million net loss in 2019, pre-COVID, but it’s much closer to the threshold between profit and loss.

There will be considerable focus in the coming quarters on when falling freight rates push container lines into the red. Carriers will still be reporting positive EBITDA when that happens.

Jefferies analyst Omar Nokta currently predicts Zim will earn a net profit of $89.9 million this year. He expects net losses in the first half offset by profits in the second. Nokta predicts full-year EBITDA will still be in the 10 figures, at $1.75 billion.

Even if large container lines do start posting net losses, they haven’t lost the windfall they earned during the COVID boom, nor will they face anything akin to financial distress anytime soon.

The top container lines have never had more cash. Zim has amassed $4.6 billion in cash in the wake of the boom ($3.9 billion including the effect of the dividend to be paid April 4). Hapag-Lloyd has liquidity of $17 billion, up from $1.2 billion at the end of 2019. Maersk’s liquidity is a whopping $28 billion.

As Citi Global Head of Shipping Michael Parker said in Lori Ann LaRocco’s “Dynasties of the Sea,” “No shipping company went bankrupt because it was unprofitable.” They go bankrupt when they “run out of cash.”

Click for more articles by Greg Miller 

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Crude shipping revs up; supertanker rates top $100,000 a day

With virtually no new ships on order and demand strengthening, the tanker business seems poised for a bull run.

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Spot rates for very large crude carriers (VLCCs) — tankers that carry 2 million barrels of oil — just crossed the $100,000-per-day threshold. It could be a taste of things to come. Analysts and investors are increasingly confident that the tanker business is headed into a long, sustained upcycle.

“VLCC rates have surged at the end of the week,” said Clarksons Securities analyst Frode Mørkedal on Friday. Brokerage Fearnleys reported “frenzied activity” in VLCC charter market.

VLCC spot rates averaged $103,900 per day Friday, according to Clarksons. That’s quadruple the five-year average for this time of year. Rates last topped six digits per day in November. They sank to around $38,000 per day in mid-January, near cash breakeven, before rebounding.

“The Middle East is showing the most activity, resulting in a widening earnings gap to the Atlantic Basin,” said Mørkedal.

Middle-East China rates for modern, fuel-efficient VLCCs jumped 20.5% on Friday from the day before, to $102,800 per day. U.S. Gulf-China rates rose 7.5% to $66,500 per day. “We believe rates in the Atlantic will catch up going forward,” he said.

According to Jefferies analyst Omar Nokta, “We count around 50 VLCC fixtures out of the Arabian Gulf this week, which compares to the typical 35 weekly fixtures.” The majority of bookings were for transport to Asia, particularly China, said Nokta.


China demand is ‘incremental catalyst’

VLCCs traditionally earn higher rates than smaller crude tankers and product tankers. More recently, however, VLCCs have at times underperformed Suezmax (1 million-barrel capacity) and Aframax (750,000-barrel capacity) crude tankers, as well as some product tankers.

Sanctions disruptions to Russian exports and European Union imports disproportionately helped rates for smaller tanker classes. Meanwhile, COVID issues in China disproportionately hurt rates for VLCCs, exacerbating normal seasonal weakness.

The market has now shifted. VLCCs “are in the driver’s seat,” said Vortexa analyst Dylan Simpson. “VLCC fundamentals are clearly the most supportive, driving the increase in rates.”

Evercore ISI analyst Jon Chappell. (Photo: Marine Money)

Evercore ISI analyst Jon Chappell told American Shipper, “One hundred thousand dollars a day is not sustainable, but the quick and meaningful move up shows that the market is becoming increasingly tighter.

“A full reopening of China is an incremental catalyst to a market that was already strengthening owing to a global demand recovery and lengthening [voyage distances], even with the biggest importer in the world [China] somewhat on the sidelines for a period of time.

“There are regional ship shortages right now that are making rates go parabolic, but those tend to even out over time,” explained Chappell. “Still, I think higher highs and higher lows are in play for the foreseeable future, barring a global recession or shutting down China again.”

US-China flows show more promise

One of the recent negatives for VLCC rates has been a shift in deployment away from the long-haul U.S.-China route toward the shorter-haul U.S.-Europe route. Tanker demand is measured in ton-miles, volume multiplied by distance. Shorter average trips are negative for demand.

More VLCCs are now heading to China again. Kpler analyst Matthew Wright told American Shipper on Friday, “VLCCs have moved up quite a bit in recent weeks, and a big increase in fixtures from the U.S. to China has played a big part in this. There have been 13 booked so far this month, up from four in February and six in January.”

The number of VLCCs ballasting (sailing empty to a pickup location) to the Atlantic Basin “was in decline from early February to early March, but the firming market is steering more vessels to the area,” said Wright.

