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Weekend Update - Commodities and Shipping Special

By: George Tsiourvas | Sunday, December 9, 2012

This weekend, while Italy is likely to lose its Monti, we are taking a break from Europe and the US fiscal cliff in order to look at stuff that gets moved from A to B and at the ones that are moving it. This will be a theme that we will be revisiting again and again every few weeks from now onwards.

Naturally we have to kick off with the guys that are driving the bus for the shipping & commodities and that is still China. Well, the Chinese stock market has been on the decline ever since 2008 and broke its longer term support a few months ago. Since then it has been trading in a narrow range. We know economic data out of China has been deteriorating, their wages are going up and many international manufacturers are already thinking about moving to the next place that offers cheap hands (Africa?). Of course China's rise as a nation and as an economy is something that will not stop in the large scale of things. This does not mean though that it can't be a bumpy and long road.

As we can see from the above chart, as long as this index stays below 2200 the pressure remains on. Temporary relief only through and above 2540. That is quite far off at the moment and not really something I would expect to see in the near future.

Shanghai Composite Index Monthly Chart
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Below we see the chart of the Baltic Dry Index (BDI). Cheap money and excessive bullishness on China helped to an oversupply of vessel orders during the boom years of 2004-2007. Most of the newbuildings have now hit the market. Freight rates therefore remain very low, as there is still huge excess capacity that has to work itself off over the next several years. In principle the BDI has stayed on the floor over the last 4 years and no relief in sight for now.

Baltic Dry Index Daily Chart
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Similar to demand for shipping capacity, the daily demand for Crude Oil has more or less stayed the same over the last several years at about 86 million barrels per day. Multiple quantitative easing by the central banks of this world and recent fears of an Iranian involvement in the current conflicts of the Arab world have not managed to propel the price of oil to its former heights.

Crude Oil Weekly Chart
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WTI Crude is now trading below a cluster of important moving averages and looks like it's headed to test at the 50% fib level between the low of 1999 and the 2008 high at $ 78.96. Once through there the next important level of support comes in at $62.84. The cheaper production sites of this world can extract oil at a cost of under $15. Many others will be unprofitable though as and when oil drops through the $75 mark. A sustained advance in oil from here looks unlikely. In order to see anything bullish here the price of oil would have to make its way at least through the nearby moving averages and close above them for several consecutive weeks. Therefore selling rallies in oil between $91-95 seems to be the right thing to do for now.

Copper is not looking too good either. It never really digested the sell off of 2011 and is still trading inside the range of this long red candle stick of mid 2011 and effectively at the same levels it crashed from in 2008.

Copper Monthly Chart
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The situation here is just like in oil. Copper needs to produce a significant advance and quick, otherwise it is destined for a southbound move.

The CRB commodities index, which is a little oil-heavy doesn't look particularly great either. Clearly the chart below shows that the last good move upwards occured on the back of QE2. Since then it has been engaged in a lengthy move sideways/downwards and it is looking very heavy at the moment. As per chart below it is really now sitting on the last support of significance before it goes on to a long slide that can take it below 250.

CRB Index Weekly Chart
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Now that we have had a look at the broader sitiuation in freight and commodities, let's come back to shipping again. The BDI suggests that dry cargo shipping companies are probably not exactly having a great time right now. Let's look at the chart of one of the better ones. Diana Shipping is one of the most solid dry bulk shipping companies around. I am not an equities analyst, I let common sense drive my judgement. And in the particular case I am just impressed with the way the management of this company has resisted the temptations of the boom years and has kept the gearing low whilst being on an expansionary path. As a result we are looking at more cash than total liabilities on the 2011 balance sheet. This is quite rare for a dry bulk shipping company. Therefore, in my mind, this is one of the best run dry bulk companies around. Although the company has been (mostly) profitable, it has not been paying a dividend for the last 4 years and that is clearly visible on the chart now.

Diana Shipping Weekly Chart
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The Price/Earnings ratio is at 8.51 at the moment and given that it is possible that earnings will further deteriorate and maybe there will be small quartely losses soon, it is not impossible that the P/E ratio drops to something like 4 in 2013. At some point there will be a gigantic once in a generation type buying opportunity coming for the whole sector. It's hard to know right now when exactly that will be the case. For now it's not, that's all I know. Maybe for countercyclical cash rich long term investors slowly slowly the time is coming now but leveraged type buyers should stay away for a bit longer.

In the world of tankers, where all company charts look more or less the same, I randomly picked Teekay Tankers Ltd. This company, like many in the tanker sector, has been losing money for a while now. It's roughly 50% geared which is not great but unfortunately in line with most of its competitors. That is a bit worrying.

TNK Weekly  Chart
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And finally, let's have a look at NYSE listed Seaspan Corporation (SSW), an American container shipping company. Many say container shipping, unlike dry bulk and wet cargo shipping, is more a function of credit than anything else. Well, that's probably not wrong and maybe I should think of producing a reverse overlay of container shipping companies versus the Gold/Silver ratio in my next post regarding this topic. For now we will just look at Seaspan as a representative for the whole sector of container shipping.

Seaspan Weekly Chart
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SSW propelled itself nicely out of the 2008 lows and managed to advance back to levels it crashed from by 2011. Unfortunately that has been "all she wrote" for now and price action around the 50% fib level suggest that we are going to see some kind of medium term decider soon. Below $13.50 tough times are coming. That's off only upon a sustained move through $19.45.

That's it for today. Unfortunately neither the commodity nor the shipping charts really do not look like there is going to be great times around the corner. It's more of a "long valley" we are marching through right now. The good news is that at the end of it there will be a huge buying opportunity. We will have to stay patient and we shall get our piece of it as and when the time comes.

Have a nice Sunday.


Author: George Tsiourvas

George Tsiourvas
The Macro Navigator

George Tsiourvas is the founder and editor of The Macro Navigator. He was born and raised in Stuttgart/Germany and moved to the London/UK in the year 2000.

He holds a degree in Law from Justus-Liebig Universitaet,Giessen/Germany (1999) and he is a graduate of Cass Business School's M.Sc. in Shipping, Trade and Finance (2001).

George started his professional carreer with ING Barings' FX desk in London in 2001. In 2007 he moved to Omni Partners LLP and helped kick start the Omni Macro Fund, working closely with CIO Stephen Rosen. In 2010 George assumed a senior sales role with Prudential Bache in London and left in 2012 shortly after it was acquired by Jefferies.

Having been a daily commentator on markets since 2010 it came only natural to take the next step and establish The Macro Navigator Financial Publishing Ltd in May 2012.

Copyright © 2012 George Tsiourvas