Shipping Races Against Time

Global slowdown is another blow to  shipping, still suffering from the downturn caused by the Great Recession. On the other hand, investors are attracted by low prices and see opportunities in the industry’s expected consolidation. Some hedge funds look to get into deals while others seek distressed assets.

Analysts discussed the prospects at a Capital Link Forum earlier this month. The majority of dry bulk carriers will be OK until 2014 and only a couple of companies may need to raise capital, says Douglas Mavrinac of Jeffries & Co.

But two tanker companies have already filed for bankruptcy and if the economy does not improve more tanker operators will run out of money. If the economy has not turned by 2013, it will be riskier, says Michael Webber of Wells Fargo Securities.

Crude oil products vs. dry bulk are distinct, says Fotis Giannnakoulis of Morgan Stanley.  Ship construction in China is adding to the dry bulk fleet, causing over-capacity, while demand for oil is sensitive to the level of economic activity. With all the new ships being built, rates are cheap, says Christian Wetherbee of Citi Investment Research.

Shipping stocks  are down –  the Capital Link Maritime Index declined 12.7% year-to-date as of September 16 – but investors wait in the wings to buy assets, not necessarily companies. It is cheaper to buy assets rather than companies, Mr. Giannnakoulis said.  Mr. Mavrinac says he gets calls every day from people looking for distressed assets.

Hedge funds with a  long term investment horizon want to take advantage of low prices possibly as part of a consortium of buyers. This summer a consortium led by private equity manager WL Ross & Co. and sovereign wealth fund China Investment Corp. announced a $1 billion investment in Diamond S Shipping, which is to use the money to buy tankers.

There are bright spots despite economic weakness. Ben Nolan of Knight Capital Group said the liquid shipping sector can segment out stronger areas.

Liquefied natural gas carriers should be in demand in five years.  Chevron just announced it is going ahead with the Wheatstone liquid gas venture in Australia and expects to start shipping LNG to Japanese buyers in 2016.  Japan is expected to import more LNG as an alternative to nuclear power after the Fukushima Daiichi disaster.

 

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