“Today, I count 27 ballast VLCCs in the West Indian Ocean heading toward the Cape of Good Hope, up from a recent low of 15 around the middle of February. Based on these trends, we see further upside to rates in the coming weeks.”

Tanker orderbook is historically low

Supply-demand fundamentals appear very positive for tankers in the medium term.

The Russia-Ukraine war fundamentally altered tanker trades, leading to longer voyage distances for both crude and product tankers. These changes look like they’ll stick.

Paula Pihno, the European Commission’s deputy director-general of energy, told the S&P Global CERAWeek conference that Europe’s shift away from Russian energy is “in many ways irreversible.”

Meanwhile, orders for new tankers are historically low. Given construction lead times and the fact that Asian yard slots are already chock full of container ship and LNG carrier orders, there is no possible way to add material crude or product tanker capacity until 2026.

According to Clarksons, the ratio of capacity on order to capacity on the water is now 29% for container ships and 52% for LNG carriers. In sharp contrast, the orderbook-to-fleet ratio for crude tankers is a mere 2.9%, with VLCCs at only 1.9%. The ratio for product tankers is 6%.

More upside for tanker stocks?

The question for stock pickers is whether future rate upside is already baked into tanker share pricing. 

The historically low orderbook is no secret to the investors. Most product tanker and crude tanker stocks have risen by triple digits over the past year.

(Chart: Koyfin)

Crude tanker stocks have done particularly well since the start of this year, given the still-developing demand upside from Russian sanctions and China’s reopening, together with the ongoing dearth of new orders on the supply side of the equation.

Whereas one-year gains are more weighted to product-tanker stocks like Scorpio Tankers (NYSE: STNG) and Ardmore Shipping (NYSE: ASC), the year-to-date gains have favored owners with fully or predominantly crude-tanker fleets, like Frontline (NYSE: FRO), Nordic American Tankers (NYSE: NAT) and DHT (NYSE: DHT).

(Chart: Koyfin)

According to Deutsche Bank analysts Amit Mehrotra and Chris Robinson, “While we believe limited fleet growth will help keep rates supported at these strong levels, we believe much of this expectation has already been priced into asset values as well as share prices.”

Mørkedal of Clarksons and Chappell of Evercore sound more optimistic.

“We anticipate that the tanker industry will thrive in the coming years, particularly in 2024 and 2025,” wrote Mørkedal. “Although there are investor concerns that tanker stocks have risen too quickly, we believe the odds of a prolonged upswing cycle are favorable, implying that tanker stocks have significant further upside potential.”

Chappell told American Shipper: “I think we turned the corner a while ago and can now start to contemplate a true cyclical upturn. Given that we are only in the early stages of an upturn, with substantial cash-flow generation and only a sliver of potential dividends distributed at this point, I think tanker stocks are set up very well for the next 12-18 months.”

Click for more articles by Greg Miller 

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Hard landing? 2023 could be Hapag-Lloyd’s 3rd-best year ever

Shipping lines like Hapag-Lloyd have suffered sharp rate falls from the peak, but they’re nowhere near financial distress.

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You can look at the new earnings guidance of Hapag-Lloyd, the world’s fifth-largest shipping line, in two very different ways: by comparing it to exceptional boom-time windfalls that will likely never be seen again, or by comparing it to historical norms.

On Thursday, Hapag-Lloyd announced full-year guidance for earnings before interest, taxes, depreciation and amortization of $4.3 billion to $6.5 billion for full-year 2023.

That equates to a 68%-79% plunge versus 2022 EBITDA of $20.5 billion. It sounds ominous. But both 2022 and 2021 were extreme anomalies to the upside.

Even if Hapag-Lloyd ends up at the low point of its projected range, 2023 would be the third-best year in the company’s history.

chart showing Hapag-Lloyd EBITDA
(Chart: American Shipper based on data from Hapag-Lloyd)

Furthermore, the shipping line is heading into the cyclical downturn with an unprecedented cash cushion.

At the end of 2019, pre-pandemic, Hapag-Lloyd had liquidity of $1.2 billion. At the end of 2022 — even after making multiple acquisitions — liquidity had ballooned to $17 billion.

Hapag-Lloyd has completely deleveraged its balance sheet. It’s now $13.4 billion net cash positive, with no net debt. At the end of 2019, it had $6.6 billion in net debt, at three times EBITDA.

Despite collapsing spot rates and schadenfreudian talk of “hard landings,” larger shipping lines like Hapag-Lloyd are a long way off from anything that even vaguely resembles financial distress.

2023 profitability will be ‘front-loaded’

The company reported net income of $3.3 billion in the fourth quarter of 2022, down 20% year on year and a 37% slide versus the all-time high hit in Q3 2022.

Freight rates (including both spot and contract rates) averaged $5,250 per forty foot equivalent unit in Q4 2022, up 2% year on year.

