The ongoing Russia-Ukraine war has led financial investors to scramble for safer assets. Global indices have declined , while commodity indices have increased with surging commodity prices (especially, crude oil, LNG and grains). More specifically, S&P 500 has declined 1.3%, while Dow Jones Commodity Index rose 16.5% (between 23 February and 8 March 2022). The war’s effect on shipping has been mixed – while tanker, LNG and LPG shipping stocks have trended up, other sectors have remained flat or declined. In this write-up, we analyse the impact of the current crisis on the equity performances of various subsectors of the bulk shipping industry: tankers, dry bulk, LNG and LPG shipping.
Amid this crisis, Western countries have come up with multiple financial sanctions such as – banning Russian ships to enter European ports, removing multiple Russian banks from the SWIFT system, and putting sanctions on the import/ export of multiple commodities. On 8 March, US announced an immediate ban on Russian oil and other energy imports. UK is also expected to phase out Russian oil imports by the end of 2022. Even before these sanctions from the US on Russian energy sector, many countries were hesitant to trade oil and gas with Russia due to the potential sanctions and lack of clarity on the mode of payment. Some of the countries have opted for FOB destination clauses rather than FOB origin, which was previously there.
On a broader level, we expect shipping supply from Russia to be significantly impacted, shipping rates to rise on higher war premium, and tonne-mile demand to increase in the short term.
Impact on bulk shipping market
The current conflict between Russia and Ukraine led to increased uncertainty at a time when the world economy is on the path of post-pandemic recovery. The ongoing conflict had a substantial impact on the tanker market as Russia is a key player in the oil and gas sector, but the impact on the dry bulk sector remained muted because of the limited contribution of both Russia and Ukraine in the overall dry bulk trade.
Crude and product tanker
Drewry’s crude tanker equity index and Drewry’s product tanker equity index surged by 12.2% and 13.3% respectively since the beginning of the conflict, highlighting the massive increase in average spot earnings of crude and product tankers, especially on key routes in the Black Sea and Mediterranean. Several traders scrambled to cope with the possible disruption in Russian oil supplies, higher bunker cost and increased risk premiums for ships plying in the Black Sea and Mediterranean. Stock prices of companies operating mid-size tankers surged more than those of the companies with higher exposure to larger crude carriers as is evident from the uptrend registered by Nordic American Tankers (45.5%), Tsakos Energy Navigation (34.2%) and Teekay Tankers (19.1%) versus the comparatively limited rise in Frontline (10.9%), DHT Holdings (8.7%) and Euronav (6.8%) which have greater exposure to larger crude carriers.
Scorpio Tankers (20.1%) and Torm (16.3%) were the top performing product tanker companies among the constituents of Drewry product tanker equity index followed by Ardmore Shipping (6.0%) and Hafnia (5.9%) whereas d’Amico International Shipping (0.7%) largely remained unaffected. The double-digit rally in Scorpio Tankers and Torm is because of their larger fleet and higher exposure to the spot market, whereas the relatively smaller fleet of Ardmore and lower spot exposure of Hafnia resulted in moderate gains in their stock prices. Smaller fleet coupled with higher time charter coverage resulted in a marginal gain in d’Amico International Shipping’s stock price during the period.
Dry bulk shipping
Unlike oil tanker indices, the ongoing conflict between Russia and Ukraine has limited impact on Drewry’s dry bulk carriers’ equity index which gained only 2.5% since the conflict began. DS Norden is the top performer and rallied 35.6% primarily due to the jump seen on 03 March as the company reported the best annual results in the past 11 years. Navios Maritime Holdings (27.9%), Diana Shipping (20.5%) and Pacific Basin Shipping (10.3%) also registered double-digit gains during the period on account of record annual profits for 2021 reported in the last week of February. However, a decline in stock prices of Golden Ocean Group (-8.5%) and Star Bulk Carriers (-6.5%) which account for nearly 55% of the Drewry dry bulk carriers’ equity index limited the growth in the index. Moreover, the spot earnings of dry bulk carriers were less volatile compared to the spot earnings of oil tankers.
What lies ahead?
The start of the conflict heightened crude supply uncertainties as Russia accounts for nearly 11.3% of global crude oil trade and 9.7% of global refined products trade. This led to an oil price jump of 31.8% from USD 97.13 per barrel on 23 February to USD 127.98 per barrel on 8 March. Traders rushed to lock in vessels while several owners were unwilling to send vessels to the Black Sea region which resulted in higher spot earnings of crude carriers. Suezmax and Aframax spot earnings on the Black Sea-Mediterranean route reached around USD 180,000pd (vs nearly USD 10,000pd pre crisis). We believe the ongoing conflict will result in higher spot earnings of oil tankers in the short term as the shift in trade patterns could boost the tonne-mile demand. Although Russian oil and gas sector is exempted from the recent sanctions imposed by western economies, buyers of Russian oil are looking for alternative sources to insulate themselves from the adverse impact of the ongoing conflict. On the other hand, if the conflict stretches for a longer period, supply from Russia will be disrupted taking oil prices higher and leading to demand destruction. This in turn will hurt global oil trade and put pressure on the earnings of oil tankers across vessel classes.
