In 3Q21 and early October, container shipping stocks saw a sell-off triggered by the risk of worsening container ship demand largely due to power shortages in China. Moreover, the risk of a cost-push from the rising oil prices has added to the concern. Despite the concerns, the dip in stock prices can best be explained by market overreaction and impulsive behavior of individual traders. Fundamentally, nothing has changed – demand is still high and the supply chain bottlenecks continue to drive the container shipping earnings. Nearly all carriers are now predicting robust results in 2H21, pointing to current historic lows in the US inventory-to-sales ratio as evidence that high demand for imports is needed to meet the domestic demand.
Port and terminal operators: In 3Q21, Port industry faced higher congestions, primarily spanned across the US, Europe and Asia. Even though the mutating virus still poses a threat to the global economy, the chances of it causing severe damage have declined drastically, providing much-needed relief to equity investors. Higher vaccination rate and supportive liquidity led the terminal operators’ stock price to move upwards. In 3Q21, Drewry port equity index inched upwards, but it has started to lose steam (3Q21: +3.8%, 2Q21: +9.6%, 1Q21: +8.9%, and 4Q20: +16.4% – QoQ growth). Looking deeply, Global / international terminal operators continues to outperform their regional peers for the second consecutive quarter.
Dry bulk shipping: Most of the dry bulk operators in our portfolio have had the best 9M in a decade. With freight rates at highs seen last in 2009 on many routes for almost every vessel class, the dry bulk shipping sector has not seemed so lucrative in a long time. However, as we move into the seasonally weak fourth quarter, many market players stand divided on the sustainability of this bull run. Iron ore, which led the bull run for most part has gone tepid as hyper inflation scare and waning demand, among other factors, have overshadowed the infrastructure-driven demand. Moreover, power crisis in the two largest Asian economies has brought coal back in the picture while a strong harvest in Europe and the US has paved the way for solid grain trade.
LNG shipping: LNG shipping assets have become more attractive for long-term investors amid the energy transition. This has led to the acquisition of three independent LNG shipping companies by private equity players in the last eight months, with Teekay LNG being latest LNG shipping company that has announced to be acquired by Stonepeak. However, acquisitions are not confined to equity investors. Recently, Gaslog Ltd entered into a note purchase agreement with The Carlyle Group and EIG for USD 325mn. The positive outlook for LNG shipping pushed up the Drewry LNG shipping equity index by 43.8% YTD.
LPG shipping: After a slow third quarter, LPG shipping rates got a lease of life as the fourth quarter kicked in. After low demand and a closed US-Asia arbitrage dragged rates and subsequently stock prices lower in the first week of October, rising energy prices boosted LPG demand and in turn charter rates, which subsequently buoyed the stock prices. As we move towards the end of the year, and heating demand picks up, a host of factors including energy crisis, low US inventory levels and high LNG prices may just provide the much-needed demand side recovery for the sector.
Crude tanker shipping: The combined market cap of crude tanker shipping stocks under our coverage inched up by 1.7% in 3Q21 despite a decline of 19.1% in July and August, mainly on the back of the rally in stock prices in September. The index outperformed key market indices – S&P 500 inched up by 0.2% whereas Dow Jones Industrial Average (DJIA) and Nasdaq Composite slid 1.9% and 0.4% in 3Q21. A rapid increase in energy demand that outpaced the growth in supply led to a surge in natural gas prices and is likely to drive the prices of other energy sources. Unusually high natural gas prices could lead to a switch to crude oil for power generation, which will support the growth in oil demand over the next six months.
Product tanker shipping: Drewry product tanker equity index slid by 9.4% in 3Q21 primarily due to the decline in July and August amid new variants of Covid, uncertain demand and ample tonnage availability despite a capital gain of 8.9% in September. The index underperformed key market indices such as S&P 500 (0.2%) and Dow Jones Industrial Average (-1.9%) during the quarter. The decline in new Covid infections, expanding vaccination reach, firm seasonal demand will support vessel earnings and stock prices of product tanker companies in 4Q21.