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Shipping Stocks -- A Perfect Way to Profit from Booming Global Trade |
Published: November 19, 2007
For most of the 19th and early 20th century, mariners were in
agreement that Britain ruled the seven seas. The nation's
massive, technically-advanced navy and merchant marine enjoyed
uncontested control over the world's oceans.
That dominance conferred myriad advantages. Specifically, there
was no air travel during this time period, so goods transported
internationally almost always had to be transported by ship. The
alternative, if there was one at all, was often dangerous
overland transport across miles of inhospitable territory.
Dominance of the sea gave Britain control over key trade routes
-- such as between Europe and the Americas, Asia and Europe. It
should come as little surprise that Britain became a formidable
merchant nation and a global economic power during those years.
A century later Britain no longer dominates the seas. However,
not everything has changed -- water transportation is just as
important to global commerce today as it was several centuries
ago.
Growing Global Trade
Chances are good that many items you use every day are at least
partly dependant on global sea trade. For example, the fuel you
pump in your car is probably at least partly imported -- the
U.S. imports about two-thirds of the oil consumed domestically
in any given day. And major household appliances, like your
refrigerator or oven, were likely built overseas or contain
numerous foreign parts -- most imported consumer products and
parts were also brought in by ship.
And the U.S. certainly isn't the only nation that's highly
dependant on the sea. Consider that this past March, rumors
surfaced that Iran was planning to disrupt oil tanker traffic
coming through the Strait of Hormuz -- a narrow ocean passage
that connects the Persian Gulf to the Gulf of Oman. Based on
those rumors alone, crude oil prices shot up by several dollars
per barrel.
In early May, the Strait was once again threatened, this time by
an unusual typhoon that eventually struck southern Iran. Again,
crude prices shot higher by several dollars before the storm
passed.
There's good reason for this reaction. According to the U.S.
Energy Information Administration, roughly 16 million barrels of
crude oil travel through the Strait each and every day. That's
equivalent to around 20% of the crude oil used worldwide on a
given day. All that crude travels through a small passage that's
just 21 miles wide at its narrowest point.
More broadly, consider that close to 90% of the crude oil
transported from the Middle East travels by sea-going tanker
ship for at least a portion of its journey. And that's not just
the case for Middle East crude -- the vast majority of crude
from Africa, South America and Australia also travels by tanker
ship on its journey to the consumer. Without tanker trade, the
U.S., Europe and Asia just wouldn't be able to satisfy their
daily demand for oil. And sea borne trade in crude oil is
growing rapidly. Consider that China's imports of crude have
soared from nothing in 1992 to more than 3.75 million barrels
per day last year.
Oil is only the Beginning
As you might expect, other commodities are similarly dependant
on the global waterborne shipping industry. Examples include
iron ore from South America that's transported to Asian
manufacturers and smelters. And agricultural products from
Brazil and the U.S. feed millions in countries throughout Asia,
Europe, and the Middle East. There are literally thousands of
globally-traded metals, agricultural products, and energy
commodities. And, of course, there's much more to the water transportation
industry than just commodities: finished consumer goods and
industrial parts are regularly transported on giant
containerships.
Before the advent of container shipping in the
1950's and 1960's, shipping goods meant loading individual
irregular-shaped items onto a ship. This proved inefficient, as
there was no good way to move many individual items at once --
and securing odd-shaped goods for an ocean voyage took a great
deal of time and labor.
Nowadays, items are packed into standard 20 or 40-foot long
containers that can be stacked neatly on the decks of giant
ships. Standardizing containers makes it easier to handle
loading, unloading, and bundling cargo from multiple shippers.
And the development of ever-larger and more energy-efficient
container ships has made it even cheaper to transport items.
 The
chart to the right shows the dramatic growth in total
container-ship trade in the U.S. in recent years.
Container-ship trade is measured in terms of twenty-foot
equivalent containers (TEUs) -- these containers measure a
standard 20 feet in length and 8 feet in height and width. From
1999 to 2006, total containership trade at U.S. ports jumped by
an impressive +66%.
