Saturday, December 10, 2011

Diary: Shipping

I've just been reading a PDF on the "Globalisation and the Long Shipping Cycle", published on 11-Nov-2009.

Ships have a useful economic life of about 25-30 years.

It concludes that the shipping industry has been driven by globalization since about 1944. It is a process that is likely to be far from over given that so far roughly one billion people have acheived high living standards, but there are another 3 billion waiting to join them.

There's a "but", though. Deep cycles have existed within this long-term trend, making shipping both difficult and risky. The great upswing during the 50's and 60's reached a peak in 1973 and moved into a downswing which lasted until the 1990s. Since 1997 the industry has been on an upswing, and arguably reached a peak in 2008, though the nature of these developments is such that there could easily be another way of growth ahead of us.

Whatever may happen to demand, there is likely to be shipping overcapacity due to the very high numbers of orders placed for new ship in 2007. So expect tough times for shipping.


Shipping has been attracting the attention of some value investors lately.

Richard Beddard discusses it on his blog, where he talks about CKNS (CLarksons). He makes the insightful comment:
The question is how sensitive is Clarksons to the shipping cycle? Certainly the share price performed very well in the 2000's which coincides with the shipping bubble he describes and was flat before that back to '94, which is as far as I can see

As for profits I just don't have the data going back far enough to see how the company performs during a down-cycle.

As Calum says, it's a broker so it's more dependent on international trade than the state of the market for ships, which is more critical for shipowners and shipbuilders. Even in the terrible 1980's shipping trade increased 1% pa so maybe the adjustment brokers are making is from high growth to stagnant growth. Clarksons could still profit in the doldrums, and make investors a good return.

All of that's predicated on continued globalisation though, albeit at reduced level until the global economic problems are resolved. If we went through a period of protectionism etc. then the whole thesis unravels and we have to look to the colonial period before the second world war for parallels.

Valuhunteruk has also written about Clarksons, the shipping services group. He provides an excellent overview of the company. It is a broker - i.e. buys and sells - ships and offshore rigs. It's main operating assets are its people. The only capex it needs is to buy property for operations. He suggests that earnings yield is the best way to value the business, rather than look at the balance sheet. The valuation suggests a decent, but not absurd, undervaluation (as at 31-May-2011).

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