Ocean Rate Report: Tanker Earnings Jump After Attacks

Ocean shipping has a unique appeal to a certain breed of risk-reward investor for two primary reasons. First, global shipping rates are completely unregulated. There's no one with the authority to declare that a rate is too high or too low. The market decides.

Second, rates can gyrate wildly due to global events that are largely unpredictable. A ship owner can wake up one morning and suddenly find himself well on his way to being either rich or broke, through no fault of his own.

World events are now coming to the fore in ocean shipping. The crude oil tanker market has become heavily contingent on the outcome of geopolitical tensions between Iran and the U.S., while the container market will go one way or the other based upon the outcome of trade tensions between the U.S. and China.

Geopolitical risks support tanker rates

As predicted, the tanker attacks in the Gulf of Oman on June 13 had an immediate and highly positive effect on rates for very large crude carriers (VLCCs). These tankers each carry two million barrels of crude and they are the vessels of choice for Middle East exports.

Clarksons Platou Securities reported that VLCC rates, as of June 18, averaged $22,100 per day, up 63 percent week-on-week, while third quarter VLCC rates in the forward freight agreement (FFA) market were $25,000 per day.

Deutsche Bank shipping analyst Amit Mehrotra noted that "charterers need to pay a premium to bring vessels into the Arabian Gulf." VLCC spot rates jumped 100 percent in the Middle East region and 26 percent overall last week, said Mehrotra.

According to Randy Giveans, shipping analyst at Jefferies, "Owners will start demanding some form of hazard pay when operating near the Strait of Hormuz, and VLCC FFAs jumped on fears that vessel supply in the region will tighten, as several operators temporarily halt Middle East Gulf operations."

Ben Nolan, the shipping analyst at Stifel, pointed out how rising dangers in Middle East waters could slow down tanker operations. The more inefficient operations become, the more that capacity is effectively reduced, a tailwind for rates.

Nolan cited the possibility that "there would need to be increased international protection for ships transiting the region, with some possibility of escorted convoys. This could slow the tanker logistics for loading and unloading.

"We expect at most it would add an additional one to two days in transit time, similar to convoys around the Horn of Africa to avoid pirates," said Nolan. He estimated that this would equate to a 2-3 percent increase in transit time.

Taking into account the portion of the fleet that does not trade in the Middle East, he said it could equate to a 1 percent decrease in the effective capacity of the world's VLCC fleet – a plus for rates, albeit a small one.

Public companies with spot VLCC exposure: Euronav EURN, DHT DHT, Frontline FRO, International Seaways INSW

LPG rates continue their ascent

In the global transportation sector for liquified petroleum gas (LPG), the long-haul routes to Asia are dominated by 84,000-cubic meter very large gas carriers (VLGCs).

As of June 18, Clarksons Platou Securities estimated that VLGCs were averaging $64,100 per day, up 21 percent week-on-week.

"VLGC rates continued the march higher, breaking $60,000 per day, a new cycle high," said Noah Parquette, shipping analyst at J.P. Morgan. "Momentum seems strong," he asserted, noting that the "east/west arb" is supporting shipments out of the U.S. Gulf to China. In other words, Asian pricing for propane exceeds U.S. pricing to a degree that provides traders profits even after paying for transport.

"In the LPG market, earnings ended [last week] at over $60,000 per day on the Baltic-quoted Middle East Gulf-Japan route," said Clarksons Platou Securities analyst Frode Mørkedal.

"From the U.S., the situation is much of the same and fixing windows are being pushed further in advance, now looking for vessels for end-July," Mørkedal said, referring to the extended time in advance vessels must be chartered for future voyages, a market dynamic that results from demand exceeding vessel supply.

Speaking at the Marine Money conference in New York on June 17, J. Mintzmyer, lead researcher of Value Investor's Edge, commented, "In the broader [investment] market, shipping is always looked at as a monolith, but it's important to differentiate between the sectors. Right now, if you look at the headlines, you see ‘Shipping is down.' But what about LPG? VLGC rates are now at five-year highs."

Shipping stocks are notoriously averse to responding to rate moves by the listed companies' fleets, but VLGC rates are now so high that Wall Street investors are beginning to take notice. "The share price of Dorian LPG is finally starting to respond," said Mintzmyer.

Public companies with spot VLGC exposure: Dorian LPG LPG, BW Gas GAS

Containers hang in the balance

Container shipping rates remained steady over the past week, as trade tensions between the U.S. and China continued to cast a long shadow. U.S. tariffs on an additional $300 billion in imports from China are being actively considered, and are increasingly seen as likely.

Over 600 companies, including Walmart Inc WMT and Target Corporation TGT, sent a letter to U.S. President Donald Trump last week. "We remain concerned about the escalation of tit-for-tat tariffs. An escalating trade war is not in the country's best interest, and both sides will lose," warned the letter's signees. Hearings on the next wave of tariffs are being held in Washington, D.C. this week.

Data tracking shipping rates for containers originating in China does not yet show any evidence of a surge in U.S. cargo demand as importers move to beat the tariffs.

Since May 1, the Freightos Baltic Daily Index (Global) is basically flat, down 2 percent. It fell in late May but rebounded to early May levels in early June, and has remained steady at that higher level throughout this month.

The two largest individual trade lanes show differing patterns during this period. The index tracking container rates between China and North Europe (FBXD.CNER) was up slightly in May, and has been flat to slightly lower in June, and is down 2 percent since May 1.

In contrast, the index tracking rates between China and the U.S. West Coast (FBXD.CNAW) fell sharply in late May and rebounded in June, and has remained flat throughout this month, but it is still down 9 percent from May 1.

In essence, the weakness of the trans-Pacific route pulled down the global average in the second half of last month and improved rates on the trans-Pacific brought the global average back up this month, while the Asia-Europe route has continued to outperform the trans-Pacific in terms of rate trends.

Public shipping companies with exposure to spot box shipping rates: Maersk, Hapag-Lloyd, Matson MATX

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