There is a saying that investors do not own shipping stocks, they just rent them. The inherent cyclicality of the industry has proved a deterrent over time to “buy and hold” institutional investors, known as long-only funds, that prefer to stay in stocks for years at a time rather than weeks or months, as is more typical of hedge funds. So, it is probably not a great surprise that one of the most-prominent long-only investors of the past 25 years, former Neuberger Berman portfolio manager Jeremy Kramer, has re-emerged as a shipping advisor to a new hedge fund called West Brow Transportation Fund.

Even in the new capacity, Kramer knows as much as anyone what the long-only funds such as Fidelity and Wellington Management look for in their now somewhat-rare forays into their sector, and just as well what they don’t want to see. He made such calls for Neuberger Berman starting in around 1999 in the tanker sector and was able to catch the wave of the last shipping “super-cycle” in the succeeding years, making handsome profits for his investors. Now he’s back with a preference for tankers again. Streetwise caught up with him near his home in Manhattan, New York and talked about his career in shipping investment and his director’s role in three public shipowners in more recent years. One of the first things Kramer learned about shipping is that supply matters, a lot. It was one of the things that attracted him to the relatively few existing public tanker companies around 1999, when the industry was still dealing with the fallout from the Oil Pollution Act of 1990 and the advent of double-hulled tankers.

More than 20 years later, supply has been affected again by more regulation, this time aimed at decarbonization. In this case, green mandates have run years ahead of the technology necessary to determine future vessel propulsion systems, helping to dampen newbuilding orders. Around the millennium, crude tankers were a natural nexus of Kramer’s research silos in transportation and energy. He recalls also being prompted by Morton Hyman, former CEO of the old Overseas Shipholding Group, to investigate the small tanker peer group that included Teekay, OMI Corp, Stelmar, General Maritime and Frontline. “It was typical for me to delve into things in great detail, and we did our own work,” Kramer told Streetwise. “What was intriguing at the time was the shift from single hulls into double hulls, and the multi-year supply constraint that created. It is very difficult to predict demand and just when it will kick in, but economies do tend to grow over time. So, if you know there’s no supply growth, it gives you a certainty that you don’t find in a lot of industries.”

Neuberger’s bets, Kramer’s bets, worked out well at the time, bringing outsized returns in relation to benchmarks such as the S&P 500. The extended shipping cycle combined with Chinese economic expansion to spawn a wave of shipping IPOs in 2004 and 2005, mostly in dry bulk. Kramer recalls that he didn’t bite easily because he was witnessing a demand story, not a supply one. “I think I probably missed some big gains early on. But it also means I didn’t own much when the dry bulk orderbook reached 80% of the fleet heading into the world financial crisis.” Kramer and Neuberger pulled back from shipping after the collapse, then selectively got back into a few tanker names while investing more in the offshore drilling sector. The firm got more singed than burned when that sector tanked in 2014. “We got caught a little in the last quarter of 2014 and got some scars on the way out, but we avoided the worst, in the aggregate it was a very profitable eight or nine years,” he said.

By 2016, Kramer, 61, decided to retire from Neuberger but wasn’t ready to leave shipping entirely. He began to take board seats with principals he had met along the way, first with Golar LNG Partners, then DHT Holdings and finally 2020 Bulkers. He remains on the DHT board, and now has re-emerged in the finance sphere with West Brow. With a long and varied perspective, Kramer gave Streetwise his investor’s eye view of shipping, particularly of the reasons behind the dearth of interest from long-only funds. “I think it is true that there isn’t as much interest in shipping today by the long-only investors, although you will see a Fidelity or a Wellington show up at times,” he said. “I think a couple of reasons are market capitalization and trading liquidity: how do you build a big enough position and how do you make sure you can get out? I think the rapid nature of shipping cycles is another reason. One of the things we tried to do had a long-term orientation. You assume you may own it for two or three years and you’d like to be able to go to five years. There aren’t many shipping companies you can own for five or 10 years without something bad happening.” Kramer also confirmed that because some public shipowners have lagged in meeting best practices for corporate governance, there has been a reputational hit as well. “I certainly don’t want to get into names, but there have been some bad actors who soured investors on the sector,” he said. “There are individuals and structures that create conflicts with the public shareholders, and I think that’s undermined credibility for the sector.”

