18-03-2017

Shipping Stocks Encounter Volatility

shipping

When President Donald Trump was elected in November, share prices of shipping companies soared by more than 1,000 percent. Investors hoped the new president’s campaign pledges, including corporate tax cuts and interest rate rises, would reverse low shipping rates and spark a rise in the lucrative transportation of various materials by sea.

Aside from a characteristic lull in February, the Baltic Dry Index (BDI) — a measure of the price of shipping major raw materials such as iron ore, grains and fossil fuels by sea — has advanced strongly in recent months, lifting stock prices across a number of shipping companies such as Scorpio Bulkers‌ (SALT), Diana Shipping (DSX) and Knightsbridge Tankers (VLCCF).

China Iron Ore Demand Lifts the BDI
However, there are also concerns about the factors supporting the BDI’s recent impressive performance. Chief among them is the record amount of iron ore arriving at Chinese ports which some analysts, including Andrew Keen at Haitong, believe is unsustainable.

The recent surge in Chinese steel production means that Capesize vessels currently make up a substantial portion of dry bulk traffic. Unusually high demand for these larger cargo ships has led to big fluctuations in the BDI and helps to explains why shares in companies that do not operate Capesize vessels, such as DryShips (DRYS), have been on the wrong end of market sentiment.

Barclays Bullish on the Shipping Sector
Analysts at Barclays are confident that the majority of the shipping sector will continue to live up to its post-election promise. Despite vast advances in most transport company share prices, Barclays notes that the stocks still trade below historical PE ratio multiples relative to the S&P 500.

Most of Barclays’s optimism is based on improving global trade, particularly between Asian and U.S. ports, President Trump’s pledge to reduce tax rates for exporters and also higher interest rates and inflation. The Federal Reserve recently raised its borrowing rate by 25 points, representing the second hike in three months. Barclays said this offers encouraging signs for the sector, because higher interest rates have historically enabled shipping companies to achieve much-needed price increases.

Source: Investopedia

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