When Will Global Shipping Recover?

A “perfect storm” gathered during The Great Recession that sank much of the global shipping industry.
 
Due to the economic expansion of the early 2000s, many ships were built and put into operation.  From this, a glut developed when economic growth declined around the world due to the effects of The Great Recession.  At present, the global dry-bulk fleet stands at a record level of almost 571 million deadweight tons.  Last year, it was only 504.8 million tons.
 
This naturally lowered rates for shipping by the fundamental economic forces of supply and demand.  Rates for the capsize vessels, the largest, are down to $6070 a day, a huge drop from the peak.  Over this same period, fuel costs increased.  The combination of higher fuel costs and lower shipping rates was lethal.  What made it even more treacherous for shipping companies to navigate through these troubled waters was that many had accumulated tremendous amounts of debt to finance the building of the new ships, for which there were now no customers or only those at sharply reduced rates.
 
This can be seen in the current financial positions of the survivors.  Frontline Ltd, (NYSE: FRO), which operates tankers and carriers, is now trading around $4 a share.  The five-year high for the share price of Frontline Ltd was over $70 in 2008.  The debt-to-equity ratio of Frontline Ltd. is 7.15.  That means that for every one dollar in asset value the company now has required $7.15 in borrowing by Frontline Ltd.  That ratio demonstrates the collapse in the value of shipping assets after much borrowing took place to create the vessels.
 
But even with this plunge, many investors do not expect that Frontline Ltd is done declining in share price, and are betting that way.  Frontline Ltd has a high short float, which results from investors borrowing shares of the stock in hopes of replacing them later when the price falls, thus booking a profit.  A short float of 5% is considered to be troubling for a company.  Frontline Ltd has a short float of 21.14%.
 
DryShips (NASDAQ: DRYS) is another “survivor.”  The share price for DryShips is now around $2.25.  In late 2007, DryShips was trading at around $120 a share.  The debt-to-equity ratio for DryShips is 1.08, not as high as Frontline Ltd but still very unhealthy in the current economic environment for shipping.  DryShips has a short float of 4.34%.
 
The overall decline of the shipping industry is demonstrated by the performance of the exchange traded fund for the industry, Guggenheim Shipping (NYSE: SEA).  An exchange traded fund is a financial instrument that represents a certain sector or other investment class.  It offers greater diversity to the investor than just buying a single company stock in that area.  Guggenheim Shipping is now around $15.65.   Last year, it was close to $30 a share.  The short float for Guggenheim Shipping is 8.84%.  Investors are obviously expecting the shipping sector to sink even more.
 
The current weakness in the global economy, and thus shipping, is revealed by the Baltic Dry Index.  The Baltic Dry Index measures the cost of shipping dry goods such as coal, grain, iron ore and lumber around the world.  Issued daily by the London-based Baltic Exchange, it is a very reliable economic indicator as no one orders iron ore or coal on spec: there is a need waiting to be filled on the other end.  Many traders buy and sell commodities purely for speculative profits, by contrast.  At present, the Baltic Dry Index is around 1075.  While that is more bullish than its low of 647 in early February, it is far beneath the record high level reached on May 20, 2008 of 11,793 points.
 
What the global shipping industry needs is economic growth around the world, particularly in emerging market nations such as China and India.  Much of the global shipping industry is the transporting of commodities such as oil, copper and iron ore to China.  Even though it is still growing, the level of economic expansion for China is declining.  Average annual growth for China was around 10%.  It has fallen by about one-fourth that amount for the second quarter of 2012, the most recent period reported.  This has had a huge impact in the demand for commodities of all types, in which China is, by far, the biggest customer in the world.  This is resulted in a lesser need for ships to haul the goods.  When China and India recover, more vessels will be needed to transport the oil, coal and iron ore from around the globe to the factories of the two most populous nations in the world.
 
But this does not look to be coming soon, as measured by the level of activity in booking ships for transporting cargo over the waterways of the world.  Sanko Steamship Company, a Japanese entity with 185 ships, recently filed for bankruptcy and on July 2 petitioned a U.S. bankruptcy court to protect its American assets.  About the future of shipping, Julian Jessop, an economist at Capital Economics, stated that, “Demand for shipping has rebounded from its late-2008 lows but capacity has risen even faster, causing utilization rates and hence shipping costs to plummet.  Order books for delivery in 2012 suggest that this year will see a further surge in supply, maintaining the downward pressure on prices.”