Rates in the latest quarter were down 15% compared with the peak reached in Q3 2022. However, they were still 2.5 times average rates of $2,124 per FEU in Q4 2019, pre-pandemic.

chart showing Hapag-Lloyd rates
(Chart: American Shipper based on data from Hapag-Lloyd)

“Declining spot rates were more than compensated for by our contract rates,” said Hapag-Lloyd CFO Mark Frese during a conference call with analysts on Thursday.

“However, despite our high share of contract business, we are not immune to market downturns. Our average freight rate clearly declined in Q4 compared to the previous quarter,” said Frese.

CEO Rolf Habben-Jansen said the support from contract rates will continue to erode this year. “Profitability in 2023 will be somewhat front-loaded because you still have some tailwind from the contracts that were closed last year,” he said.

Spot rates are already down to pre-COVID levels, said Habben-Jansen. “That is a problem, because when we look at unit costs these days, they are definitely elevated. This means that over time, [spot] rates will have to bounce back somewhat, because they won’t stay below unit costs for very long.”

Rebound expected later this year

“We’ve had a subdued market in the last couple of months,” he explained. Demand fell in the aftermath of Lunar New Year, as was traditionally the case before the pandemic. But demand did not follow the usual pattern of increasing prior to that holiday. It remained weak.

“What I think we see at the moment is subdued demand because of destocking. I expect this to continue a little bit longer as the destocking cycle is completed.

“We would expect a bit of a rebound in the course of the year. Exactly when is difficult to estimate … which is why we came up with a broad range in our outlook [EBITDA guidance].”

Newbuilding delivery delays predicted

Another big uncertainty is how the supply situation will play out given the tidal wave of newbuilding tonnage about to hit the market. 

Hapag-Lloyd does expect supply to outpace demand, but its supply-demand balance outlook seems more balanced than some other projections. The ocean carrier makes large assumptions on both scrapping of older tonnage and slippage of new tonnage delivery dates.  

(Chart: Hapag-Lloyd Q4 2022 investor presentation. Data sources: MDS Transmodal, Clarksons, Alphaliner, Drewry, CTS, Seabury)

Hapag-Lloyd projects supply and demand will roughly align this year, up 2% in both cases — but only if the 2.5 million twenty-foot equivalent units of gross capacity growth is whittled down to a net gain 500,000 TEUs. This would entail 1.1 million TEUs of slippage of 2023 deliveries to next year, plus 900,000 TEUs of scrapping.

If scrapping and slippage don’t reach those levels, capacity could rise as high as 8%, quadruple projected demand growth.

Hapag-Lloyd expects fleet growth of 4% to outpace demand growth of 3% in 2024. But this assumes gross capacity gains of 4 million TEUs will be brought down to just 1 million net TEUs by 2 million TEUs of slippage plus 1 million TEUs of scrapping. If not, capacity could increase by as much as 9%, triple projected demand growth.

Asked on the call why Hapag-Lloyd expects so much slippage of newbuilding delivery dates, Habben-Jansen said, “The yards are scaling up activity from a very low period to a very busy period. What we see is that it’s simply taking longer than some people would have hoped.

“There were issues around availability of materials although most of those have now been resolved,” he continued. “Also, when you look back over the last year and a half, there were all kinds of COVID-related restrictions at a number of yards. Those have caused delays.

“We’re not talking about delays of years. But even if everything moves back just three to six months, that has a material impact on the number of ships that are going to be delivered [in a given year].”

Click for more articles by Greg Miller 

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Container lines still chartering ships despite drop in cargo demand

Charter rates are far below the peak but higher than pre-COVID as liners continue to sign new container-ship leases.

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With import demand flagging, freight rates falling, the container ship orderbook at record highs and ocean carriers canceling voyages, you might think nobody would be chartering more ships. In fact, the container-ship charter market is far from dead.

Charter rates are well off their peaks. Gone are the days when a small container ship could earn $200,000 per day for three months, or a midsize ship could earn $60,000 per day for five years. Yet deals are still getting done.

“It’s not like there is no demand. There is ongoing demand. There is ongoing charter business,” affirmed George Youroukos, CEO of Global Ship Lease (NYSE: GSL), on a conference call Wednesday.

“Charter rates are stabilizing at above historical levels,” said Moritz Furhmann, CFO of Oslo-listed MPC Containers, during a conference call Tuesday.

The Harpex index, which measures charter rates across multiple ship sizes, stood at 1,059 points on Friday. That’s down 77% from the all-time peak in March 2022. But the pace of decline has lessened this year and the index has stabilized in recent weeks. The Harpex index remains more than double its level in February 2019, pre-COVID.

Alphaliner reported on Feb. 21, “Demand is picking up in the container charter market as Asia has gone back to work after the traditional Lunar New Year celebrations. The continued shortage of prompt tonnage across most size segments bodes well for charter rates, which … should continue to rise in the coming weeks.”

