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The best time to invest? Perhaps, but don’t lose sight of the Three Es

The best time to invest? Perhaps, but don’t lose sight of the Three Es

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The industry is getting excited about asset values relative to earnings potential but keep a weather eye on the downside, advises Dr Adam Kent from Maritime Strategies International.

Many sectors of the shipping industry are past their respective earnings troughs and at first sight the outlook looks encouraging.

Seaborne trade has not been a problem over the last decade, with positive growth posted in the majority of years for nearly all sectors. The real burden has been the supply side, which was first built up during the ‘superboom’ years and then augmented further by the private-equity fuelled rush to order ‘eco tonnage’ in the years following the financial crisis.

However, the winds are finally changing and the shadow cast by the supply side is shortening. With deliveries outpacing contracting and increased scrapping playing its part, fleet growth across the main sectors is set to fall to low single-digit levels in the next few years. Couple this with vessel prices that remain temptingly close to cyclical lows and why wouldn’t you invest now?

The keys to a successful shipping investment are the three Es: Entry, Exit and Expectations. Timing is everything – as those owners that invested $15m on a five-year-old panamax bulker in 2002 and went on to sell as a 10-year-old in 2007 for $73m will surely attest (together with the buyer of the vessel in 2007, who sold it in 2012 as a 15-year-old for $9m).

On the demand side, without a new China waiting in the wings, driving commodity trade into double-digit growth, or further step changes in outsourcing and containerisation fuelling a boom in the shipment of manufactured goods, trade growth looks to be steady rather than stellar. Owners and investors need to have an eye fixed on the last millennium for comparisons.

Overall, MSI are – in the short to medium term – positive on both earnings and prices for all the main shipping sectors, for the reasons outlined above. The upside for asset play on existing tonnage currently looks good, with low double-digit returns to be made from buying five year-old tankers, bulkers or containers today and holding for a few years before cashing in.

But the positive sentiment currently abroad in the market could be shipping’s downfall once again.

The improving supply side hasn’t passed owners and investors by and we are now starting to see newbuilding orders begin to creep up. To the consternation of those that can’t or more importantly won’t order, this could curtail any sustained recovery if contracting volumes continue to gain momentum.

The surplus of global shipyard capacity, built up in the last decade and currently underemployed, adds to this risk, particularly as new ships can be made available relatively quickly when compared to recent cycles when shipyard capacity limited the timeliness of deliveries.

So is this is the best time to invest in 30 years as was reported on this site a couple of days ago? Much will depend on your evaluation of the three Es and your appetite for risk, but it’s certain to make for an interesting ride.

 

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