Still, as long as there have been public shipowners, there have been management teams talking about luring the long-only types of funds back in. How can companies do this? “I think you need to have a company that’s built to survive the cycles,” he replied. “A company with lower leverage than in the past. A mix of spot and term business, and a shareholder-friendly return of capital policy. And finally, you want to be transparent and honest, without conflicts of interest.” There is the blueprint, public shipping executive. And failing that, well, there are always the renters.

Despite floods in November, the Australian wheat production estimate for the 2022/23 marketing year (July 2022 to June 2023) has been increased by the USDA. Australian wheat exports could rise 9.8% this marketing year driven by strong harvests and strained global supplies. Australia has been experiencing the La Niña weather phenomenon for a third consecutive year, bringing higher rainfall to the country. While some regions reported a loss of wheat quality due to the floods, the higher rainfall improved yields across the country. Australia is now estimated to harvest a record 36.6 MMT of wheat, 0.7% higher than last year’s harvest.

With two strong wheat harvests back-to-back, Australia’s wheat exports could account for 13.7% of global wheat exports this marketing year. Wheat exports from last year’s harvest remained strong during the second half of 2022, when volumes typically begin to slow down. We can expect the ongoing harvest to result in similarly strong export volumes throughout 2023.

The Australian infrastructure was under significant pressure during the first half of 2022 when export ports were running at full capacity. Some difficulties were reported in getting wheat transported to port facilities, but no significant disruptions occurred. Investments have been made to improve capacity; however, operational challenges could still emerge in the coming months. Australian wheat will likely be in high demand this season due to a weaker harvest in Argentina, the only other large southern hemisphere wheat exporter. USDA now estimates that Argentina will only export 7.5 MMT of wheat in the current marketing year, down 57.5% y/y and below the 10 MMT export quota set back in March.

A strong harvest in Australia will help demand for panamax, supramax, and handysize ships in Asia. Seen in isolation, however, it will not be enough to bring stability to the global wheat trade. Throughout 2022, global wheat supply has been strained due to the war in Ukraine and prices have reacted strongly to supply shocks such as poor harvests in key exporting countries.

The USDA forecasts global wheat exports will rise by 3.6 MMT or 1.8% y/y in the marketing year 2022/23. However, this increase will come at a cost of exporting countries’ inventories as harvests are expected to remain lower than global consumption. Global wheat inventories are estimated to drop by 8.9 MMT. A resolution to the war in Ukraine remains a necessity to improve the global availability of wheat and to mitigate demand destruction in low-income countries.

Liner newcomer China United Lines (CUL) will cough up CNY 470m ($67m) to terminate long-term charters on up to a dozen boxships. The payment of a penalty will enable the company to end a long-term arrangement with Shanghai-listed Antong Holdings.

CUL was on the hook for charters of 12 panamax ships of 4,100 teu to 4,700 teu that had been taken for $52,000 per day, as well as the lease of containers. The charters were concluded last year and still had another two years to run. The vessels were initially chartered in March 2021 for a new Asia-Europe service, which was extended to the transpacific in July 2021, according to analyst Linerlytica.

The agreement took effect from 1 June 2022 and was supposed to expire in 34 months, on 1 April 2025. However, Antong told the Shanghai Stock Exchange on 28 November 2022 that CUL was seeking to terminate the agreement. A settlement announced on 9 December, if approved by Antong shareholders, will also include an additional payment for unpaid charters and lease payments. The deal will then terminate the Long-Term Cooperation Agreement between Antong and CUL.

CUL is one of several newcomers that have been forced to adapt to the dramatic falls in the container shipping market. Earlier this month it emerged that the company planned to abandon the Asia-Europe trades, where it operated a service jointly together with Taiwanese operator TS Lines. The company will continue to operate a transpacific service, but with smaller ships, according to Linerlytica.

No vessels departed Ukraine under the Black Sea Grain Initiative on Monday because of unfavorable weather conditions and electricity shortages, according to the Joint Coordination Centre. The port of Odesa, one of the export hubs covered by the deal, was temporarily closed after Russian forces targeted the city’s energy facilities on December 10. Ukraine President Volodymyr Zelenskyy warned it would take several days to restore electricity because critical facilities were hit.

