Overview of the Shipping Industry, Cycles and Projections
The shipping sector is ripe for profitable investments NOW!
If you are a paid subscriber, you know that we own a shipping company stock in our portfolio. The reason is two fold:
The industry is currently in an upcycle that may last a while, and,
The company we own is cheaply valued, earning more, and returning more money to the shareholders as dividends.
Investing in undervalued securities when the business cycles are on the upswing can be very profitable. The caveat being that you need to be able to divest when the cycle is close to the top. Fortunately, business cycles are not the same as market timing a stock - business cycles are predictable and move according to the undulating demand and supply in the sector.
Let’s consider the current industry dynamics below.
We are primarily looking at the tanker ships (that transport crude oil). This is the sector where our investment is today. We are not going to talk about container ships or dry bulk shippers (that transport things like grain, coal, etc).
The Shipping Demand is Increasing for these 3 Reasons
There are economic and other geopolitical factors that are contributing to the increase in demand for the crude shippers.
The crude demand is going up
According to the US EIA, the oil prices will peak in Q3 of 2024 (now) and then slowly decline. However, the demand for crude continues to grow year over year (consider seasonality when you look at the chart above). This means that a lot of oil supply is coming online and will need to be shipped. Therefore more shipping is needed.
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The sailing distances have risen and therefore each tanker is on the water for longer
I will show you the following two charts:
and,
Due to the threat posed by the Houthis in Yemen, ships are now avoiding the Suez Canal and taking longer route via Cape of Good Hope. As a result, the average sailing distances have gone up by 7% in 2024 for Crude oil tankers. There is another 3% increase in the sailing distances due to the sanctions on Russian oil. While there is an expectation (or shall I say, hope) that the situation due to the Houthis and the Russian sanctions will resolve by 2025, I feel that it will not be the case.
The average age of tanker ships is the highest in a decade
According the Clarksons Research, the shipping fleet has aged considerably and the average age of a tanker ship is now 12.9 years, which is the highest it has been in a decade.
This means a large percentage of the ships will need to be scrapped soon and replaced with newbuilds. Newbuilds take many years from order to build to delivery.
Since 2nd quarter of 2023, there has been a surge in new ship orders. The order book has increased 160% and is now approximately 7.4% of the trading fleet (Source: Bimco). However, most of these newbuilds will only be delivered starting in 2026.
With this as a backdrop, it is easy to see why this is an industry that is calling out for our investment dollars. If only we could find a cheap stock here! Actually we have and I will post an analysis of the stock we own in the paid member area in the next few days.
I own a shipping stock from Hong Kong through a divident ETF. It's the largest position in it.