We would like to present two big charts that are rather suggesting for a bullish outlook on global trade and shipping stocks. These charts centre on the costs of shipping cargo and hiring ships. Most people focus on the “infamous” Baltic Dry Index as a means of gauging what is happening on the high seas. However, as we have pointed out in the past, the Baltic Dry Index is heavily influenced by the erratic behaviour of the Capesize Index. We prefer to use the index of the smallest size bulk carriers, the Handysize, because its behaviour is significantly less volatile than the Baltic Dry Index and therefore long term trends are easier to depict. It is important to note that the Baltic Dry indices are based on how much it costs the shipper to ship bulk cargo.
There is another index which is widely overlooked, and in fact virtually unknown to the investment “community” let alone the general public. While Baltic Dry indices are based on the cost of shipping cargo in bulk carriers, the Contex Containership indices focus on the cost of chartering containerships. An analogy would be the cost of a taxi fare vs. how much to hire a taxi for a day. To be more precise the ConTex is a:
Container Ship Time Charter Assessment Index. It is a company-independent index which is calculated as an equivalent weight of percentage change from three ConTex assessments, which are for the classes of Type 1100 TEU, Type 1700 TEU and Type 2500 TEU. The index starting point is 1000. ConTex is compiled by a group of international operating brokers and is updated twice a week. The data source is Vereinigung Hamburger Schiffsmakler und Schiffsagenten e.V. (VHSS), the Hamburg Shipbroker’s Association.
The behaviour of the ConTex Index below is very encouraging, you don’t ship iron ore or coal inside containers…………you tend to send finished goods such as textiles and electronics.
Considering that you don’t tend to import or export finished goods unless there is demand from end users and the more demand for container space results in higher demand for ships to carry containers, does the chart above suggest that we can now expect inflationary forces to take hold? That would be a rather logical conclusion but either which way, it does suggest that the outlook for shipping stocks are about to improve dramatically!
And for those of you who are worried about the “overhang” of ships, well scrapping is a function of the level of commodity prices in general and scrap steel prices in particular. Just look at the two charts below, they depict the scrapping rates for bulk carriers and containerships. It does not take a rocket scientist to work out that we may well be looking at a shortage of ships over the coming months!
From a valuation perspective shipping stocks remain very cheap. The average book value of the top 20 shipping stocks in the world is approximately 1x, dividend yield of 5%, and price to cash flow of 7x – even after all the earnings and cash flow dramas they have been subject to over the last 18 months! Yes this is a simplistic way of looking at things but think about it. Within the next three years we are confident enough to say that the price to book value of shipping stocks will be materially higher than 1x! Our preferred entry to this market is via the ETF SEA.