Unlike oil tankers, spot earnings of dry bulk carriers are less likely to be impacted by the ongoing conflict in Ukraine as the region accounts for nearly 4% of the global dry bulk shipping demand compared to nearly 11.3% for global crude oil trade. Spot earnings of dry bulk carriers are expected to decline in the short term because of disturbances in trade originating/terminating in the Black Sea region, but demand and average spot earnings of these vessels are expected to recover from 2Q22 with resumption of trade after the situation in the region stablises.
The recent announcement of the US administration to ban imports of Russian oil and gas and energy will have limited impact on the international oil market as US imports account for a small fraction of exports from Russia. Moreover, we believe other major customers of Russian energy including several European countries will refrain from adopting a similar stance because of their heavy dependence on Russian oil and gas in addition to the unavailability of alternative sources of supply to phase out imports from Russia.
LNG and LPG shipping
Key sanctions which will impact LNG shipping and consequently LNG shipping equities are i) European countries barring Russian ships (owned, flagged, beneficially owned), ii) Major integrated oil and gas companies (Shell, BP, Total) exiting Russian LNG projects, iii) Russian banks unable to participate in SWIFT systems, and iv) Multiple countries showing unwillingness to import Russian LNG.
After being soft for most of this year due to lackluster Asian LNG demand and increased US-Europe LNG trade, spot LNG shipping rates have started to recover. Going forward, we expect this uptick to continue in the short term due to the geopolitical uncertainty and possible sanctions on Russian vessels. Major Russian LNG shipowners, Sovcomflot owns 12 LNG ships and Gazprom owns three LNG ships, accounting for 2.5% of the global LNG fleet.
We expect a decline in tonne-mile demand as LNG trade on the US-Europe route rises. We believe strong trade between the US and Europe will act as a negative catalyst for spot LNG shipping rates. However, there will be some addition in tonne-mile from Russia LNG ships trading to Europe and potential Asia-Europe re-export.
DMFR LNG equity index up 5.2% YTD
Drewry LNG shipping equity index expanded by 5.2% YTD (as of 4 March 2022), outperforming S&P 500, which declined 9.2% during the same period. The share price of Golar LNG skyrocketed by 45.1% and that of Nakilat improved by 11.2%. However, Flex LNG stock declined by 14.6% as the stock corrected from rich valuations.
Golar LNG share price has benefited from the rise in crude oil prices and the recent spin-off of its eight TFDE LNG vessels into Cool company Ltd. Golar’s earnings from Hilli Episeyo FLNG project has a potential upside linked to the increasing crude oil prices as Perenco will pay higher tolling fee, apart from the basic tolling fee, for crude oil prices exceeding $60 per barrel. This component will generate additional annual operating cash flows of about $3 million for every dollar increase in Brent crude between the stipulated range. Additionally, Nakilat share price has also benefited from its long-term charter coverage, which hedges it from the ongoing volatility in LNG shipping due to the Ukraine-Russia crisis.
LPG charter rates are expected to rise amid the uncertainty and possible sanctions on Russian vessels. The Russia-Ukraine war has led to possibilities of sanctions on Russian entities, which could create demand for substitute LPG cargo from the US. The current crisis has resulted in higher crude prices, impacting LPG and bunker prices. If sustained, higher LPG prices can hamper the demand for residential and petchem sectors, thus affecting global LPG trade and bringing down freight rates in the long term.
LPG stocks up 12% YTD
LPG stocks under our coverage strengthened by 15% in February on an average and 12% YTD (as of 4 March 2022). These stocks are up 10% on average since Russia’s attack on Ukraine. LPG stocks have reacted positively to the changing trade pattern, following the Ukraine-Russia war, and volatility in charter rates.
Stealth Gas share price zoomed 18% YTD and 24.5% since 24 February, when Russia attacked Ukraine. Navigator Holdings stock price rose by 17% YTD (6% since 24 February). Stealth Gas has 39% of its fleet days in 2022 on long-term charter. Navigator has most of its fleet on the spot charter but reported an average utilisation rate of 87.6% during 2016-2020.
We have seen a historically high correlation between asset prices and stock prices. This is especially true for VLGC spot market players such as BW LPG. However, with a steep decline in BW LPG share prices in 2021, this correlation has deviated a bit. As LPG shipping rates are likely to improve, stock prices will also strengthen, aligning them with the asset prices.
What should investors do?
For LNG and LPG shipping, we believe stocks with long-term charter coverage, historically high utilisation rates and lower leverage are expected to be preferred by investors during these uncertain times as they have a more resilient business model.