Charter activity focused on midsize, smaller ships

Charter activity is not evenly spread, however. Almost all of it is the midsize and smaller ship categories, vessels with capacity of around 10,000 twenty-foot equivalent units or lower.

The reason is that almost all of the larger vessels were put onto multiyear charters during the boom. Those contracts won’t expire in the near future. Furthermore, larger vessels whose charters were coming up for renewal this year were “forward fixed.” New charter extensions were already agreed to last year.

There are no more forward fixtures in any size category. “The forward fixture market is effectively on hold,” said GSL Chief Commercial Officer Tom Lister.

According to Youroukos, “Charterers now wait until two to three months before expiration to enter discussions for renewals. They want to see for themselves what the demand is from their clients, the shippers.”

Another big change: Charter durations have reduced sharply. No one is signing multiyear deals anymore. GSL has placed four of its ships on charters since October at an average duration of 10 months.

Among charters by top liner companies beginning this month reported by brokerage Braemar: MSC has chartered the 3,469-TEU Hansa Europe for two to four months at $17,400 per day and the 1,355-TEU Atlantic West for five to seven months at $13,000 per day. Hapag-Lloyd has taken the 2,506-TEU Maira for four to seven months at $17,750 per day.

CMA CGM, which has been particularly active, has just chartered four ships: the 3,434-TEU Hope Island (eight to 10 months; $17,250 per day); 2,754-TEU Atlantic Discoverer (10-12 months, $17,000 per day); 1,7891-TEU Sheng An (six to eight months, $14,500 per day); and 1,355-TEU Atlantic West (five to seven months, $13,000 per day).

Orderbook risk higher for lessors of larger ships

The longer-term concern on ship-leasing companies relates to the record-high orderbook. These companies have most of their ships employed on charters through at least this year, but what about after that?

As new, more fuel-efficient ships are delivered from the shipyards, ocean carriers will presumably let charters of older ships expire. If lessors cannot find any new takers, or if rates become uneconomical, they would face either layups or, eventually, scrapping.

Both MPC and GSL emphasized during their calls that the orderbook — and potential impact on ship lessors — is heavily weighted to larger-ship classes. They maintained that lessors of midsize and smaller ships should escape the big capacity hit.

According to MPC CEO Constantin Baack, “What you see is that the very significant portion of the orderbook … is the very large ships. The smaller the ship, the smaller the orderbook in relative and absolute terms.”

Baack also pointed out that the more recent orders have heavily favored dual-fuel vessels capable of using liquefied natural gas or methanol. These orders are inherently for larger ships. Smaller vessels operate in regional trades where LNG and methanol fuel infrastructure won’t be available.

Alphaliner reported Tuesday that 92% of container newbuildings ordered this year and 86% of newbuilds ordered last year were for either LNG- or methanol-capable vessels.

Lister of GSL noted that the overall ratio of container-ship tonnage on order to tonnage on the water is 29%. But that ratio is 52% for ships larger than 10,000 TEUs, and only 14% for ships smaller than TEUs. 

In the sub-10,000-TEU category that GSL focuses on, a high level of scrapping — which is expected — would actually lead to very minimal fleet growth, said Lister.

Ship-lessor stocks up YTD

The headwind for ship-lessor stock pricing is future expectations. Profits remain high due to charters booked during the boom, but eventually these charters will roll off and be renewed at lower levels. So, it’s all downhill from here.

The counterargument is that ship-lessor stocks have fallen too far. Share pricing does not reflect the current value of the existing charters plus the residual value of the fleet assets. As the market realizes it overshot to the downside, the stock prices will increase, at least temporarily.

According to Jefferies analyst Omar Nokta, “GSL’s revenue backlog stands at $2.1 billion. We estimate its EBITDA backlog at $1.6 billion. This is above its current enterprise value of $1.5 billion, meaning no value is being placed on the fleet’s remaining useful life or residual value.”

Container-ship-lessor stocks generally peaked in March 2022, fell through second and third quarters and stabilized in the fourth. Year to date, pricing of the pure container-lessor stocks implies that the “overshot-to-the-downside” thesis is gaining ground. GSL is up 24%, MPC Containers 14% and Danaos Corp. (NYSE: DAC) 13%. GSL’s stock rose 6% on Wednesday.

chart showing container ship lessors stocks
(Chart: Koyfin)

Earnings roundup

Legacy charters continue to translate into extremely strong earnings for ship-leasing companies, despite the worsening business prospects for their customers, the ocean carriers.

On Wednesday, GSL reported net income of $72.6 million for the fourth quarter of 2022 versus $66.1 million in Q4 2021. Adjusted earnings of $2.14 per share came in much higher than the consensus forecast for $1.70 per share. GSL has 93% of its capacity already employed on charters through the end of this year. In 2024, 72% of its capacity is already booked.

chart showing earnings of container ship lessor GSL

On Tuesday, MPC Containers reported net income of $103.6 million for Q4 2022 compared to $127.9 million in Q4 2021.

