Article Highlights:
- Bulk shipping. This is one of the most hated, beaten-up sectors around.
- With the tariff war, it would seem there’s even less to like about this sector now.
- However, right now is actually the ultimate buying opportunity.
In the depths of the financial crisis, I was taught a valuable lesson in the art of contrarian analysis.
I was a financial reporter for PBS. I was offered the opportunity to interview Itchko Ezratti, the founder of GL Homes — then (and now) one of the largest privately held homebuilders in the nation.
By 2009, homebuyers were few and far between. Banks were reluctant lenders at best.
Yet home prices were starting to rebound. And Ezratti — with 30 years under his belt as a builder — couldn’t have been more confident. “Demand will go wild,” he told me on camera, “in the next two or three years.”
He was right, of course.
It was Economics 101 stuff, the kind of insight we tend to ignore most when the chips are down.
Most builders had slowed or stopped construction. But young families still wanted new homes. So did empty-nest boomers.
A housing market rebound was in the cards, one way or another.
Reflecting on that lesson gave me the ultimate contrarian idea in the Trump tariff war era…
The Most Hated Sector
If you’ve followed the shipping industry to even a small degree, you know it’s one of the most hated, beaten-up sectors around.
Shipowners ordered far too many new vessels 10 to 15 years ago and paid the price for it. Charter rates collapsed.
And with the newfound love for tariffs in the U.S. and China, it would seem there’s even less to like about this sector now.
But two factors are changing things in a hurry, pushing up ship charter rates in a big way — tariffs or not.
The Global Fleet Is Shrinking
In recent years, shipowners have scrapped their ships in record numbers. Not just dry bulk ships, but vessels of all kinds — tankers, container ships, you name it.
Just in the dry bulk category, more than 500 vessels — roughly 5% of the world’s fleet — were cut up for scrap between 2015 and 2018. Hundreds more were scrapped early in the decade.
The second factor is a mandated switch away from low-grade fuel known as “bunker crude.”
By January 1, 2020, ships can only burn oil with a sulfur content of 0.5% (compared to as much as 3.5% now).
The new regulations, brought forth by the International Maritime Organization, are compelling shipowners to send even more vessels to the scrappers.
The removal of so many vessels started to show up earlier this year in the Baltic Dry Index, which tracks the charter rates charged by shipowners. In July, day rates for bulk goods such as iron ore soared to the highest levels in more than five years.
And that bit of news comes even amid a slowing global economy and the pile-on effects of the U.S.-China trade impasse.
Profit From Tariff Troubles Now
Buy shares in bulk shippers, or an exchange-traded fund (ETF) such as the Breakwave Dry Bulk Shipping ETF (NYSE: BDRY).
It’s already up 50% since the spring. I think it has a long way to go:
(Source: TradingView.com)
In a nutshell, this is the ultimate contrarian trade.
If the U.S.-China trade impasse drags on and global growth slows further, what will happen? Shipowners will pull even more vessels out of the global fleet — and charter rates will remain stable, in the least.
On the other hand, if the White House and Beijing decide to bring the tariff war to a negotiated conclusion, global industries will take that as a sign of economic growth to come — and charter rates will move sharply higher.
Best of good buys,
Jeff L. Yastine
Editor, Total Wealth Insider