Profiting from Rising Demand for Water Transport
All this trade is conducted by ships and tankers owned by a host
of dedicated water transport firms. Typically, these firms don't
actually own the commodities and goods they transport -- rather
they handle the shipments in exchange for a fee. Often, that fee
is quoted on a daily basis and is known as a day-rate.
Day-rates are highly volatile and depend on prevailing supply
and demand for ships in a given region. Since crude oil is one
of the most commonly shipped commodities globally, the market
for tanker day-rates is highly developed. In fact, prevailing
rates for specific voyages are quoted on The Baltic Exchange on
a daily basis.
One commonly quoted index of day-rates is known as the Baltic
Dirty Index. The index is based on day-rates for a diversified
array of crude oil tanker routes and ship sizes -- when the
index rises, it indicates that tanker rates are generally
rising. As you can see from the chart, spot rates as measured by
the Baltic Dirty Index are highly volatile and exhibit certain
seasonality.
For example, demand for tankers tends to rise in the winter
months as refiners seek to restock their crude oil inventories
ahead of the busy summer driving season. By contrast, mid-summer
is typically a slow time for the tankers.
Spot vs. Time Charter Market
Some shippers prefer to operate solely on the spot market;
that means they book their ships on short-term contracts for a
specific voyage. The Baltic Dirty Index is a decent gauge for
the rates shippers can charge on spot contracts.
Other water transport companies tend to focus more on the
time charter market. In other words, these companies lease
out their tanker ships on longer-term contracts at fixed or
partly-fixed day-rates. The advantage of time charters is they
offer insulation from the volatility inherent in spot day-rates
-- ship owners have more predictable profitability. The downside
is that such contracts don't offer as much upside during strong
tanker markets.
In either case, global trade is growing, and that spells rising
demand for shipping services. Even better, there's an income
kicker: Once a firm has put up the capital to construct or buy a
ship, maintenance and crewing costs are relatively low and
predictable. As a result, most of the shipping fees earned drop
straight to the bottom line -- water transport firms tend to
generate strong cash flows and pay out attractive dividends. In
fact, hefty yields in the 10% to 20% range aren't uncommon for
the group.
With these points in mind, my staff and I recently devoted hours
of research to this industry, poring over financial statements and
analyzing each and every major publicly traded shipping company.
The end result of this exhaustive process -- we uncovered
six outstanding shipping stocks . . . six companies that are in
the best position to profit from the recent boom in global trade. These
include . . .
- A Hong-Kong based firm that has seen its shipping rates jump +200%
in recent years.
- A crude oil shipper that is now serving up a hefty 15.4% dividend
yield
- One of the world's only shippers of liquefied natural gas (LNG) --
a critical market that is poised to become the most important source
of imported gas in the U.S. by 2012
- Plus three more must-have shipping stocks!
Important
Note: Throughout the remainder of this article, StreetAuthority
co-founder Paul Tracy provides an
in-depth look at his six favorite shipping stocks.
However, in order to view the remainder of this article, you'll need to
subscribe to our premium newsletter -- the StreetAuthority Market
Advisor. After you subscribe you'll receive immediate access to this
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and a host of additional premium content. Please visit one of the
following links to continue . . .
-- Paul Tracy
Editor
StreetAuthority
Market Advisor
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Paul Tracy
founded StreetAuthority and became Chief Investment Strategist in 2001. Prior to
that he spent several years as Managing Editor at a multi-million dollar
financial publishing firm with over 150,000 subscribers. In addition to
his role as managing editor and lead financial writer, he was also
responsible for equity research and managing a team of seasoned
professional financial writers, researchers and market commentators.
Paul's previous experience
includes a position at Robert W. Baird & Co.'s full-service
brokerage operations as well as economic research work on a Money and
Banking project funded by the National Bureau of Economic Research. He
has also spent time doing outside consulting and research for the
University of Virginia, has appeared as a guest expert on several
prominent financial radio shows, and has been a featured speaker at
various investment conferences across the U.S.
Paul graduated with a B.S.
in Finance and Management from the McIntire School of Commerce at the
University of Virginia.
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