MPC has 86% of its available days already contracted for 2023.

Click for more articles by Greg Miller 

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Baltic Dry Index has collapsed: Ominous sign for economy?

The Baltic Dry Index has fallen 91% since October 2021 to one of its lowest levels ever, yet shipowners remain confident.

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Dry bulk — the world’s largest ocean shipping market in terms of volume — is off to one of its worst starts ever in 2023.

The sector’s famous bellwether, the Baltic Dry Index (BDI), is viewed in financial circles as an important indicator of global economic health. The BDI fell to 530 points on Thursday, down 91% versus October 2021.

Since London’s Baltic Exchange began publishing the BDI in 1985, it has only been lower than it is today during two other periods: in the first half of 2020, at the height of pandemic lockdowns, and in the first half of 2016, during an extreme downturn for the dry bulk sector.

This sounds like an ominous sign for the world economy. But there are industry-specific reasons why things may not be quite as dire as they seem.

‘A dearth of cargo’

One reason is that the BDI, over the years, has increasingly become more of an indicator on China than the world at large. And China is currently recovering from its abrupt reopening after extensive lockdowns and a subsequent wave of COVID infections — it is in the midst of a one-off event.

The BDI is 40% weighted to spot rates of Capesizes, bulkers with capacity of around 180,000 deadweight tons (DWT). Capesizes rates, in turn, are heavily driven by long-haul iron exports from Brazil to China. 


Volumes on this particular route are always low at this time due to heavy rains in Brazil, but this year they’re particularly low.

“It has been an exceptionally weak start of the year,” said Urik Andersen, CEO of dry bulk shipowner Golden Ocean (NASDAQ: GOGL), during a quarterly conference call on Thursday. “Q1 is seasonally the weakest quarter, but clearly rates are now very, very low — lower than most expected, certainly ourselves.

“The reason why we are where we are is primarily due to a lack of iron-ore exports out of Brazil. It is that simple. There is no iron ore flowing as we speak.”

According to Breakwave Advisors, “A dearth of cargo flow, especially out of Brazil, has driven Capesize rates to almost zero as seasonal weakness is now in full swing. As a result, owners prefer to stay in the Pacific … which in turn has also driven rates in that part of the world to multi-year lows.”

Argus Media reported “large gluts of tonnage in the Atlantic and Pacific basins, causing some shipowners to hide the positions of their ships to avoid further downward pressure.” (Hiding ship positions gives the illusion of fewer vessels available to move cargo.)

Brokerage Fearnleys said Capesizes are “burning cash,” calling this Wednesday’s Capesize index rate of $2,600 per day “miserable” and “tragic,” at almost $5,000 per day below breakeven. 

Clarksons Securities estimated that spot rates had fallen even further by Friday, to $2,200 per day.

Scrubber premiums

Yet many dry bulk ships are still earning money, despite indexes being deep in the red. 

The reference vessels used to assess the BDI burn more expensive very low sulfur fuel oil (VLSFO). Bulkers with exhaust gas scrubbers burn much cheaper high sulfur fuel oil (HSFO), so they earn considerably more than the index reference ship.

Clarksons Securities estimates that Capesizes with scrubbers currently earn $2,300 per day more per day than those that don’t — equating to more than double the day rate — due to fuel cost savings.

Since the international fuel sulfur rules came into effect in January 2020, dry bulk owners have invested heavily in scrubbers. According to Clarksons, 44% of the world’s Capesizes have scrubbers installed. 

Golden Ocean has scrubbers on 48% of its fleet of 93 vessels. Star Bulk (NASDAQ: SBLK) has scrubbers on 120 of its 128 ships.

Because so many bulkers now have scrubbers, with even more being added, the Baltic Exchange’s decision to base its assessments on non-scrubber reference ships — a decision that was aggressively contested prior to the IMO 2020 fuel sulfur rule — means its dry bulk indexes are increasingly less reflective of rates reported by shipowners.

Slow steaming effect

Ship speed is another factor in the disparity between dry bulk indexes and actual earnings.

During a conference call on Friday, Star Bulk CEO Petros Pappas explained, “If you look at the [index] spot rate of around $2,500 per day for Capes, that is based on a speed of 13 knots. But in situations like this, we slow steam, and that $2,500 actually ends up at $8,000 per day, because we burn much less fuel oil. Then, you add the scrubber benefit” and the actual rate ends up higher still — in Star Bulk’s case, above breakeven.

Average bulker speed has decreased 3.2% over the past year, Pappas said, to 11.3 knots.

Add it all up and public companies are reporting rates well above Baltic Exchange assessments. In the fourth quarter of 2022, Golden Ocean’s Capesizes averaged $21,000 per day, $7,000 per day above the average index level. Its Panamaxes (bulkers with capacity of 65,000-90,000 DWT) earned $19,000 per day, $5,000 per day above average index levels.

