Shipping rates a respite for GE Shipping, but sustainability is key
While fleet capacity stagnated due to low orders and scrappage, demand grew steadily driving up the charter rates
Tracking the rebound in the tanker shipping rates, shares of Great Eastern Shipping Co. Ltd (GE Shipping) have gained as much as 22% from the lows in July. Crude tanker rates represented by the Baltic Dirty Tanker index gained as much as 78% from the first week of July. While fleet capacity stagnated due to low orders and scrappage, demand grew steadily driving up the charter rates. So much so that tanker rates on some routes tripled.
With a large portion of the fleet catering to crude and allied products, GE Shipping is seen to benefit from this. “After nine years of downturn, the unfavourable economics of this sector is now self-correcting as sub-par profitability, liquidity crunch, and rising regulatory cost have shrunk order books to a decadal low of 13% and increased scrapping to 8-year high. This bodes well for GE Shipping as crude and allied product tankers account for 76% of its DWT capacity,” Ambit Capital research said in a note. DWT stands for deadweight tonnage, a measure of the weight a ship can carry.
The recovery does face intermittent risks. Operating costs are on an uptick. As winter impact wanes, charter rates can soften too. Similarly, production cuts by Opec (Organisation of the Petroleum Exporting Countries) can hurt the tankers. Even so analysts are not worried yet. Tight market conditions can keep tariffs high even though they have been moderating. “Experts tell us the rates would still be 20-35% higher YoY due to stagnating tanker fleet growth,” Ambit Capital research adds.
Similarly, unlike in earlier years, the oil market is well supplied now. Production cuts can be compensated by exports from the US. This will aid crude tankers thanks to the higher distance from the US, points out Drewry, a maritime research consultancy. “As the distance between the US and Asia is almost double that between the Middle East and Asia, ton-mile demand will more than compensate for any notional loss in crude oil trade volumes,” Drewry adds.
That said, how much of this optimism translates into GE Shipping’s earnings is to be seen. One reason is that a sizeable portion of revenue (29% last fiscal) still comes from offshore business. Fortunes of this business are intertwined with crude exploration, which is yet to come back in a big way. Second is currency volatility which its business is inherently exposed to. Last quarter, the company had to book large non-cash loss on derivate contracts. With exchange rates expected to remain volatile, investors should be prepared for such untoward charges.
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