For maritime industry participants, December is a time for looking backward- what happened in the past 12 months, and looking ahead, at what might happen in the next year or two or three. I can sum up what happened this past year when it comes to the drybulk side of the market- it went up for much of the year, boomed during late Summer, backed off during October, and then found its sea-legs in November.
But peering out into the future is far more interesting. Breakwave Advisors, a maritime investment originator based in New York, hosted an excellent online forum, appropriately dubbed “Breakwave Day”, bringing together industry experts to discuss the markets. With Breakwave being best known for its highly successful Drybulk Shipping ETF with the symbol “BDRY”- which is quoted on the New York Stock Exchange, it makes sense that much of the virtual conference looked at the dry side of the shipping market. At early December, BDRY- which invests in “paper”, ie traded derivatives on shipping freight (not in actual company shares, like some ETFs) is up almost 300% (yes, that’s nearly 3x) from its end 2020 levels.
The market’s forward prospects, like everyone knows, are determined by the intersection of vessel supply and cargo demand. Lead-off panelist Nick Ristic, who runs dry-cargo research at behemoth shipbroker Braemar-ACM from his desk in London, offered a bullish view of that interaction- but not only for the usual reasons- including the well-publicized historically low orderbook (around 7% of the existing fleet). His thesis, oversimplified here but to the point, is that new regulations coming into effect at the beginning of 2023, notably the “EEXI” rules governing energy efficiency for existing vessels (built prior to the advent of “EEDI” rules in 2015) will force many vessels to slow down, the simplest (and cheapest) way of complying with the new rules.
In theory, by lowering effective supply, “utilization” (the % denoting the supply and demand intersection) could jump upwards towards 90%, and maybe even higher (where ups and downs can be magnified by “supply inelasticity”)- which was seen at the height of 2021’s boom times. Braemar’s economic modeling efforts suggest that speed reductions could bring about the equivalent of taking 65 Capesize bulkers out of the fleet, and equivalent numbers of smaller ship sizes. If this type of scenario plays out, watch out above!
In his remarks, Mr. Ristic noted that “Broadly speaking, we are not overly bullish on commodities like iron ore in terms of trade volumes. The same goes for coal where longer term, we don’t really see where the growth in demand is coming from- on the same scale that we’ve been used to for the last decade. However, we are still very positive on the minor bulks and grains…the thing that’s going to pick up the blue line (market moving average on one of his charts) for the next few years is that limited supply growth.” In talking about possible impacts of the emerging EEXI rules, he said “It could throw a real spanner into the works to the normal cyclical pattern that we’ve become used to.”
Breakwave Day also included a panel session on the investment aspects of “Green Shipping” which will impact all the sectors. It is still early days, but Breakwave Advisors has also launched a new ETF, with symbol “BSEA”- which will focus on exactly that. There was no precise consensus on fuels for shipping’s future, but a general agreement that technological change (way beyond simply slowing down vessels) will be looming large on shipping’s horizon.
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