“The premiums are driven by our modern fuel-efficient fleet, fixing paying [time charter] contracts, and scrubber premiums,” explained Anderson.

Despite what spot indices imply, Pappas said Star Bulk should be profitable in both the first quarter of this year and the second.

Optimism on China reopening

There remains a surprising amount of optimism toward dry bulk despite the collapse of the BDI. One reason is the connection between rates and global GDP, and growing sentiment that the world will avoid a recession this year.

Another is the much ballyhooed “China reopening” trade — the idea that once one-off COVID fallout passes, China will resume higher industrial activity and thus higher bulk imports. If China does rebound, dry bulk is more leveraged than any other shipping sector to demand upside.

“We are not out of the woods yet, and it will take time before the Chinese efforts to revive the economy translates into increasing demand … but we are starting to see signs that a recovery of the dry bulk markets in the second half of the year is realistic,” said Andersen.

That optimism can be seen in the behavior of dry bulk stocks in relation to the Breakwave Dry Bulk Shipping ETF (NYSE: BDRY). BDRY is an exchange-traded fund that purchases freight derivatives, created by Breakwave Advisors to mimic the BDI. As spot rates fall, so does BDRY. Dry bulk stocks, in contrast, are driven by investor sentiment.

Since the start of this year, BDRY is down 28%, declining along with rates as designed. The stock price of bulker owner Genco Shipping & Trading (NYSE: GNK) is up 18% year to date. Eagle Bulk (NYSE: EGLE) is up 15%, Golden Ocean 14%, Star Bulk 12% and Safe Bulkers (NYSE: SB) 12%.

chart showing dry bulk shipping stock prices
(Chart: Koyfin)

Dry bulk earnings roundup

Dry bulk owner earnings announced this week highlight the disparity between indexes and actual rates.

Star Bulk reported net income of $85.8 million for Q4 2022 compared to $300.2 million in Q4 2021. Adjusted earnings per share of 90 cents were in line with the consensus forecast for 89 cents.

Star Bulk has 57% of its Q1 2023 available Capesize days fixed at $18,126 per day, compared to $19,682 per day in the fourth quarter. It has 75% of its Q1 2023 Panamax days fixed at $12,337 per day, versus $19,702 per day in the fourth quarter.

Golden Ocean reported net income of $68.2 million for Q4 2022 versus $203.8 million in Q4 2021.

According to Clarksons Securities analyst Frode Mørkedal, “Golden Ocean has booked 66% of its earnings days in the first quarter at $13,800 per day, which is comfortably above the fleet’s cash breakeven rate of $12,000 per day.

“This accomplishment is especially noteworthy given that the Baltic Capesize Index has been less than $8,000 per day this year.”

Click for more articles by Greg Miller 

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Lag effect: Why liner profits stay high much longer than spot rates

The reversion in spot rates is pulling down contract rates, with a significantly delayed effect on ocean carrier earnings.

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Spot container shipping rates in many trades have already collapsed back to pre-COVID levels. But container liner earnings are still nowhere near where they were pre-pandemic. Ocean carriers are still earning billions more per quarter than they used to.

German carrier Hapag-Lloyd reported earnings before interest, taxes, depreciation and amortization of $3.8 billion for the fourth quarter of 2022. That’s over seven times EBITDA in Q4 2019, pre-COVID.

The Bloomberg consensus forecast is for Hapag-Lloyd to post EBITDA of $5.6 billion for full-year 2023, 2.5 times EBITDA in 2019. Deutsche Bank thinks Hapag-Lloyd’s EBITDA will be $7.7 billion, 3.5 times 2019 earnings.

Fall in spot rates comes first

Spot index data over the past decade shows just how extreme of an anomaly the COVID era actually was. Global spot rates averaged around $2,000 per forty-foot equivalent unit in 2012-14. They fell to around $1,300 per FEU in 2015-16 amid the Hanjin bankruptcy. They averaged around $1,450 per FEU in 2017-19.

The pandemic era’s goods-buying spree propelled the global spot average to an unprecedented peak of over $10,000 per FEU in late 2021. Global averages of the Drewry World Container Index (WCI) and Freightos Baltic Daily Index (FBX) are now back to around $2,000 per FEU.

chart showing spot container shipping rates
Spot rate in $ per FEU. Blue line: Drewry. Green: Freightos. (Chart: FreightWaves SONAR)

Most of the east-west spot rate indexes have now normalized. (The still-booming trans-Atlantic westbound trade from Europe to the U.S. is an exception.). The pace of descent flattened in December and January across most global trades. The cliff-like rate plunge seen in August-October has ended.

