Grant's Interest Rate Observer

Trade Boom Already Started?

It's easy to grin

Is the global shipping industry, long mired in a turgid slog amidst overcapacity and a lukewarm economic environment, finally springing to life? Recent sightings abound of an acceleration in activity, with the Port of Long Beach (the second largest in the U.S.) announcing on Thursday that October saw record volumes, with a 15% uptick in twenty-foot equivalent (TEU) cargo units year-over-year.  Through the first 10 months of the year, total shipment volumes are up by a sturdy 9.6% from their 2016 levels.  For next year, IHS Markit forecasts global container trade growth at 4.9%. 

 

Anecdotal evidence of something resembling a boom was pervasive on shipping companies’ third quarter conference calls. AP Moller – Maersk A/S (MAERSK-B on the Copenhagen Stock Exchange) CEO Soren Skou noted a brisk pace of activity on Nov. 7: “We continue to see strong fundamentals in container shipping. We are positively surprised about demand growth.”   Gregory G. Zikos, CFO of Costamare, Inc., (CMRE on the NYSE) told listeners-in on Oct. 25 that: “There are positive signs coming from demand growth, which has been exceptional up to now this year.” Loukas Barmparis, president of Safe Bulkers, Inc., (NYSE: SB) offered this forecast on Nov. 1: “We expect that the strength of [the] charter market in the following months will push asset values substantially higher . . . We believe the prospects for global growth remain overall positive.” Robert Bugbee, president of Scorpio Bulkers, Inc., (NYSE: SALT) reported an acceleration in activity beyond their expectations on Oct. 23: “Since we last spoke in July, we ourselves, despite being bullish and confident then, have underestimated the strength of the market in each of the months that have gone through that time.” 

 

Although some companies, such as Safe Bulkers (up 200% year-to-date) and Scorpio Bulkers (up 45% year-to-date) have handsomely rewarded a well-timed investment, the price action in the group remains generally moribund. The Dow Jones Global Shipping Index, which is little changed for 2017, sits almost 30% below its five year average and almost 50% below its 2014 interim highs, and trades at a spartan 0.79 price-to-book value ratio. 

 

Beyond the prospects of the shippers themselves, the evident upturn in activity may be providing a signal for overall economic vitality. The Jan. 27 edition of Grant’s (“‘DJT’ on the New York Stock Exchange”) presented the pleasant possibility of a new paradigm of economic growth, as globalism (“trade encumbered by politics, complexity, favoritism and rent seeking”) would be replaced by globalization (“unfettered economic cross border exchange”).  

 

Biff Robillard, president and co-founder of Bannerstone Capital Management, explained the distinction with the following analogy:

 

Robillard says that the world economy reminds him of a gigantic jetliner. How well it flies unburdened with, say, extra antennae jutting out from its fuselage, or with a redundant engine awkwardly bolted on to its wing.

 

Now, Robillard proceeds – just maybe, under the rising threat of the angry populists in America and Britain – the plane will be stripped of the oddments that have kept it from soaring.  ‘Removing unnecessary drag from the airframe is a good thing if you want an efficient aircraft,’ he says. ‘Maybe that’s what capital smells coming – retractable landing gear!’

 

To hear the cadre of shipping executives tell it, the economic jetliner is cleared for takeoff.  In terms of their stock prices at least, the shippers themselves are still taxiing on the runway. Or, as they say in the maritime trades, idling by the jetty.