Market Overview

Shipping Stocks Pull Back After Trump Trade Warning

Shipping Stocks Pull Back After Trump Trade Warning

U.S.-listed shipping stocks have fallen on investor fears that U.S.-China trade tensions could reduce the volume of cargo at sea.

U.S. President Donald Trump said in a tweet on May 5 that previously implemented 10 percent tariffs on $200 billion of Chinese goods would be increased to 25 percent as of May 10, and further warned of 25 percent tariffs on an additional $325 billion of Chinese goods.

Jon Chappell, the shipping analyst at investment bank Evercore ISI, said in a note to clients, "It is far too early to truly understand whether these comments are just a negotiating tactic or a real threat of a full-blown trade war, but the stock market and commodity price reaction has been swift."

The Dow Jones Industrial Average fell by over 470 points at one point on May 6, but bounced back and finished the trading session down less than 1 percent.

Shipping stocks did not fare as well. In the dry bulk space, the Breakwave Dry Bulk EFT (NYSE: BDRY), an exchange-traded fund designed to mirror bulker rates, declined by 8 percent; Seanergy (NASDAQ: SHIP) fell by 7 percent; and Golden Ocean (NASDAQ: GOGL), Safe Bulkers (NYSE: SB), Genco Shipping & Trading (NYSE: GNK), and Star Bulk (NASDAQ: SBLK) fell by 4 percent.

In other ocean shipping segments, container-ship lessors Costamare (NYSE: CMRE) and Seaspan Corporation (NYSE: SSW) both dropped by 4 percent; and liquefied natural gas (LNG) transporter Golar LNG Ltd. (NASDAQ: GLNG) declined by 5 percent.

In general, ocean shipping has outsized exposure to U.S.-China trade tensions because of the lengthy voyage distance between the two markets. When trade conflicts prevent vessels from taking this long-haul route, cargo sellers find alternative buyers in destinations that generally require shorter voyages. Shorter trips lead to more ships being available to compete for bids on spot cargo tenders, a negative for spot shipping rates.

In reference to President Trump's latest tweet, Thomas Chasapis, research analyst at Greece-based Allied Shipbroking, said, "It is obvious that we will continue to face random and unpredictable shocks, with tremendous consequences to the overall state of the freight market."

Chappell believes dry bulk shipping stocks are at the greatest risk. "The dry bulk industry stands to be one of the biggest losers from a trade war. It's reliance on a China economy that could be severely pressured by escalating tariffs is reason alone for worry."

He continued, "With the issues in the iron ore and coal markets today, the last thing this sector needs is more trade disruption."

To date, most of the dry bulk consequences from U.S.-China trade tensions have centered on U.S. soybean exports, which have been diverted to other destinations following the implementation of a 25 percent tariff imposed by China.

According to statistics from the U.S. Department of Agriculture, China was the fifth-largest buyer of U.S. agricultural products in 2018, purchasing $9.2 billion in supplies. That's down 53 percent from the year before, when China was the second-largest buyer, purchasing $19.6 billion.

In the tanker trades, Chappell noted that "oil and refined products have yet to be directly dragged into retaliatory tariffs by China, but the threat alone led many Chinese importers to avoid U.S.-originated crude oil for much of last year."

"Some U.S. cargoes had just started to arrive in China, but there is a risk that this long-haul trade halts again," cautioned Chappell.

Another important segment to watch is LNG shipping. A number of U.S. liquefaction (export) projects are seeking to move ahead with final investment decisions (FIDs), which in many cases require the projects to obtain long-term supply contracts to support financing.

If Chinese buyers were active in the supply contract market, FIDs could come sooner, ultimately leading to more shipping demand. Ongoing U.S.-China trade tensions represent a headwind for the timing of the FIDs.

According to Chappell, "For a nation massively in need of LNG imports each winter, with imports up 40 percent-plus in each of the last two years, it seems unlikely that China would cut off the top incremental supplier to the market."

However, he warned that "given the importance of these two nations to the LNG shipping trade, if negotiations became so frayed that LNG was indeed included in China's retaliations, the impact on LNG shipping rates would undoubtedly be unfavorable."

The post Shipping stocks pull back after Trump trade warning appeared first on FreightWaves.

Image sourced from Pixabay


Related Articles (CMRE + BDRY)

View Comments and Join the Discussion!

Posted-In: Freight FreightwavesGovernment News Politics Global Markets General