1/ What do you get when you combine high fuel costs, impending emissions limitations starting in 2023, and record high scrap steel prices?
Large ships sold for scrap at much younger ages than usual despite an optimistic outlook on earnings.
Last week's demo sales per Advanced:
2/ It is no surprises to see large 18 and 19 year old tankers sold for scrap last week considering the weak rate environment but it is a bit of a surprise to see young capesize bulk vessels scrapped with rate futures expecting highly profitable rates in the balance of 2022:
3/ But I can't argue with the decision to sell an asset nearing the end of its life for more than double the scrap value that similar vessels fetched only 18 months ago.
That is nearly $15m of cash for each cape sold last week which can now be redeployed into a younger vessel.
4/ It is becoming hard to refinance these old polluting vessels. That $15m of capital from an 19 year old vessel that can't be financed when sold for scrap can easily buy an 8 year old eco vessel financed at 50-70% which garners much higher rates.
5/ High scrap prices, lack of ship finance, and new carbon regulations requiring expensive retrofits will ensure that old ships get scrapped much earlier than usual. Even in a strong rate environment, average capesize demolition age will likely be closer to 20 going forward.
6/ Meanwhile average fleet age continues to rise and the orderbook for new ships remains at all time lows as a percent of fleet.
We are on a collision course with a massive supply shortage of ships.
7/ This dynamic is playing out across shipping sectors but is especially pronounced in drybulk and tankers whose orderbooks are insufficient to replace scrapping and meet growing demand.
This is incredibly bullish for drybulk and tanker equities.
8/ Many of the largest and highest quality names in drybulk and tankers like $SBLK, $GOGL, $EURN, $FRO, $DHT have already surged and now trade at or above NAV. Although these remain great investments they are no longer 'cheap' relative to peers.
9/ Fortunately there are still some incredible bargains to be had with the smaller and more idiosyncratic names if you are willing to do DD and understand the risks.
Some of my favorite bargains of the moment include $NMM, $SHIP, $TNP and $CMRE.
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1/ Last nail going into the coffin of supply side headline risk. After this OPEC will have successfully gotten the market to price 0 OPEC+ restraint by September. Now we get price discovery on what the market thinks they can actually deliver without a cap.
I remember in fall 2023 when the unemployment rate first spiked 40bps nearly triggering Sahm rule, delinquencies started to go parabolic, student loans were supposed to go into repayment (before 2 more years of Biden can kicking) someone said that equities couldn't go lower when EVERYONE was bearish. This turned out to be the correct take. Markets went higher -> wealth effect -> reflexive economic strength along with fiscal can kicking heroics by Yellen and the Biden Admin to get through the election.
At the time, I tried to imagine a scenario where everyone was bullish DESPITE an incredibly bearish backdrop and couldn't. But here we are.
Read the comments on any bearish data or bearish takes today. Lots of "markets only go up". No rationale other than technicals and markets usually go up.
Sure the soft data hasn't been a reliable indicator in recent years but the hard data is starting to roll but nobody cares because "markets go up". And nobody is looking forward - the headwinds to the hard data are massive and obvious.
The response to a confluence of bearish factors is always "Fiscal dominance" or "Trump will jawbone the market up" or "who cares chart says up". Nothing like price to drive sentiment.
I'm personally exhausted. I'm starting to be concerned that the degens might actually be right and we go straight to Zimbabwe without the global margin call step.
At the same time my own feelings tell me we might be near that moment where positioning is back offsides and we are due for a mean reversion.
Logic tells me to stay the course - The bearish case is far clearer than it was in 2022 or anytime since yet sentiment is the most dislocated from reality today. And although I have always thought we would get the global margin call before the Zimbabwe, the fact that the Fed is not cooperating gives me more conviction that the Fed will require things to get MUCH worse before taking action to enable the Zimbabwe regime to begin.
I can only hope that the regime shift from margin call to Zimbabwe will be obvious when all is said and done and I can nail the turn from net short to levered long. Probably naive to think I can nail the path but this feels like the juice is worth the squeeze. GLTA.
Hydrocarbon trades (regardless of clean/dirty) are super fungible over any time period more than the next couple months. If profits in one size get out of whack, the WILL be quickly cannibalized by other ship sizes into a more typical $/ton distribution.
1/ FINALLY some good data on US port calls vs Chinese fleet proportion regarding the proposed Chinese ship fees.
🧵TLDR: Most shipping trades will easily find non-Chinese tonnage to call US ports to avoid the fees
h/t Omar/Jefferies the first reasonable take vs the hysterics
2/ Here are the ratios of non-Chinese fleet to US share of global trade to show how many times over US trade is covered for each segment by the non-Chinese fleet:
3/ Thats not to say there won't be disruption and extra costs. THERE WILL BE. Just not nearly to the hysterical estimates I keep seeing from shipping analysts and the liner company CEOs talking their book and threatening huge reductions in port calls. Not going to happen.
2/ With inventories at bottom of 5 year averages, it seems unlikely that inventories decline meaningfully from here. Just returning to flat inventories adds back the +30 VLCCs of demand. Adding the expected 1mm b/d supply/demand growth in 2025 requires another +30 VLCCs.
3/ Therefore my base case for 2025 sees +60 VLCC equivalents employed vs levels seen since June.
This is vs a fleet of ~900 VLCCS so +7% utilization relative to recent months.
1/ Buried under all of the Middle East and port strike chaos headlines, a very important debate about a carbon tax on shipping is ongoing at IMO meetings this week.
2/ Support for a carbon tax is gathering momentum as it would be one of the most simple, economic, and effective ways to lower carbon emissions in the shipping industry. On the other side of the debate are middle income countries responsible for the lion's share of world trade
3/ These major exporters oppose it because it will increase the cost of traded goods which is partially borne by the producer and partially borne by the consumer.