Global shipping may not be the first industry to come to mind, particularly in the United States. But it could soon grab worldwide attention as the global shipping bubble bursts and takes down a cavalcade of companies with it.
Hedgeye Managing Director of Industrials Jay Van Sciver created the above chart, which essentially says it all. We’re almost at peak global shipping tonnage and it’s about to fall very hard and fast. He’s outlined his case below, noting that a severe downturn is likely to occur within the next year:
• Severe: The shipbuilding downturn will be disruptive, making it important to avoid suppliers, creditors and customers, in our view. Freight capacity should be well supplied for years, leaving indicators like Baltic Dry less useful for macro analysis.
• Just Past Peak: Since ships last for about 30 years, capacity added after WWII was replaced in the 1970s and that capacity was just replaced, with peak deliveries in 2011-2012.
• Next Two Years Painful: The drop-off will be unusually sharp this cycle because the financial crisis clipped off orders in 2008. 2014 capacity utilization at ship yards will be a fraction of current levels (something like 20% of current utilization). Many shipyards will not survive.
• Avoid/Short: We suggest staying away from or shorting Samsung Heavy, Hyundai Heavy, and other shipbuilding exposed names, and even avoiding high quality suppliers like Wartsila.
