Spend a bit of time with a few shipping professionals and you’ll find that they’re a refreshingly cheery bunch. Not that they’ve had a huge amount to be optimistic about in recent years. But, if Nordea’s 11th annual shipping seminar in London on Wednesday is anything to go by, their bon homie may at last have some foundation.
It is as ever, all about supply and demand. And this time, fleet owners look set to take advantage of an alignment that should offer good returns until at least 2021.
“For years, the industry has been over-leveraged, but those days are long gone,” said Ridgebury Tankers CEO Robert Burke. “Ships are cheap and shares are still cheap. We’re hitting a sweet spot for the next two years.”
“Shippers are either very bullish or we see it as becoming very bullish eventually,” said Burke, speaking on the tanker panel. “Everything is looking good now and we really see the next year to 18 months at least as great for us.”
Fellow panelist Patrick Rodgers was quick to agree. “Every ship ordered now is net fleet growth, this is not just a seasonal pick-up,” said the Euronav CEO. “One wrinkle is that there’s a big order lined up for next year, but that will be offset by the incoming International Maritime Organisation’s legislation in 2020. The new capacity can be absorbed quite easily as long as dynamic growth keeps coming.”
Industry stalwart Ioannis Zafirakis also weighed in during the afternoon’s dry bulk panel. “In 2017, rates were neither here nor there,” said the Diana Shipping chief strategy officer. “We can say that for the first time after many years, we feel strongly about markets picking up and rates picking up.”
“If you look at the ‘fear-o-meter’, it is relatively high,” he said. “If the fear of something is actually less than the actual reality, then the net effect is positive. At the moment, it is so high that the market really should improve.”
The only fly in the ointment was the threat of overbuilding which, panelists warned, has scuppered the industry before. “Shipowners are a little bit like miners,” said Mark Kremin, CEO of Teekay LNG. “As soon as they find a little bit of gold, they build another hole.”
“We can’t out build the market for the next 2.5 years,” said GasLog CEO Paul Wogan, alongside Kremin on the LNG panel. “If we don’t overbuild into this plateau market, then it will stay very good, but when we do overbuild, we will kill it, so let’s not overbuild on speculation or we’ll just ruin it in the next three to four years.”
China in your hands
But, despite those well-founded fears, it was difficult to suppress the genuine buzz of excitement among the industry even allowing for the impact of presidential tweets, the ups and downs of the Baltic Dry Index, the US-China trade war or a global manufacturing slowdown. Participants stressed again and again that there is a timeframe up to 2021/22 that offers the chance to make hay.
And where is that demand coming from? Well, despite that trade war and reports of a slowdown, it’s still China and it’s still likely to be China for the foreseeable.
“China’s demand is growing and it’s being driven by the conversion from coal power to gas-fired power,” said Golar LNG CEO Iain Ross. Indeed, the potential for more demand to come out of China was outlined by fellow panelist Wogan.
“the only thing that is stopping China now is infrastructure, not demand for LNG,” he said, in a lively debate on the prospects ahead for the industry in a cleaner-fuel environment. “There’s a lot of talk about supply coming into China through the Russian and central Asia pipelines but it didn’t really work last year and by the time you apply all the various tariffs, it was not particularly competitive either.”
“We’re proud to say that the LNG we are delivering is playing a part in restoring blue skies in Beijing again,” he added. “China used to dominate the 50 most polluted cities in the world list but that’s now been taken over by India.”
It’s an enticing prospect for LNG transporters with a likely proliferation in floating regasification storage units (FRSUs) ahead, not only for China but also for India when it gets its act together, the panelists said. And as environmental and ESG concerns crystallise, that move towards cleaner fuel and away from dirtier fossil fuels like coal, they said, could only become more central to shipping strategies, benefiting above all those companies aligned with and ready for the raft of regulations coming online in the next few years.
Given the windfall outlined by the experts, it was hardly surprising that some urged investors to take a serious look at buying stock in 2019.
“I think 2019 could be the year of the dark horse,” said Roberts. “If we keep prices reasonably in range, if refinery turnarounds next year are not too extreme and we see an easing of congestion in ports by the middle of 2019, then we’re looking good. At the moment, shares are low but that’s because of all the anxiety on the macro scale. We’re well balanced and well structured and the important thing in this industry is to make sure you are a survivor because, in the long term, the returns are good.”
That argument also ran in tandem with the general preparedness of the big players in the sector for the raft of environmental legislation on the horizon.
“The whole regulations push, IMO 2020, decarbonisation and so on is a really positive thing for well-capitalised companies,” said Genco Shipping president John Wobensmith. “A lot of smaller companies will have great difficulty with the regulation, but I’m optimistic that we will see ship scrapping come down.”
Fellow dry bulk panelist Herman Billung agreed. “I love regulation,” said the Star Bulk senior vice president. “It makes life more difficult [for companies unable to meet compliance standards].”
To scrub or not to scrub
But it was ironically that very agreement on the benefit of strong legislation that opened up the most contentious debate of the day, namely the application of scrubbers designed to remove harmful particulates and reduce ship emissions.
Trygve Munthe, CEO at DHT, was one of those adamant that scrubbers were the way forward, at least for now.
“We’ve been overdue a shipping clean-up act,” he said, during the tanker panel. “We’ve gone with scrubbers for two-thirds of our fleet and while we’re neither for or against, it is just an economically interesting way to comply with the rules. Everything is uncertain at this point but we think the chances are with large tankers that the pay back could be quite attractive. We are definitely in.”
Magnus Halvorsen, chairman at 2020 Bulkers, was also a fan arguing that scrubber penetration “will grow over time” during the dry bulk debate and Birgitte Ringstad Vartdal, CEO at Golden Ocean Management, also marked her company down as in the “positive camp on scrubbers.”
But for many, the scrubber issue was something of a red herring. Billung argued that “in 5-10 years, we will all be laughing at the whole scrubber story,” while Benoit Timmermans at CMB dismissed them as “a solution driven by Wall Street and greed. We are already over that debate and we’re looking at new solutions like hydrogen,” he said.
Zafirakis was typically forthright. “Scrubbers are nothing to do with shipping,” he said. “They are not a good investment and it is now possible to be environmentally friendly by using clean oil for example.”
But where all the panelists were in agreement was that this debate would likely play out for quite a few years yet before a clear winner in the race towards less emissions would emerge.
Perhaps one of the most interesting themes to emerge outside of the debate on the environment and sustainability was the role of oil and gas in the future. Keynote speaker Maria Moræus Hanssen was clear that while both would remain important, the role of gas would become increasingly significant.
Hanssen, CEO at DEA Deutsche Erdoel, outlined the current merger process between DEA and oil and gas giant Wintershall as driven by a bigger-is-better mantra.
“This is about synergies and costs,” she said. “Size matters if you want to do things on an international scale and it takes enormously deep pockets to do that.”
“We believe in the future of oil and gas and in 50 or even a 100 years, they are still going to be big business,” said Hanssen. “But if you want to invest in this business long term, it is gas that you should be really thinking about. There is a significant difference between gas and oil and the gas market is not one global market and one price. In the US, gas is produced as a by-product of oil and sells at about 25% of the price in Europe piped from Norway or Russia.”
“The dynamics of gas are different and we’re going to spend a lot of time explaining to shareholders who are probably going to take some convincing,” she said. “We’re in for a time of consolidation, of mergers and acquisitions and about how to grow in a sustainable way.”
“I don’t believe we can reach climate goals through government alone,” she added, rounding off with a return to the environmental debate. “We will be driven by technology and we might suddenly pivot into being something else.”
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