Are Shipping Stocks Safe?
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Jonathan Yates
Are Shipping Stocks Safe?

It has been a difficult period since the onslaught of The Great Recession for shipping shops such as Frontline Ltd (NYSE: FRO), DryShips (NASDAQ: DRYS), Nordic American Tankers (NYSE:NAT), Scorpio Tankers (NASDAQ: STNG), and others.

The shipping industry was caught in a “perfect storm” of adverse conditions as a result of The Great Recession.  Due to the global economic boom before, shippers took on a great deal of debt to build new units.  When The Great Recession hit, the demand fell.  As a result of plunging demand, cargo fells declined.  But the high costs of the debt for building still remained.  In addition, publicly traded shipping stocks have a history of paying dividends, which further drained capital.

From all of those factors and more, there were many bankruptcies in the shipping industry.

But as the global economy begins to recover, so has the shipping industry.  Scorpio Tankers is up almost 40% for 2013.  DryShips is trading higher by more than 85% since the first of the year.  Over the same period, the exchange traded fund for the shipping industry, Guggenheim Shipping (NYSE: SEA), has risen by more than 23%.

Much of how well the shipping industry does in the future will depend on the recovery of the Chinese economy.

In recent data, the economy of the People’s Republic of China is starting to perform better.  As China is the largest consumer of many commodities carried by ships, greater demand will do much to lift the share prices again of the shipping industry.  The chart below shows how the Guggenheim Shipping exchange traded fund has risen along with the iShares China Large Cap (NYSE: FXI), the main exchange traded fund for the Chinese economy.


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