When I’m Not Speculating, I’m Looking For Longer Term Plays
Admittedly, I love shipping stocks. I largely view them as a sector rich in cash, paying higher and higher dividends, securing future contracts to de-risk operations and seizing the opportunity of buying further ships in a counter-cyclical fashion. Management teams seem to be very practical, pragmatic and “in-touch” with the “true” global economy.
Furthermore, every decision they make is done with an element of far-sightedness rather than myopic vision that has become so common with traders in this new crypto and tech universe. Some use debt heavily, others more prudently. Notwithstanding that shipping will suffer troubles as the world begins to reshape and people realize how the economic growth figures in China & Europe aren’t coming true. Long-term however it’s a disliked glue for the global economy.
The modern global economy could not survive in anything like its current form without shipping. Not today, not post-2000, and arguably not even post-1950.
Reasons Why It’s Not Going to Sink (by various shipping sectors)
Shipping isn’t a sector as much as it’s the circulatory system of the global economy
Roughly:
- ~80–90% of global trade by volume
- ~70% by value transferred moves by sea.
If shipping stopped:
- Factories don’t just slow — they stop
- Energy systems collapse
- Food systems fracture
- Financial markets follow shortly after and a domino effect of counterparty defaults occurs.
This is why it gets hate… it’s not a steady sort of industry that you can plant your flag for 30 years and expect to crush it year over year. As a result, while there’s massive wealth involved here It has not historically consistently produced more millionaires or billionaires than other major industries like finance and investments, technology, or manufacturing.
Too Important
Energy, and the need for critical minerals collapses without shipping
Energy Security= Political Security
& most crude oil, uranium & refined products come from other countries. Most oil-producing countries aren’t even capable of consuming their own production due to lack of refining capacity
No crude/product tankers →
- Refineries shut down
- Fuel shortages in days
- Electricity grids, transport, agriculture, and military operations follow
LNG
- Europe, Japan, Korea, China rely heavily on LNG shipping
- Pipelines cannot replace LNG at scale or speed (and where is the CAPEX coming from for such pipelines?)
In a world of no LNG tankers →We’re looking at immediate power rationing, industrial shutdowns and a humanitarian crisis within a week. I try to be a realist in viewing that this is something that some central planners would actually want for a moment, to crush the plebs out there. Having said that, energy via shipping is simply too integral to their own interests that it cannot be ignored.
As an example, realistically ask yourself…
- with all those who have interest in gaining a return on their investment into the war machine, namely Ukraine…
- with all of the hype and investment not just spoken about but already made into AI, semiconductor chips and new technologies
- with all of the efforts on now reshoring US manufacturing and policies by Trump
- with the immense amount of underinvestment in oil and gas companies as it stands now (to the tune of 3B barrels a day!!!)
Does it therefore stand that the governments, billionaires and dogmatic religious interests of the world would allow the energy markets to die? Surely, they will be diverted, and globalism will shrink to regional powers instead, but if we can agree that energy markets are not doomed, than we can deduce shipping companies will also be integral for the foreseeable future.
While energy may be one thing, food shipments are another. However, modern food systems depend on shipping for:
- Fertilizers (potash, ammonia, phosphate)
- Animal feed (soy, corn)
- Staple grains
Most countries have 30–90 days of food reserves, if that. Even countries we would regard as “food secure” still greatly depend on critical inputs to sustain that production. Worse yet for large countries, the processes to food production are so centralized and dependent on a few companies that breaking their supply chain has huge impacts.
There are only nine meals between mankind and anarchy
It’s the value inputs that really matter and the world is far, far too globalized to unwind this overnight. I’d bet that government are careful with respect to food price spikes, lest an Arab Spring occurs on their watch.
You know why we’re not gonna lose on this…because what we do, keeps the world’s economy afloat”-Zero Zero Zero
Manufacturing collapses
Container shipping = modern manufacturing
Since ~2000:
- Just-in-time logistics
- Globalized supply chains
- Ultra-specialized production
A single car may cross oceans multiple times before final assembly.
No container ships →
- Electronics disappear
- Auto production halts
- Medical equipment shortages
- Replacement parts vanish
Air freight cannot substitute:
- Too expensive
- Too small capacity to meet demand
- Energy-intensive
Amazon is now a stock with a market cap of 2.17T US dollars. The world has an interest in this remaining the case, and shipping is the glue behind this.
RoRo ships quietly keep entire economies moving
RoRo is an interesting sub-sector of shipping that handles vehicles, heavy machinery, rail equipment, military hardware & devices
This is why militaries care deeply about commercial shipping capacity. I wrote about one that has been excellent for me personally. Here it is:
Shipping touches geopolitics
Politically… a reduction of various forms of shipping would be a nightmare and the cowardice political types will always be quick to push a problem off to the opposing government. In fact, we're actually seeing the opposite with respect to securing supply chains of critical minerals at the moment–tightening trade blocs, for geopolitical purposes.
Shipping is so fundamental that insurance of shipping lanes (e.g., Hormuz, Malacca, Suez) is a core geopolitical concern. Why do you think the US cares so much about Panama and China about the strait of Mallaca?
Could the world “adapt” within the next 5 years?
Realistically, we’re so dependent on inputs that even if every country were to begin domestic production to meet all of their needs– it would take a minimum 5 years to remotely see any sort of change. Even the materials and infrastructure to be completely self-reliant would need to be shipped. Of course, energy shipping (oil/LNG) would still be required for reasons mentioned. You can’t electrify or digitize your way around physics and geography.
This is important I believe because there is a major question mark to investors as to where they should deploy their capital for the next few years--given the number of uncertainties.
I’m not sure what the world will look like in 20, 30, 50 years…but I’m willing that shipping will be a fundamental part of the world for the next 5-10 years.
Why this is often misunderstood by investors
Shipping is:
- Capital-intensive
- Boring to consumers
- Highly efficient (low cost per unit); but growth is small
- Invisible unless it breaks
That invisibility makes people think it’s optional. It’s not. Again, because we have grown so myopic in our state of the world and big changes appear to occur on a weekly basis (no longer a decade basis). It’s therefore easy to see all of the immediate threats to shipping and view that all shipping sectors are doomed, but it misses the big picture. I don’t want to downplay the risks ahead, all you have to do is read the opening statements of annual filings to see that they are very real to hurt revenues for the foreseeable future…but not forever. Let cooler heads prevail.
Last Point
As far as I can tell… as investors we are at a crossroads…where do you allocate your capital for this new world that we are heading towards? As you know, I am a huge proponent of gold being an ultimate place to have an overweighted exposure, but that’s not the only answer.
Owning great businesses should also be your priority. Businesses that continue to work for you, secure a great predictable margin and pay you either in dividend returns or in capital appreciation. As Warren Buffet says, “if you want to know whether you’re investing or gambling, you shouldn’t care if the stock market opens for 10 years or not”.
I believe that one of these areas that are attractive is the shipping sector. Valuations are very fair right now, they’re not going to disappear looking at their balance sheets, they have limited upcoming competition with demand remaining strong (even now during a global recession), they’re ultimately needed by governments around the world, they’re paying you to be a shareholder and they’re set to be a beneficiary of higher inflation if you agree that is to be expected into the future, too.