Trans-Atlantic strength is still keeping the global averages higher than in 2017-19, while in other lanes, including Asia-West Coast, spot rates are all the way back to pre-pandemic levels.

chart showing container shipping spot rates
Spot rates in $ per FEU by Drewry. Dark blue line: Shanghai-LA. Purple: Shanghai-NY. Light blue: Shanghai-Rotterdam. Green: Shanghai-Genoa. Orange: Rotterdam-NY. (Chart: FreightWaves SONAR)

Fall in contract rates comes next

With spot rates having already plunged, why are Hapag-Lloyd’s earnings still so much higher than pre-pandemic? One reason is the lag effect in revenue recognition. Depending on timing, cargo booked in a particular month may not show up in a carrier’s revenue line until the following quarter.

But the main reason is that the majority of ocean carrier revenue is not booked on spot, it’s booked on annual contracts, and the decline in contract rates lags the decline in spot rates.

As industry expert John McCown has repeatedly emphasized: “Earnings in the container shipping industry are on a different curve than what has occurred with spot rates, as the large majority of loads move under contract rates.”

Most annual Asia-Europe contracts reset on Jan. 1 and most annual Asia-U.S. contracts on May 1. In some cases, carriers agreed to lower annual rates in the middle of last year’s contract — Zim (NYSE: ZIM) has acknowledged doing so — but only after spot rates fell well below contract rates.

Long-term rates are tracked by Norway’s Xeneta.

Whereas the global WCI and FBX spot rate indexes peaked in September 2021, Xeneta’s XSI long-term index didn’t peak until 11 months later, in August 2022.

chart showing long-term container contract rates
Index: 100=January 2017. (Chart: Xeneta)

The XSI fell moderately in the fourth quarter, then registered its largest-ever month-on-month plunge — 13% — in January. Even so, the XSI was still at 364 points last month, 3.4 times higher than the 2017-19 average.

Hapag-Lloyd’s results confirm the central importance of contract rates. In Q4 2022, its average freight rate, including both contract and spot, was $5,250 per FEU, almost double the average FBX and WCI global spot index levels during that period. 

The carrier’s Q4 2022 rates were 2% above rates in Q4 2021, a time when the supply chain crisis was peaking. They were 2.5 times Hapag-Lloyd’s average rate in Q4 2019, pre-COVID.

The carrier’s average rate fell 15% in Q4 2022 versus Q3 2022. That is a much more moderate drop than the average decline in the FBX global composite spot index, which plunged 48% quarter on quarter.

Fall in earnings after fall in rates

The other reason carrier earnings are still nowhere near pre-COVID levels: Carrier bottom lines jumped much faster than rates during the COVID boom, due to very high operating leverage.

Rising average freight rates multiplied by total volume drove revenues up much faster than costs (fuel, container handling, crewing, chartering, etc.). As a result, profits still have a long way to fall.

Most carriers, including Hapag-Lloyd, didn’t see earnings peak until Q3 2022, a year after spot rates began falling.

Hapag-Lloyd’s EBITDA declined sharply in the fourth quarter versus the third, down $1.9 billion, or 33%. Yet it still came in $3.3 billion or 622% higher than EBITDA in Q4 2019.

chart showing Hapag-Lloyd performance vs Q4 2019
(Chart: American Shipper based on financial filings by Hapag-Lloyd)

The question ahead is how the lag effect will play out. Will the normalization of spot earnings be followed by the same normalization of contract rates and eventually, carrier EBITDA and net income sinking back to pre-COVID levels, or even below those levels?

Or will there be a surprise to the upside: no global recession, sturdy U.S. consumer demand, carrier capacity management offsetting newbuilding arrivals, retailer inventory levels winding down and needing replenishment, and volumes (and rates) edging back up during the next peak season?

“We think momentum in the space continues to be negative and therefore we remain cautious on the sector,” Deutsche Bank analyst Andrew Chu wrote in a client note. “We forecast that container shipping profits will normalize quickly, although it is hard to forecast numbers given the operating leverage in the business, a macro slowdown and significant supply — plus-10% — coming into the market.”

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Sanctions effect begins: Crude tankers forced onto longer voyages

Russian crude restrictions are having the predicted effect on tanker trades, soaking up more vessel capacity as sailing distance lengthens.

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Tanker investors have been getting cold feet this winter. Spot rates are down sharply from November and stocks are off earlier highs. Yet the bullish tanker thesis — war-induced trade inefficiencies, post-COVID reopening, new vessel capacity that’s about to fall off a cliff — hasn’t changed.

After spot rates “began to ease from highs that were completely unsustainable” came “the predictable selloff in the equities,” said Evercore ISI analyst Jon Chappell in a research note on Friday.

“We’ve been inundated with questions about why rates have ‘collapsed’ and where rates can ‘bottom,’ completely missing the fact that the current rate environment for most asset classes remains far above the long-term averages.”

