News that the US stock market ended the year 29% up is pretty exciting. And shipping did even better, ending 2013 with the ClarkSea Index (covering earnings of tankers, bulkcarriers, containerships and gas carriers), 79% up on the end of 2012. But equity investors know that the big increase in stock prices, against the background of the fairly half-hearted US economic recovery, has something to do with the lack of alternatives. And shipping investors are justifiably concerned that the year’s positive developments are driven as much by money as fundamentals.
A Weak, Bleak Year
Shipping is a supremely volatile business and the increase in earnings is not as good as it sounds. 2013 was, on any reasonable appraisal, a bleak year. The ClarkSea Index spent most of it below $10,000/day, which is uncomfortably close to operating costs. The recovery, which started in late October, pushed earnings up to $17,141/day by year end, but the full year average was only $10,335/day.
Fundamentals Looking Better
Dig a little deeper and there are signs that although the fundamentals are edging are in the right direction, the market is not much closer to recovery than it was a year ago. Seaborne trade, the ultimate driver of the shipping cycle, grew by a healthy 3.8%, close to shipping’s 50-year average. Meanwhile the tanker and bulkcarrier fleet grew by 4.3%, a great improvement on the last 4 years (2009 8.4%; 2010 10.7%; 2011 10.4% and 2012 7.3%) and roughly in line with bulk demand. So although the fundamental supply-demand imbalance stopped growing in 2013, there is still no sign of a significant reduction. Freight statistics support this view. The 12-month moving average of the ClarkSea Index, a better indicator of the underlying trend, bottomed out at $9,131/day in the summer and has edged up above $10,300/day. An improvement, but not exactly a boom.
Markets in Recovery Mode
Cash rich investors were quick to respond to these improvements, and the result is not helping in the quest to reduce surplus capacity. Scrapping fell 31%; total new orders rose from 54m dwt in 2012 to 140m dwt in 2013 (doubling for tankers and trebling for bulkers); and asset prices edged up. All good for investor balance sheets, but not for the surplus. In the global economy the damping effect of the credit crisis seems likely to hang around for a while, despite the short-term recovery. In shipping the slow steaming surplus is out of sight, but not out of mind, at least for smart investors. Scrapping decreasing and bulk orders more than doubling is the recipe for a long second half. The ‘Fat Lady’ still needs to slim down a bit before she’s ready to sing. Have a nice day.