Hope on the horizon

Petter Haugen, equity research analyst for Kepler Cheuvreux and Swedbank, is looking forward to 2020. In a speech delivered at Marine Money Week, Mr Haugen unreservedly expressed his enthusiasm for the upcoming year: “In my experience — 12 years in shipping — I’ve never been that excited for the next year as I am now,” he said at the event in New York.

Why is Mr Haugen so eagerly anticipating 2020? In his opinion, next year will be the first year since 2007 when all areas of commodity shipping reach a simultaneous cyclical high. According to him, “the case is building for a prolonged super-cycle”. There are two drivers for this, he said. The first is that significantly lower ordering in 2016-2018 will yield lower fleet growth for 2018-2020 and orderbooks are now below most historical comparisons. The second driver relates to “the US shale revolution”.

Next year is a big year for maritime. As soon as the clock strikes midnight at the end of the 2010s, vessels operating outside designated emission control areas will have to ensure that they keep the level of sulphur in their fuel oil at no more than 0.5% mass by mass (IMO 2020). Coupled with production cuts by the Organization of the Petroleum Exporting Countries (OPEC), this imminent limit is responsible for the positive consequences of greater oil prices, in Mr Haugen’s view.

He predicts that elevated bunker prices are set to slow up vessel speed to decrease consumption. This is set to lower effective supply, a freight rate tailwind. Additionally, Mr Haugen said that greater commodity pricing generates more headroom for shippers to pay extra for transport — whether it be for LNG, crude oil, refined products or liquefied petroleum gas. According to him, a bigger oil price boosts the preparedness to pay for transport services. As for reductions by OPEC, Mr Haugen claimed that decreased exports from the Middle East to Asia are set to be supplanted by US exports, which travel further and use more vessels.

“OPEC cuts are simply subsidising US shale and moving incremental production two to three times further apart from consumption,” he argued, venturing that together, all these elements could next year lead to a super-cycle scenario for shipping and its equities.

Positive feeling

Mr Haugen is not alone in his optimism. Other shipping analysts are also anticipating that next year, freight rates will rise steeply. Curtailed fleet growth combined with IMO 2020 will mean less ships on offer for charter. Randy Giveans, analyst for investment banking company Jefferies, says that though the first half of 2019 “was bad pretty much across the board for shipping rates”, next year appears a lot healthier.

“2020 is looking much better due to slowing supply growth and the positive impacts of IMO 2020,” he said.

Meanwhile, Jo Ringheim, analyst at Norwegian investment bank Arctic Securities, hints that regardless of trade issues, the company’s forecast for shipping of commodities is upbeat.

“With orderbooks close to historical lows in commodities shipping, we are constructive on the outlook despite the trade tensions,” he notes. “We also remain upbeat for oil tankers due to increased long-haul Atlantic [Ocean] exports, a manageable orderbook and the anticipated IMO 2020 impact on oil-demand and vessel-supply.”

Returning to Mr Haugen’s presentation, there are three catalysts for the simultaneous cyclical high of next year. The first relates to the idea of the trade war being rationally resolved by more US exports. The second is linked to the concept of OPEC reductions, with a greater oil price, supporting shipping through different avenues, and the third is connected to IMO 2020 decreasing supply by making the global fleet sail slower.

However, he added two caveats to his upbeat prognosis: firstly, shipping is among the planet’s most volatile businesses, and secondly, “consensus will always lack imagination”. The shipping industry could well be its own worst enemy when it comes to supporting a sustained recovery.

The Baltic Exchange will hold its next Advanced Freight Modelling & Trading course on 9 and 10 October in UK capital London. More information can be found here.