The broader upcycle for tanker owners and stocks has “only just begun,” argued Chappell.

‘Rates are still strong’

Why have rates pulled back this winter, scaring away some investors? And what’s the outlook?

For perspective on current and future crude tanker market drivers, American Shipper interviewed Nick Watt, head of freight pricing at price-reporting agency Argus.

“Europe has slowed down its chartering a bit after its rush to hit the Dec. 5 deadline,” said Watt, referring to the date the European Union banned imports of Russian seaborne crude.

“That helped lead those gains in November and that has cooled off,” he explained. In addition, OPEC cut its production starting in November. “That has definitely been a factor. And then you had the holidays and Lunar New Year, a slow time for chartering.

“But actual ton-mile demand [demand measured in terms of volume multiplied by distance] has not really dropped that much. That’s why you’re not seeing rates fall quite so much. Rates are still strong. You’ve got a fair amount of tightness for the midsized vessels.”

Sanctions hiking voyage distance

The positive ton-mile effects from the EU import ban and the G-7 and EU price caps are playing out as predicted: Voyage distance is increasing.

Russian Urals grade crude that used to go to the EU is now going all the way to India. “India is the one that has really been bumping up its imports of Russian crude,” said Watt. “There’s quite a lot of Urals moving into India right now.”

China is also taking Russian crude, keeping imports steady with historical levels.

At the same time, the EU is buying cargoes from further afield, adding to ton-mile upside.

U.S crude exports were record high last year, driven by higher flows to Europe, mostly aboard Aframaxes (tankers that carry 750,000 barrels) and Suezmaxes (1 million barrels), but also on very large crude carriers (VLCCs; tankers that carry 2 million barrels).

U.S. flows to Europe will likely increase in 2023, given the EU ban on Russian crude.

“U.S.-to-Europe shipments are not as positive for ton-miles as U.S. crude to China, but they’re a replacement for short-haul shipments from Russia to Europe, which is a positive,” said Watt.

“It also looks like the U.S.-to-Europe VLCC trade is here to stay. We’re seeing quite a few of those — before last year you hardly saw any.” He added that VLCCs are also now heading to Europe from Brazil.

“The tanker market has structurally changed, replacing short-haul routes with longer-haul routes. That is the main thing affecting the dirty [crude and fuel oil] tanker market — and that is just ongoing,” said Watt.

According to Chappell, “In our view, the redrawing of the global trade map has only entered the early innings, with sanctions on Russian refined products set to go into effect next month, with crude price caps set to be reviewed again, and most importantly, with Europe unlikely to return to its previous reliance on Russian fossil fuels to any extent at any time in the foreseeable future.”

War fallout on energy trades is a “generational geopolitical event,” he said.

Expected China resurgence

And then there’s China. Chinese demand was a headwind for crude tanker rates during the pandemic, but switched to being a positive driver in the second half of 2022.

After business returns to normal following the Lunar New Year break, and after COVID-19 cases subside, China is expected to hike its imports of crude, adding yet another layer of long-haul demand, particularly for VLCCs.

“There are expected to be increased shipments into China in the post-lockdown phase,” said Watt. “We’ve already heard that [Chinese oil company] Sinopec has been increasing its purchases, including extra purchases from Brazil.”

He expects around 1 million barrels per day in additional crude imports to China in 2023 versus 2022. “Some of that increase will be coming from the Americas — from Brazil and the U.S. Gulf — so that’s obviously a positive for ton-mile demand.”

Tanker deliveries destined to collapse

The downside risk is that China and the global economy overall suffers a recession.

Chappell cautioned, “There is potential upside to projections from the emergence of China from strict lockdowns. However, the risk to the downside is potentially even greater as the world teeters on the brink of a real recession.”

While the debate on demand continues, there’s little uncertainty about vessel supply. “The supply side of the equation is so much easier to decipher, at least for now,” wrote Chappell.

Deliveries of new tankers will slow markedly this year then collapse in 2024-25. Owners could not add capacity in those years even if they wanted to, given construction lead times and the fact that yard slots are already full of container ships and gas carriers.

Capacity of crude tankers on order is only 3.1% of tonnage on the water, Clarksons Research reported this week.

There were 42 new VLCCs delivered in 2022. Only 26 will be delivered this year. Only two VLCCs are on order after that, one for delivery in 2025 and one in 2026, according to Clarksons.

There were 42 Suezmaxes delivered last year. Only nine will be delivered this year and six in 2024, with another six contracted for 2025. 

There were 20 new Aframaxes delivered last year and 25 will be delivered this year. Next year, only nine Aframaxes will be delivered, with five on order for 2025 and two for 2026.

“You don’t have many deliveries after this year,” said Watt. “So, if you’re thinking from a crude tanker owner’s perspective, you’ve got to be pretty excited about 2024 and onward.” 

Click for more articles by Greg Miller 

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