Shipping industry crashes into the rocks

(source: Image by AFP/Getty Images. Pictured: The cargo ship smashed to pieces just minutes after 31-strong crew were plucked to safety, By Daily Mail Reporter. Last updated at 9:36 AM on 12th October 2008)

One of the most volatile industries out there is the shipping industry. The transportation companies, in particular, are very volatile and only a few brave souls will ever invest in them. The stock price charts are volatile enough to scare off most investors.

Given the collapse in world trade, it shouldn't be surprising how badly the industry has been hit. The Economist has a story updating us on the present state of affairs:

World trade in general remains in its worst slump for generations, although it too is no longer falling. Two of the biggest shipping banks (RBS and HBOS) are in state-backed rehab. The parlous state of the world economy could mean more shipping companies following Eastwind Maritime, which went bankrupt in June. On July 28th Hapag-Lloyd, Germany’s largest container-shipping company, secured a €330m ($468m) bail-out from its shareholders while it seeks up to €1.75 billion to keep it from sinking altogether.

Worse, there is a huge supply of new ships on order and due off the slipways over the next four years. For bulk carriers alone, the backlog is equivalent to more than two-thirds of existing capacity.

Although the situation looks dire there are some green shoots that can be seen:

Analysts at ICAP Shipping Research in London shrug off the idea that there will be a glut, since shipments of cheap Australian coal and iron ore to China have for years been constrained by a lack of big ships. More giant bulk carriers will lower the prices of ores delivered to China and stimulate trade growth, they say.

The outlook for tankers is less clear because of the volatility of crude-oil prices. Rates recovered strongly in June, according to ICAP, partly because large vessels were in demand for storage, as oil companies waited for crude prices to strengthen... But lower demand will be offset by a scheme to phase out single-hull ships on environmental and safety grounds in European and North Atlantic waters. The decline in production from mature oilfields in the North Sea and Alaska also means that replacement supplies will have to be hauled longer distances by sea to the refineries of Europe and North America.

The part of the shipping industry headed for the choppiest waters is the container trade, which had steamed ahead gloriously since the mid-1970s. The forging of global supply chains in the past 20 years, the rise in merchandise trade and the emergence of China as the workshop of the world created growing demand. Vessels became gigantic, with the latest capable of carrying 15,000 standard containers. Now the box trade, as it is called, is in the midst of its first decline. AXS Alphaliner, an information service that tracks the trade, has estimated that some 15% of capacity will be idle by October.

Even though I post a ton of stuff seemingly unrelated to any viable investment idea I have, I think it is useful for amateur investors to expand their knowledge base and keep up with events. By glancing over an article like this, one may get a basic understanding of the business. Even if you don't invest in a shipping company, at least you'll learn, like I did, how the dynamics for container shipping companies is very different from the dry bulk carriers or the crude tankers. The time may come when one may consider investing in this industry. Mohnish Pabri made a killing investing in Frontline (FRO) when it was out of favour and a pure value stock, around 5 years ago. Shipping companies—or anything to do with China, emerging markets, trade, credit, or real estate—were overvalued hyper-growth stocks in the last few years but they may become value investments at some point.