New Year Perspective: Managing Through Fat Years and Lean Years

In the Book of Genesis, Joseph interprets Pharaoh’s dreams as a warning of seven years of plenty followed by seven years of famine. His advice was not to deny the coming abundance, but to “look for a wise man,” someone who would manage the years of plenty, so that abundance itself did not become the cause of ruin when the cycle turned.

The shipping market has its own cycles, three major cycles of which are apparent in the data from 1985.  We are currently at or near peak returns in the third major market cycle, which began in 2021.  See the chart below for Marsoft’s investment performance indices.[1]

• The cycle that began in the second half of the 1980s was linked to a collapse in the price of oil and a recovery in global grain trade.

  
  

• The cycle that began in the early 2000s was linked to China’s accession to the WTO and growth in world trade that resulted.

  
  

• Our current cycle is of a different character – its origin is in the COVID pandemic and successive waves of disruptions including Russia’s invasion of Ukraine and the Houthi closure of the Red Sea.

Although the global economy has grown at a fairly steady pace, the pattern of trade has been disrupted, increasing shipping demand.  For example, the effective closure of the Red Sea forced widespread rerouting around the Cape of Good Hope.  Effective demand for containerships increased by 7–8% as a result. Tariffs also contributed volatility, with China’s shift to longer-haul South American grain sources adding to bulker demand.

Although investment returns appear to have peaked, if history is any guide there may be more to come.  The “fat” cycles beginning in 1988 and 2003 lasted for 6.5 years.  The current cycle began in 2021 (2023 for tankers) and has lasted just over 4 years.  Even if we are past peak returns, two more years of returns in excess of 20% may be too good an opportunity to turn down.

A return to a geopolitical “normal” of peace in Europe accompanied by imports of Russian energy and elimination of Houthi missile and drone munitions would quickly suck the air out of the shipping markets.  If ship prices are any guide the market is assigning very low probability to those developments.

At the same time, the Trump Administration’s actions in Venezuela and against sanctioned tankers in the Russian oil trades could easily trigger more disruptions which could favor shipping rates, while China’s revisionist strategy in the Pacific also seems likely to alter the existing status quo. Geopolitically-speaking, a return to “normal” may be a long time coming.

The Pharaoh’s advisor would probably conclude that the shocks to the system that have driven the markets up so strongly are likely to continue.  Would the advisor take money off the table and sell ships?

Surely he would be wary of the containership orderbook, as that industry seems to have used its abundance of profits to dramatically expand fleet capacity in the battle for market share. No doubt he would see the rapidly falling cost of renewable energy to be a medium-term threat to the hydrocarbons trade.  Sustained rapid growth in LNG demand might not seem so plausible in that light.

We have the impression that many in the shipping business are prepared to stay “risk on” until more definitive signs of a turning point emerge.  That may turn out to be a successful strategy and perhaps the industry is in a better position to absorb risk now than ever before, with balance sheets in good shape and plentiful cash on-hand in most segments of the market.

Much more worrisome is the strong sign that some in the business are raising their stakes by ordering new ships.  Ordering new vessels at historically high prices is a highly leveraged play that is unlikely to earn a good return even if we enjoy two more “fat years.”

The Pharaoh foresaw that the lean years were so dismal that they consumed all the rewards of the fat years.  His advisor would undoubtedly counsel all to carefully assess how they would navigate a “wall of pain” that may be on the horizon to ensure they will be around to enjoy the next fat years to come.

We do not have the Pharaoh advisor’s number handy, but you can reach Marsoft at info@marsoft.com or +44 (0)20 7362 9715.

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[1] Marsoft’s analysis of returns on investment over that period are averages across benchmark sizes in each segment, based on the unlevered purchase of a five-year-old vessel and sale of that vessel five years later as a ten-year-old and trading the vessel on the spot market over that time.