I know, by now I probably sound like a broken record. For about a year or so I was pushing this ‘weird’ idea to get exposure to the shipping industry and supply chain companies, given the extremely favorable risk/reward outlook, but after seeing the ridiculous price action and recent selloff I have to state bluntly: it is pretty much now or never to jump on board…
Once again, the market hugely misinterprets what’s happening, and provides us, savvy investors with incredible discounts on rock-solid companies, such as ZIM International Shipping, Danaos, and Golar LNG.
Before I get to the bullish factors, let’s take a quick look at what likely caused the recent downturn in these businesses, that were still quite undervalued despite recent rallies.
The key driver behind the market’s irrationality is the recent drop in the Freightos Baltic Index, one of the main benchmarks for shipping prices. Many, especially those who are less familiar with the dynamics of the shipping industry, took this as a sign of easing, whereas the Feb-Apr period is historically a very weak period for moving things around.
In other words, it is perfectly normal for shipping prices to drop at this time of the year, in fact, before the pandemic-induced madness, this spring drop used to be much deeper. The fact that it only dropped by 3% (and actually it is still up 3% YTD) shows that the problems of supply chains do everything but easing.
The other reason is probably the market’s overall sentiment about a slowing economy, which is still somewhat misplaced in relation to the shipping industry, but that topic belongs to another day.
For now, let’s take a quick look at the 3 things that will likely keep the shipping market very tight this year (and possibly beyond) with prices still sky high.
First stop, Shanghai.
I can’t help it but think that the market hasn’t digested (yet) the significance of the lockdown of Shanghai, and what implication this will have for the global supply chain and shipping.
Just to set the stage and give a bit of a context, Shanghai’s port handles four times (!) the volumes of the port of Los Angeles. Right now, 500+ ships are waiting for a berth to on and offload their stuff. I let this settle in for a sec.
Yes, it is true that current throughput is down by about 33% due to the lockdown, but here is the thing. The world’s largest container port and trade hub won’t stay locked down forever. And when it finally reopens, the rebound will be huge, and with hundreds of ships at anchor, the race for available ships will likely push prices to new heights.
This leads us to the second bullish reason, closely related to the availability of ships. See, the sanctions that have been imposed on Russia are having some unpleasant side effects when it comes to messing with the already messed up supply chains.
Everything that Europe previously bought from Russia now has to come from somewhere else. The problem is that this “somewhere else” is likely a 10000+ nautical miles away, which creates demand that previously didn’t exist.
And this is only about replacing the Russian supply with resources that come from far away. Besides this, other countries are also switching into ‘stockpiling-mode’ due to the increasing scarcity of commodities, a move that requires more ships and more mileage on the sea, that directly translates into higher revenues and profits for shipping companies.
Lastly, in the midst of news about the war, the shenanigans of the FED and Will Smith’s slap, the upcoming wage negotiation between the ILWU (International Longshore and Warehouse Union) workers and the ship/port operators get little attention, despite it could easily deliver another strong blow to the supply chains.
The current contract expires on 30th June this year, and the chance that workers will negotiate very hard to get their share of the money-stuffed pie is a real risk. As I’ve explained in earlier posts, the last time they discussed the contracts was in 2014-15 and the negotiations did last for more than a year.
This time around the cards on the table look completely different as workers know they have a huge leverage over the other side because without them, ports stop working.
So, all in all, the outlook for the shipping industry to keep operating at sky-high prices and generate piles of FCF is super-bullish, hence the current price-drop represents an incredible buying opportunity.
This is, of course, not an investment advice, just my humble opinion and conclusion of my research into the industry.
With ZIM trading almost 40% below it’s ATH despite the fundamentals not only remain the same but got stronger, again, I repeat my original thesis:
It is now or never to get on board.
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