Submitted by QTR's Fringe Finance
This is part 1 an exclusive Fringe Finance interview with shipping analyst (and friend of mine) J Mintzmyer, where we discuss the state of the Russian invasion of Ukraine and its effect on markets and shipping stocks.
J is a renowned maritime shipping analyst and investor who directs the Value Investor's Edge ("VIE") research platform on Seeking Alpha. You can follow him on Twitter @mintzmyer. J is a frequent speaker at industry conferences, is regularly quoted in trade journals, and hosts a popular podcast featuring shipping industry executives.
J has earned a BS in Economics from the Air Force Academy, an MA in Public Policy from the University of Maryland, and is a PhD Candidate at Harvard University, where he researches global trade flows and security policy.
Part 2 of this interview will be up in days.
Q: How has the invasion of Ukraine changed the short-, mid- and long-term outlook for shipping?
It’s important to recall that most shipping markets, with the exception of oil tankers, were already very tight prior to the recent invasion of Ukraine. This invasion and the ripple effects of international sanctions are likely to have 3 key effects:
1) There will be significant delays and increase of congestion around regional ports, which could escalate further to major hubs like Rotterdam. This will synthetically reduce supply of ships similar to the disruptions we saw around COVID shutdowns.
2) Food and energy products must eventually move, so we will likely see re-routing into less efficient trade channels across the world. This will lead to higher total ton-miles (i.e. total cargo moved x distance between trading partners), which is the correct way to measure shipping demand.
3) Higher oil prices drive up the cost of the bunker fuel utilized by ships, which will incentivize “slow steaming” to consume less fuel, providing an additional synthetic supply reduction.
Ultimately, we have two clear pathways to reduce available ship supply in the short- and medium-term as well as one pathway to increase demand. There is a common misconception that ties shipping demand to global GDP growth or to total global commodity consumption, but that’s not the correct way to analyze the markets.
You have to look at trade routes on a product-by-product basis and see what happens when inefficiencies are introduced. There can be a scenario where total transport volumes go down, but ton milage still increases, and I think we likely see that outcome in both grain trades and crude oil trades.
In the longer-term, we need to be cognizant of the potential ripple effects to the global economy. Russia makes up an extremely tiny slice of global GDP once we exclude oil, gas, and other commodities, but it is still worth considering. Additionally, if the war ravages all spring, summer, and next fall without agricultural exclusion zones or other mitigating events, we could have a global food shortage crisis on our hands by next fall/winter. It’s still too early to be making strong predictions here, but I am watching the situation as closely as possible.
If short-term is a few weeks, then shipping is likely mixed, slightly bullish. Medium-term, say 1 month through a year, I believe shipping companies and equities are extremely well positioned. In the longer-term, there are legitimate concerns about global food crisis, extreme energy prices, and the ultimate impacts to the global economy.
Shipping doesn’t do well in a global recession, but it can be an amazing place to be in a mature cycle. Lots of 10-bagger returns in shipping from 2005-2008 and valuations today are even lower than valuation in 2005.
What parts of the shipping/logistics sector haven't yet seen their stocks rise in proportion to what you think they will? Have any stocks gone "unnoticed" yet?
Great question! Folks are always looking for the ‘uncovered gems’ so to speak and of course I have to reserve a good portion of our ongoing research for members of Value Investor’s Edge, but I will foot-stomp a couple previous public picks which haven’t moved much even as fundamentals have significantly increased.
The added ‘bonus’ of these firms is that the core business is based on long-term contracts, so although they are benefiting at the margins from the current supply chain tensions, these aren’t ‘boom and bust’ operations.
These two stocks are Global Ship Lease (GSL) and Textainer Group (TGH). Although both stocks have increased on a y/y basis, both firms are significantly cheaper today in terms of current and forward earnings multiples, free cash flow multiples, net asset values, and virtually any other valuation metric than they were a year ago. Both companies were included in our latest Value Investor’s Edge top picks update (posted for members on March 2nd), which highlighted 14 firms across the industry.
What is the best possible outcome, assuming a ceasefire tomorrow, and a worst possible outcome, assuming the conflict in Ukraine lasts many more months or years?
I’m glad we agree on what the best outcome would be, since my best wish would be for this crisis to be resolved tomorrow. It is important to remember that shipping stocks were performing incredibly well before any of the Ukraine tensions and eventual invasion, so any sort of return to normality would still be good for these firms!
In terms of a near-term ceasefire, sadly it does not appear likely at this stage, but if it does occur, we should see a significant drop in oil and gas prices and a slow return to pre-war situations in shipping.
However, sanctions tend to be stickier on the way out, so I still expect trade disruptions and re-routing to continue. I also expect both European and Asian nations to significantly bolster their stockpiles of all types of commodities, which of course would lead to a surge in dry bulk and tanker demand, likely for at least several years. A reminder that dry bulk supply/demand remains incredibly tight and the current orderbook (i.e. forward supply) is the lowest in modern history. And that’s before considering significant environmental regulations which begin kicking in January 2023!
The worst outcome, without getting into the extremes of thermonuclear war (in which case, stocks are irrelevant), would be a multi-year conflict which disrupts the global food and energy supplies, leading to millions facing starvation along with extremely high oil prices ($150-$200+), which could threaten the global economy. As I mentioned above, if you believe a global recession is likely, then shipping isn’t likely to perform well. However, almost nothing performs well here, so S&P 500 (SPY) and Nasdaq (QQQ) index puts probably make a lot more sense than trying to bet against shippers.
If we’re in a similar state as 2006, for instance, there could indeed still be a recession down the road, yet many of these firms might still return 2,3, or even 5-10x, in the final stages of the global economic cycle.
Part 2 of this interview can be read here.
Disclosure: J is long EGLE, GSL and TGH. J and I may have positions in other names mentioned in this interview. J is a podcast Patreon of mine and has been donating to my podcast monthly (as listeners already likely know from my constant shout-outs), though that is not why I seek his expertise. I have known J and have been reading his work for almost a decade now on Seeking Alpha and have met him numerous times in person. He’s a top class person - and analyst - in my opinion.
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