SEA: Stable Returns in a Choppy Market?
Don Dion
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In his recent lampoon of U.S. financial policy, Asia Times reporter Spengler noted, “An American economy based on opening containers from China and selling the contents at Wal-Mart (WMT), or trading houses back and forth, provides scant profitability.” While the future profitability of these methods is a subject of debate, Spengler ’s argument highlights an integral practice—one so ingrained that many fail to notice—the acquisition of raw and finished products overseas and the industry built around their transportation.
Unless you live by Manhattan’s East River or in the port of Piraeus outside Athens, it is easy to forget how enmeshed the maritime industry is with everyday consumption. The most efficient transoceanic way to transport anything from corn to Nike sneakers to oil is aboard one of the thousands of merchant ships that dock and depart U.S. ports daily. Fleets of vessels constitute major public companies, and as Claymore launched the Claymore/Delta Global Shipping Index ETF (SEA) in August, it facilitated access to the maritime shipping niche through select shipping equities.
SEA comprises 60 maritime shipping owners and operators located across the globe. Greece, with a 35% equity allocation, is the largest country weighting. The U.S., the Bahamas and Bermuda also each hold 10% or more of SEA, with 19%, 15% and 10% weightings, respectively. While all the companies within the index “participate in maritime activities,” these functions can be further broken down into bulk shipping, oil tankers and container ships.
Merchant ships are expensive to build, maintain and fuel. While labor is perhaps the biggest cost in building a ship, materials like steel have become increasingly expensive. Ideally, merchant ships are used for less than 20 years, but due to increasing costs, a greater number of vessels are utilized longer. Fuel costs also constitute a major expense, and ship owners and operators have a variety of options when fuel prices increase dramatically. Operators can cut costs by slowing down ships at sea; other methods include financial hedging and technological improvements.
Increased globalization has garnered both praise and resentment from the shipping community. General trends have resulted in a reduction of taxes and tariffs, allowing small economies to become part of a global marketplace. The growth of industrial countries has also increased shipping volume. Crude oil cargo ships sailing from the Middle East to industrial giants like Japan, the U.S. and Europe have increased shipping tonnage, while coal and ore cargoes traveling from South America, South Africa and Australia to industrial consumers have done the same.
The timing of SEA’s debut is perhaps conspicuously tied to the recent run on commodities. While the cost of fuel is passed on to consumers, it is the value of commodities transported that drives SEA’s returns. As demand for oil remains constant, other commodities—such as copper, iron and corn—impact equity return as supply and demand shift. Because of the variety of shipping methods—container, freight and bulk—Maritime subsectors are impacted differently by the changes.
This tide of demand has largely been pulled by developing nations such as China in recent years. All of SEA’s components will be subject to the needs of emerging markets, but those companies involved in bulk transportation feel this influence the most. When comparing relative profitability, Capt. Taylor Apollonio, master of the 621-foot freight ship Tina Litrico, noted that “while oil tankers are stable and container(ships) fluctuate with the economy, bulkers will fluctuate wildly depending on China.”
Seaspan Corp. (SSW), SEA’s largest holding, at 4.53%, has recently seen an influx of trade from China. “We have seen the inbound volume of goods really picking up,” noted CEO Gerry Wang in a recent interview with CNBC. “We are surprised, but it’s a positive surprise.” CNBC labeled SSW’s stock movement the “Christmas indicator” due to the high percentage of consumer items that are transported by the company. After taking delivery of a new container ship earlier this month, Wang said, “Since our initial public offering, we have increased the capacity of our contracted fleet by 244%. Our current available liquidity of $850 million will allow us to continue to execute our disciplined growth strategy and consider additional growth opportunities that meet our strict return strategy.”
Horizon Lines Inc. (HRZ) constitutes 4% of SEA but engages in a different business model. HRZ, which recently celebrated 50 years of service at a company event in Puerto Rico, has invested more than $10 million in a San Juan development project aimed at increasing efficiency and reducing truck turnaround times by 20%. In addition to increasing efficiency on shore, HRZ is also developing new technologies so its customers can monitor refrigerated pharmaceuticals and perishable food items while they are en route. Despite industry-wide slowdowns, HRZ has gained more than 16% from July 24 to September 17.
Rapidly developing countries, demand for commodities and improved navigation technology have spurred merchant ship profits and industry awareness. Still, SEA’s scope is small, and the fund represents a concentrated position in a specialized sector. In a well-diversified portfolio, however, manned by an investor seeking indirect commodities and retail exposure, SEA could provide stable returns in choppy markets.
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This article has 5 comments:
- poor&unemployed
- 19 Comments
Oct 12 05:31 PMShipping is similar to real estate - floating real estate.
Sectors include - raw materials, construction, residential, commercial, leisure, homes, apartments, rental buildings, malls, office buildings, warehouses, land, management, brokers, insurance, .... virtually every sector in real estate has a peer in the shipping.
CNBC labeled SSW’s stock movement the “Christmas indicator” due to the high percentage of consumer items that are transported by the company. _ THEY HAVE NO IDEA WHAT SO EVER ABOUT WHAT THEY ARE TALKING! MAY BE THEY HAVE NOT HEARD OF COSCO, AP MOLLER (MAERSK), HAPPAG, HAMBURG SUD, CMA-CGM, HANJIN. THESE COMPANIES CARRY/CONTROL MOST OF THE CONTAINERS IN THE WORLD.
Seaspan vessels are leased to above players on contracts like many other. Many of Seaspan vessels are on lease back deals. They purchased the old vessels from likes of Maersk and leased them back for a few years. (it is opposit of lease to purchase)
COSCO, MAERSK, HAPPAG, EVERGREEN reflect on actual container cargoes.
IMHO - SEA is a vehicle to unload shipping shares to unsuspecting investors.
Look at the bath this sector has taken in past 6 months.
- Elliot Miller
- 55 Comments
Oct 16 07:24 AM- einstein p fleet
- 95 Comments
My Website
Nov 08 04:09 PMToday they trade for a less than a quarter of what I sold them for and the dividends are higher, creating extraordinary yields. I recently bought back into OCNF, PRGN, and SBLK to pick up the dividends and as a spec play on China returning to the market to support their own internal needs for food, energy, and infrastructure.
The liquidations by hedge funds and redemption of mutual funds have created several of these abnormally high yield opportunities, not only in the dry bulk shippers, but in several of the Canadian and American natural gas trusts. It seems to good to be true and what's too good to be true usually is, but I'm not so sure that's the case this time.
AN OPEN QUESTION REGARDING DRY BULK SHIPPERS:
Are these dividends sustainable with the Baltic Index trading at this level? I would be very interested in hearing other opinions.
- Dragonkeep
- 1 Comment
Nov 24 11:18 AMCurrent income levels will remain for at least the next two years with a possible increase in income from new vessel acquisition. Hell, look at the EPS - most of these companies have huge EPS (greater than that of Intel, RIMM and many other large companies, but more importantly is their P/E ratio sitting at just over 1. This stock is pretty much being given away.
Although I don't expect the dividend yield to remain at 100%+ the fact remains that this stock is extremely oversold. Furthermore, companies like this have been hit by a of the wave of shit spurred on by American Bankers, but in no way should today's artificially low prices be constituted as things to come. And by no means should anyone compare this sector to the housing sector in America - man what where you thinking.
Furthermore, even in a recession - global or not - crap still needs to be shipped and thus this sector will continue to preform well.
- LobsterM
- 327 Comments
Nov 28 07:04 AMWhat you said are very true.
With fuel cost now coming down,
good for this sector.
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