The UN-brokered Black Sea Grain Initiative enables the export of certain agricultural products from three of Ukraine’s greater Odesa ports, Chornomorsk, Odesa and Yuzhnyi. Departures from the export hubs are below the highs seen in September and October. According to the JCC, weekly ship sailings peaked at 55 during the week of September 19. A total of 19 ships sailed from Ukraine under the deal last week.

Growing demand to ship Ukrainian grain, poor compliance with procedures, unfavorable weather conditions and Russia’s alleged unwillingness to increase the number of inspections has delayed JCC activities, creating a logistics bottleneck and slowing traffic. Inspections are required under the Black Sea Grain Initiative. The teams check documentation and look for any unauthorized cargo or crew.

A total of 657,235 tonnes of foodstuffs was shipped out of Ukraine under the grain deal in the week of December 5. While a higher volume than the previous month, when uncertainty over the renewal of the agreement further weighed on exports, it is nearly 40% lower than October’s figures.

There are 81 vessels queueing for inspection in Turkish waters as of December 12. A total of 61, with the export capacity of 2.2 MMT, are waiting to travel into Ukraine. The remaining 20 ships are laden and waiting to continue to their destination.

In all, 13.68 MMT of grain and other foodstuffs have been exported under the initiative, as per JCC data.

Giant US retail group Costco is cutting exposure to container ships as rates slump and capacity supply improves. The company had claimed last year to have chartered three small vessels for three years, and some box capacity, as congestion rose, and freight costs rocketed. Chief financial officer Richard Galanti has now told analysts on a conference call that Costco later added four more ships, as well as more boxes, in a bid to save money. But the CFO also said the group will take a $93m charge in its first quarter ending 20 November “mostly related to downsizing our charter shipping activities”.

“You will recall that the supply chain challenges related to shortages of the containers and shipping delays greatly intensified with container freight and shipping rates skyrocketing,” Galanti said. He explained that the group also wanted to improve shipping times. “This allowed us to better stay in stock and drive sales; and…to reduce some of the skyrocketing shipping and associated container costs. We achieved those objectives for a period,” the CFO added.

Over the course of 18 months Costco was able to control the shipping and delivery of nearly 50,000 containers, Galanti said. Many of these would have been greatly delayed. The group estimates it saved somewhere between $1,000 and $2,000 per container. “That, of course, fluctuated. Now, with a dramatic improvement in shipping times and much lower shipping and container costs, it made sense to downsize our commitment and lower prices for our members,” he concluded.

Other big chains like Walmart, Home Depot and Ikea were also reported to have chartered vessels, but brokers were skeptical. One source told TradeWinds last year there was no evidence of direct chartering, and the deals probably just represented the shippers taking extra space and trying to show the big lines they could operate independently.

The High Court in London has appointed an administrator at Allseas Global Project Logistics, part of the Allseas Group freight and logistics company. Steven Parker and Joanne Rolls of Opus Restructuring were appointed in November, according to a court notice.

The company, based in Oldham, northwest England, launched a service between China and Europe at the height of the container shipping boom in mid-2021, through Allseas Shipping. The trade from Asia to Europe has suffered in recent months, with lower volumes and falling freight rates hitting operators with ships on hire at high rates.

As recently as June this year, Allseas fixed the 2,900-teu Windswept (built 2010) for three years, with delivery in August at around $47,000 per day. Allseas was one of several companies that entered the market as a carrier at the peak of the containership boom before pulling out of the market in September.

Another newcomer, China United Lines, withdrew its liner services this month.

Allseas has been contacted for comment.

Taylor Maritime Investments (TMI) is pinning its faith in dry cargo fundamentals and slow ship speeds to support rates next year. The London-listed handysize specialist’s chief executive Ed Buttery expects earnings to stay above historical averages into 2024. “Despite macro uncertainties, we remain confident in the fundamentals of the geared dry bulk sector and are cautiously optimistic that slower operating speeds will have the effect of removing supply from the fleet as regulations come into force next year,” he added. By 2024, vessel supply growth is forecast to be at a new low, with the potential for healthy demand as economic headwinds ease, the CEO said.

