By Ulf Bergman
Every beginning a new year brings a plethora of predictions for the for the coming twelve months, with many pundits, in line with tradition, proclaiming it to be the year of shipping investments. Often, the sector fails to live up to the lofty expectations set in the beginning of a year, especially from an equity perspective. This year is no exception, with many analysts presenting bullish outlook for the year. However, given the incredibly special circumstances the global economy is facing, the shipping bulls may have a strong case, with maritime transportation being one of the beneficiaries of the post-pandemic recovery.
The overall macro picture should be supportive for many shipping segments in the months and the year to come as the global economy recovers from impact of the pandemic, but the picture is not without dark clouds. The rapid declines in economic activity last year are also unlikely to be matched by equally rapid recoveries this year. While the expected recovery is likely to provide numbers of impressive magnitude, the return to full pre-pandemic strength is likely to be spread over a few years.
The manufacturing surveys from IHS Markit are pointing to resurgent industrial production in both the North America and Europe, with readings at multi-year highs. The data from China are also showing that the industrial output remains strong, although at a somewhat more moderate pace. The recovery in industrial production will support a continued strong demand for industrial commodities, such as iron ore, copper and coal. The continued improvement can be expected to be a bit rocky, as COVID19 infection rates are again soaring in many parts of the world, with Germany extending its restrictions and Britain likely to face a third lockdown. France’s President Emmanuel Macron also warned in his New Year speech that the first few months of the year are likely to be challenging for the country. The speed of the rollout of vaccines will most likely dictate how quickly countries can return to something that resembles normality and at current rates the latter part of the second quarter appears to be a good bet for many countries achieving a critical mass of vaccinations. In the meantime, recovery rates are likely to be a bit volatile.
Iron ore and copper have retreated from their highs in the middle of December last year, whether this is due to seasonal weakness, increasing supplies or the impact of Chinese attempts to change the pricing mechanism can be debated. While it is a bit of bad news for the mining companies, it is likely to support demand and keep traded volumes near the record levels seen during the second half of last year. The pickup in manufacturing in many parts of the world will also provide additional support to the demand for dry bulk commodities. While demand for oil is also starting to recover, any meaningful recovery for the black gold is unlikely to be seen before the middle of the year, as many travel restrictions can be expected to remain in place until infection rates are well and truly under control.
Iron Ore, USD/Tonne
Assuming the global economy recovers as expected, with the vaccines being successful in fully controlling the COVID-virus, there is a case for shipping investments. With government stimulus packages fueling demand for commodities for infrastructure investments and industrial production, there would be an increasing demand for tonnage. Limited delivery of new tonnage and an increase in scrapping of vintage vessels is likely, in combination with increasing demand, support charter rates in the dry bulk sector during the coming months. Crude and product tankers are, on the other hand, likely to see any improvements later in the year when demand for transportation picks up with the easing travel restrictions and the returning demand for services. The freight markets are also likely to be reliable providers of both volatility and seasonality to investors, as the global economy emerges from the grip of the pandemic with a recovery unlikely to be without glitches.