President Biden’s new order seeks to increase competition in the marketplace and facilitate mobility of labor. This is expected to force companies to focus on innovation to outwit the competition rather than monopolistic practices to fix prices. The resultant drop in prices are therefore expected to help consumers.
But the order also indicates an increased focus on containing the surge in transportation costs, as pandemic-related supply chain disruptions meet resurgent demand from a recovering economy. This could hurt railroad, trucking and shipping companies that have been enjoying sky-high pricing stemming from the soaring demand.
Shipping companies in particular have been enjoying strong rates, and it’s not just related to the factors mentioned above. The truth is, it’s a highly cyclical industry. Companies generally order new vessels when demand outpaces available capacity, but they have to plan several years ahead because it takes around two to three years to build a cargo ship (depending on the size).
When the ship is delivered, it may be expected to have excess capacity so it can take care of demand growth for at least a few years out. This makes revenue growth highly dependent on rates. Because when demand is high and capacity relatively limited, rates ride higher and when there’s excess capacity rates of course drop lower.
When the pandemic hit, the industry happened to be in a scrapping phase, so capacity was low. However, goods consumption increased during those times, helping with rates.
And now that demand is back and capacity still limited, rates remain high. Although this demand strength has driven operators to raise orders for more vessels, these won’t come any time soon, so rates will remain elevated.
Environmental concern is another factor contributing to the constrained capacity. When companies scrap their vessels, they upgrade to new eco-friendly ones. But since eco-friendly vessels are more expensive, owners/operators try to use other methods to meet regulatory guidelines for harmful emissions.
One of the ways to do this is by refurbishing vessels to make use of fuels such as LNG or biofuels. Another method is to turn down the speed. And naturally, when vessels operate at lower speeds, they take longer to complete a trip, further limiting available capacity for new loads. This again drives up rates.
Another reason for higher rates is the number of alliances among the top players in the industry. While alliances were few and far between in the prior decade, the 2010s saw the emergence of alliances as a method of containing capacity and maintaining rates in order to reduce the boom-and-bust cycles the industry typically has to go through. Three major alliances have been in operation since 2017, accounting for around 80% of the TEU (twenty-foot equivalent unit) during this time.
This is exactly the kind of thing Biden’s order could hit, so it’s a slight negative for the larger players. But if Biden’s infrastructure plan takes off, the resultant increase in demand will offset any negative from possible rate containment.
There is also a growing awareness about the benefits of digitization that could include increased efficiencies and new operating models. It may also be possible to harness the data thus generated to create new revenue streams, with a corresponding reduction in the dependence on rates. However, a clear path to the realization of this objective is not visible as yet. As a result, upgrades remain slow.
Given this backdrop it appears clear that the growth outlook for this segment is quite strong at least through the rest of 2021 as both volumes and rates are set to remain high while capacity remains limited. So, with that in mind, here’s a group of smaller players in the Zacks-classified Transportation – Shipping industry (top 26%) which are likely to enjoy the strong rates minus the regulatory scrutiny.
Grindrod Shipping Holdings Ltd. GRIN
Grindrod Shipping Holdings Ltd. owns and operates a diversified fleet of owned, long-term chartered-in and joint-venture owned drybulk and liquid-bulk vessels. The drybulk business operates under the brand Island View Shipping and includes handysize drybulk carriers and supramax drybulk carriers.
The liquid-bulk business, operates under the brand Unicorn Shipping and includes a fleet of Medium Range product tankers and small tankers. Singapore-based Grindrod operates primarily in London, Durban, Cape Town, Tokyo and Rotterdam.
The company is a beneficiary of China trade. So the China flooding last year that led to increased grain imports was a positive. And the bout of cold weather earlier in the year was also positive because it boosted demand for coal in China, Korea and Japan.
Since China was avoiding Australian coal, it turned to U.S., Canada, Colombia and the Black Sea. With cheap Australian coal finding its way to India, South Africa, which usually supplies India, also started selling to China.
Grindrod has also recently added two newly-built Japanese eco-vessels (long-term charters with purchase options) and entered into a sale and lease back arrangement for one of its product tankers. It has significantly reduced its tanker fleet to bring down costs.
The shares carry a Zacks Rank #1 (Strong Buy) and value-growth-momentum (VGM) Score A.
Orient Overseas International Ltd. OROVY
Orient Overseas (International) Limited through its subsidiaries operates as a provider of container transport and logistics services. Its principal business activities include container transport and logistics services, ports and terminals, and property investment.
The company also provides freight management services, extensive domestic distribution services and supply-chain management. It also operates container terminals which forms an integral part of its international containerized transportation business. The Wanchai, Hong Kong-based company operates on the Trans-Pacific, Trans-Atlantic, Asia/Europe, Asia/Australia and Intra-Asia trade routes.
The shares carry a Zacks Rank #1 (Strong Buy) and VGM Score A.
Pacific Basin Shipping Ltd. PCFBY
Hong Kong-based Pacific Basin Shipping Limited is a provider of diversified shipping services primarily engaged in owning and operating dry bulk vessels. As of Feb 29, 2020, the company had a fleet of 235 ships, including 133 Handysize vessels, 117 Supramax vessels, and 2 Post-Panamax vessels.
The company operates in three main maritime segments under the banners of Pacific Basin Dry Bulk, PB Energy & Infrastructure Services, and PB RoRo. The dry bulk segment owns and operates handysize and handymax dry bulk vessels providing cargo solutions and a range of freight services.
The company’s PB Towage segment offers services and barge fleet including Harbour Towage, Terminal Support, Project/Module Transportation and Logistics, Bulk Transportation, Offshore Support, Ocean Towing and Salvage Support. RoRo fleet operates in Northern Europe, the Mediterranean and elsewhere.
The shares carry a Zacks Rank #1 (Strong Buy) and VGM Score A.
ZIM Integrated Shipping Services Ltd. ZIM
Haifa, Israel-based ZIM Integrated Shipping Services Ltd. along with its subsidiaries provides container shipping and related services. The company offers dry, reefer, project, out of gauge, breakbulk and dangerous cargo services; inland transport services and ZIMonitor, a reefer cargo tracking service. As of Mar 31, 2021, ZIM operated a fleet of 101 vessels through a global network of 69 weekly lines.
ZIM is one of the most profitable companies in the industry and the company is seeing very strong growth this year on top strong rate increases. As a result, management raised its outlook for the year back in March.
The company also recently extended and deepened its agreement with Alibaba up to 2023. ZIM’s extensive network of lines, particularly the recently introduced dedicated eCommerce express lines, provide Alibaba.com customers reliable, fast, high quality freight services, as well as product support and system optimization.
The original agreement, signed in 2020 allowed Alibaba sellers to book and purchase sea freight on ZIM and logistic services through an easy-to-use interface available directly on the Alibaba.com platform. With this extension, Alibaba buyers will also have access to the service.
The shares carry a Zacks Rank #1 (Strong Buy) and VGM Score A.
Cosco Holdings Co. CICOY
Coscp Holdings Company Limited is engaged in providing container shipping, dry bulk shipping, logistics services, terminal and container leasing for both international and domestic customers. As of Dec 31, 2020, it operated a fleet of 536 container vessels with a total shipping capacity of 3,073,684 TEUs.
The company engages in the management and operation of container terminals; provision of integrated logistics services, including third party logistics shipping agency and freight forwarding; and container manufacturing business. China COSCO Holdings Company Limited is based in Tianjin, the People’s Republic of China.
Source: Zacks