TMI foresees a gradual lowering of operating speeds to reduce fuel consumption and meet IMO emissions targets. This will speed up scrapping, particularly among older handysizes, the boss believes. Asset values will in turn be supported, Buttery said. The CEO said earnings were healthy in the six months to 30 September, allowing the owner to repay $20m of its revolving credit facility. Net profit was $7.5m, down from $127.2m in 2021, when it carried out its London initial public offering.

The company does not report revenue but said total income was $11.6m against $128.9m last year, which comprised gains on financial assets at fair value. The average net time charter rate for the period was $18,858 per day, with the figure at $17,418 by the end of the quarter, a decrease of 6.5% from 31 March.The company has covered 59% of remaining fleet days for the financial year ending 31 March at $18,135 per day.

October saw an improvement in the market after the typical summer holiday lull, but this was stalled by drought conditions in the Mississippi River Basin and zero-Covid policies in China, TMI said. Non-seasonal softness in the Atlantic has begun to subside however and the owner is expecting some strength to emerge before the end of 2022.

In the Pacific, rates have shown signs of stabilizing in recent weeks as cargo and tonnage become slightly more balanced.

TMI added that, in the medium term, recently announced stimulus measures in China are expected to have a positive impact on dry bulk demand, targeting the property and construction sector and are expected to coincide with the supportive gradual easing of zero-Covid policies as the country reopens next year.

About 73% of TMI ships are currently trading in the Atlantic.

In 2017-18 China dramatically changed the structure of the Pacific seaborne cement trade by moving almost overnight from the world’s largest exporter of cement to its largest importer, as demand from coastal cities in China accelerated at a time when China was endeavoring to close down some of their older cement kilns. Thus, Chinese imports which were less than a million metric tons in 2017 skyrocketed to a massive 37 MMT by 2020 and were still 31.3 MMT in 2021.

Most of these shipments were in the form of cement clinker with Vietnam the main supplier to China with shipments rising from 0.1 MMT in 2017 to nearly 20 MMT last year. China as a destination also dominated the cement export markets of Japan (2.7 MMT in 2020) South Korea, (1.9 MMT in2019), Indonesia (2.7 MMT in 2020) and Thailand (2.5 MMT in 2020).

Bangladesh, previously the largest importer of cement in the Pacific with 16.5 MMT in 2018 rising to nearly 23 MMT last year suddenly had to look elsewhere from Vietnam as its principal supplier; consequently, the UAE stepped up to provide 6 MMT clinker last year (from less than 1 MMT in 2018) as well as significant contributions from Indonesia (5 MMT), Thailand (4 MMT), Pakistan (2.6 MMT) with Iran (1.7 MMT), a completely new supplier.

This dramatic change in cement trading patterns had significantly impacted the Indian Ocean supramax sector which has become the premium ocean due to additional tonnage being repositioned out of South East Asia to China whilst the strong Arabian Gulf (AG) cement clinker-aggregates-gypsum trade to the Bay of Bengal has often led to a shortage of tonnage in the AG.

Against this backdrop, China’s decision in May to virtually halt all cement imports has the potential to once again significantly change these trading patterns. This move is indicative of a wider malaise in the Chinese construction industry; annual cement consumption which reached a peak 2.4 BMT In 2020 and 2021 has fallen sharply in recent months with consumption down a massive 228 MMT (-11%) year on year in the ten months to October.

As yet China has not resumed exporting cement but clearly there will be a shake up in the Indian Ocean and South East cement clinker trades in 2023.

The Breakwave Dry Bulk Shipping ETF (BDRY) ended this week up by 19%.  Sentiment has now turned (arguably one week late) following the change in China that commenced two weeks ago.   As we have been stressing in our work in recent weeks, China is during its third covid surge, but this one remains quite different as lockdowns are being lifted even as cases have been rising.  Also notable with BDRY is that volume reached 793,000 shares on Thursday.  This has marked the largest volume seen since November 15th.

The Capes

We’ve seen a war, soaring inflation and an unpredictable China. But what has been a considerably volatile year for the Capesize market, is soon coming to an end.

From the beginning

Following a year in which the Baltic Capesize Index reached its highest level since 2009, 2022 has unfortunately not kept the party going. It was a lackluster start to the year as the Chinese holidays approached and the historic levels of Chinese congestion embarked on a sharp decline, falling from 19.7 MDWT to just 5.1 MDWT in little over a month. This coupled with the removal of the 14-day minimum ballast requirement in West Australia later in the year meant the Capesize market has been operating much more efficiently, weighing on freight rates. Though we got a brief spike in Chinese queues in September due to Typhoon Moifa this wasn’t close to the peaks of the start of the year. The C5 roundtrip has now shed approximately 7 days compared to what it was a year ago, despite the fleet operating at considerably slower speeds.

