1/ I'm going to pound the table a bit more about and show that shipbuilding capacity is insufficient to replace scrapping let alone accommodate trade volume growth.
But this time we will look at the global aggregate merchant fleet including all sectors.
2/ Across all sectors, the global orderbook is only ~10% of the active fleet compared to ~8% that is already beyond economic life in the new high fuel cost/low emissions requirement paradigm. It the time it takes the ~10% to deliver, ~14% more will approach end of economic life.
3/ In 2022, ships reaching critical decision age whether to scrap or repair for compliance increases significantly and continues to increase each year this decade.
Notice in 2022 and beyond, the capacity of ships delivered fails to match capacity hitting the new 20 year wall.
4/ The only way owners pay the huge repair and compliance bill keep these old uneconomic assets operating is with very high rates: high enough to amortize a $1.5M per year repair schedule, 30% worse fuel economy, a rate uncertainty premium, and a ROIC cash financing premium.
5/ At high enough rates to keep these old assets trading, modern fuel efficient ships that can be financed will make truly exceptional profits. The largest modern scrubber fitted ships currently earn ~$20k per day more than their oldest equivalents.
6/ Capital investment and constraints on ship ordering drives shipping cycles. Ship ordering lags rates, ship deliveries lag orders ~3 years, and new shipbuilding capacity lags years after that.
7/ The last cycle was demand driven with China joining the WTO and shipbuilding playing catch up for a decade. This one will be supply driven as capacity is now insufficient to replace ships from the last boom and meet more stringent emissions regulations.
Where are we at?
8/ But this cycle is different. It is a NO BRAINER. Who could have predicted the crazy demand increase in the 2000s cycle?
This time we have the visibility to see that supply is insufficient even under a pessimistic demand scenario of multi-decade low trade growth.
9/ What other capital intensive business that has grown consistently with global GDP do you have such visibility of 3+ years out of shrinking supply in lieu of high rates?
There is no short-cycle shale patch to ruin this party.
Only global economic and geopolitical tail risk.
10/ I will point out again that in addition to aggregate shipbuilding capacity being insufficient to keep up with replacements for the global fleet, today's orderbook is heavily skewed toward container and gas carriers.
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.
What few vessels the US has sanctioned due to Russian oil prior to Sovcomflot have been mostly stranded due to the sanctions.
I never trade after hours but felt compelled to today. Picked up a good chunk of $IMPP (had already been buying this dip earlier this week) and $TNK at fair prices. Tried for some $TNP as well but only got a bit.
I count 42x aframax and 15x suezmax in the sovcomflot fleet. If all of these are sidelined, I expect midsize rates to benefit the most which is why I bought the above. $NAT also a good option but already bid up much higher after hours.