As the congestion in China eased, the world was met with the alarming news of a war starting in Ukraine. The EU immediately started implementing waves of economic and trade sanctions on Russia, which saw global seaborne coal flows (among others) drastically change. With the full EU import ban on Russian coal not taking effect until mid-August, most European energy producers were quick to stockpile Russian coal as gas prices in Europe soared. Though it was when power stations started looking elsewhere for coal that the Capes saw some benefits. European power stations started importing coal from the US, Colombia, South Africa, and Australia with the long voyages suiting the Capes. As a result, Capesize demand from European coal imports increased by 79.4% YoY across March-November. With the war now in full flow and European coal demand soaring, Q2 was trending towards a return to the good times as locked down Australia and a rainy Brazil re-emerged following a disappointing Q1. With the issues of Q1 in the rear-view mirror, Capesize iron ore shipments out of Australia and Brazil increased by 8.2% and 18.9% respectively in Q2. Now gaining momentum, the BCI increased by 19.4% in April closing at $18,460/day. In May, India surfaced as the X-factor that would drive the market to its peak of the year in May. An extreme heatwave saw the country’s coal imports from Indonesia hit their highest ever level, with 8.9 MMT lifted on this trade by the Capes in May. As Indonesia started sweeping up Capes sailing from the Far East, resulting in a shrunken ballaster list back to the West. By May 23, the BCI reached its peak at $38,169/day, more than doubling MTD. As the sudden spike in demand dwindled, so did Capesize returns, reversing back $21,516/day by the end of the month. Hitting new quarterly highs in both Q1 and Q2, West African bauxite has continued its rise in importance to the Cape market. Bauxite volumes surged 19.8% YoY in 1H22 to 42 MMT.  However, the inevitable weather ridden Q3 took its toll and thus the West Africa option for ballasters was less fruitful and the Brazilian miners had more vessels to choose from. This was particularly impactful on Capesize returns as the VLOCs started grabbing a greater share of Brazilian iron ore shipments, reaching their highest daily volume of the year by October.

The Macro

Though prices were already on the rise due to a widespread supply-demand imbalance in several dry bulk commodity markets in 2021, the war exacerbated global inflationary pressure. To combat rising prices, central banks have turned hawkish and global economic activity has started to slow. This naturally had effects on steel-intensive industries such as property and infrastructure which was then reflected in declining steel demand and thus production across all global producers, apart from India. So far this year, global steel production has declined 3.7% to 1.6 BMT according to the World Steel Association. October data did, however, provide some encouragement with most major producers showing a MoM improvement. China on the other hand, has not had the burden of mounting inflation but has been during a year-long battle against Covid-19. The country’s zero-Covid policy has waned on its economy and therefore commodity demand, while its property sector has yet to show any meaningful signs of a recovery. The developments of the past couple of weeks have been encouraging as restrictions across several major cities have been relaxed. China has announced a range of stimulus policies to support its property sector, but the results have yet to show. As we discussed in a Big Picture in November, there is inherently a response lag with these policies and thus remain confident the results will start to show next year.

The macroeconomic environment and volatile freight returns this year has driven a cautious approach to newbuild contracting so far this year, as well as the looming environmental regulation set to take effect from the turn of the year. Newbuild prices have remained firm, however, despite the sharp downturn in the market as energy costs and steel plate prices, particularly in Japan, have yet to subside. As a result, just 30 Capes have been ordered so far this year. Slots are said to be almost full up for 2025, and some yards which can build both bulkers and tankers are now unsurprisingly seeing more interest for the latter, which could further extend delivery times. Cape deliveries have also been few and far between, set to match the 10-year lows of 2018 at 51 vessels. Meanwhile, just 12 vessels have been removed resulting in net Capesize fleet growth of 2.2%.

Looking to next year, there remains several uncertainties with regards to new regulation, a Chinese recovery, and a worsening economy in the West. And while the growth outlook for iron ore and coal is limited, we still see the potential for better days ahead.