Date: Tuesday, November 10, 2020
Source: Freight Waves
The stock market soared on Monday in the wake of President-elect Joe Biden’s victory and Pfizer’s vaccine announcement. Both news bombshells will affect ocean shipping — with myriad consequences for the container and tanker sectors. The market puzzle is getting even more complicated.
Low-case stimulus scenario for containers
Federal stimulus has had an enormous effect on consumer spending power, and consequently, containerized imports. According to analysts at Evercore ISI, the best-case scenario from a stimulus perspective would have been an intermediate Q4 stimulus by the lame-duck President Donald Trump and Congress, followed by a massive Q1 stimulus by Biden and a Democratic House and Senate.
The low-case stimulus scenario appears to be taking shape. No Q4 stimulus and a smaller Q1 package with Biden and the Democratic House constrained by a Republican Senate.
“A big [Q1] stimulus package is likely off the table,” said Jefferies Chief Economist Aneta Markowska. “We expected a ‘skinny’ bill of roughly $500 billion with 2021 [GDP] growth averaging 4% versus $3 trillion-plus [stimulus] and 5.5% GDP growth under a blue-wave scenario.”
As for Q4, Bloomberg reported that Democrats have incentive to wait for the two runoffs that will decide the Senate balance of power. Furthermore, Trump has little incentive and no political capital to push for a deal before leaving office, said Bloomberg.
With no new stimulus until 2021, the container sector could see some of the froth taken off demand. But as Stifel analyst Ben Nolan pointed out, “The container market is red-hot. So, even a little softening is unlikely to be devastatiing.”
Vaccine a mixed bag for containers
Pfizer plans to manufacture the vaccine in the U.S. for domestic recipients and in Europe for non-U.S. recipients. To the extent that nondomestic vaccine distribution (whether the Pfizer vaccine or another vaccine) takes up air-cargo space, it will push more cargo into ocean transport. That would be a plus for liner demand.
But there’s a caveat. Analysts believe a shift in U.S. spending is driving record container volumes in the trans-Pacific market. Consumers are buying more goods as they spend less on travel, restaurants, bars and movie theaters.
When vaccines return the world to normalcy, consumers will reallocate more spending to services. In addition, a resumption of passenger air travel will increase capacity for air cargo. That would shift some cargo back from ocean to air.
According to Nolan, “The container market would be negatively impacted over time as more discretionary income is spent on services than goods and belly space on passenger airplanes becomes more readily available.”
He said that Matson (NYSE: MATX) is “most at risk,” because its expedited China-U.S. ocean service “has been the biggest winner from the lack of passenger airplane belly space and the increased spending on goods in the U.S.”
Stock investors don’t appear to see this risk yet. Matson’s stock rose 6% on Monday.
Jet fuel upside for tanker demand
Reduced jet-fuel demand has hit both crude and product tankers hard. At last month’s virtual Capital Link New York Martime Forum, Ridgebury Tankers CEO Bob Burke said, “Everyone has experienced an 8% decline in demand, and if you ask why, there’s one answer: airlines.”
According to Nolan, “Refined product tankers with high leverage should benefit [from the vaccine’s positive effect on air travel] as they have been oversold on the opaque outlook for the recovery.”
On Monday, the stock of product-carrier owner Ardmore Shipping (NYSE: ASC) rose 15% and shares of Scorpio Tankers (NYSE: STNG) rose 14%.
Among owners of both crude and product tankers, Diamond S Shipping (NYSE: DSSI) rose 13%, Frontline (NYSE: FRO) and Teekay Tankers (NYSE: TNK) rose 10%, and International Seaways (NYSE: INSW) gained 8%.
In the pure crude-tanker segment, Nordic American Tankers (NYSE: NAT) rose 8%, Euronav (NYSE: EURN) 4% and DHT (NYSE: DHT) 3%.
Biden policies and tanker demand
Analysts generally view Biden’s presidency as negative for tankers, given increased regulation of the U.S. energy complex and constrained drilling on federal lands and offshore versus a Trump administration.
However, if the Senate remains under Republican control, Biden’s effect on U.S. energy production would be curtailed.
According to Clarksons Platou Securities, “If Republicans maintain the majority in the Senate, this could prevent drastic policy changes.”
Hugo de Stoop, CEO of crude-tanker owner Euronav, said on the latest quarterly call, “Given that [Republicans are likely to control the Senate], I think that we’re not going to have a revolution. I think we’re going to have an evolution.”
Biden is expected to lift sanctions on Iran if the country complies with the nuclear deal. According to Argus Media, this would likely increase Iranian output and allow the country to sell more of its inventory.
More Iranian crude would complicate decisions on OPEC+ coalition production cuts. In addition, a Reuters article reported that Trump’s pressure on both Russia and Saudi Arabia was an important factor in the original OPEC+ deal. Biden is more adversarial than Trump toward both countries. Sources told Reuters that there’s a heightened chance of a breakdown in relations among OPEC+ partners under Biden.
If a Republican Senate prevents Biden from implementing policies that curtail U.S. oil exports, Iran increases exports and the OPEC+ production agreement breaks down, that’s good for tankers.
On the other hand, if Iran exports more and OPEC+ stays together and reduces production to compensate for Iran, that’s bad for tankers.
Clarksons explained, “More Iranian oil production would be carried by Iran’s domestic fleet. To balance the oil market, OPEC and Saudi Arabia would likely be forced to cut their production, which is more reliant on the international fleet of tankers.”
Biden and trade relations
The trade war under Trump has been extremely negative for shipping stock sentiment. It has been a headwind for U.S. exports of oil, liquefied gas and agribulk. “Biden’s promise to end trade wars should be good news for shipping,” said Clarksons.
Biden is expected to be friendlier to European trade than Trump — a positive for future trans-Atlantic container flows — but not toward China.
According to Jefferies analyst David Kerstens, “Trade policy under Biden will likely become more consistent, but tariffs are unlikely to be abolished in the near term. Trade policy under Biden could try to involve other partners, such as the EU and Japan, in a coalition against China. [But] anti-China sentiment might be the only thing Democrats and Republicans have in common.”
Vaccine effect on fuel spread
Yet another consequence of the latest news involves marine fuel.
In late 2019 and early 2020, there was enormous focus on IMO 2020. That rule requires ships to burn more expensive 0.5% sulfur fuel known as very low sulfur fuel oil (VLSFO). Ships with exhaust-gas scrubbers can continue to burn cheaper 3.5% sulfur heavy fuel oil (HFO).
Investments in scrubbers have been very slow to pay off because the VLSFO-HFO spread shrank in the wake of COVID. One big reason it shrank was loss of jet-fuel demand.
Richard Joswick, head of oil pricing, refining and trade flow analysis at S&P Global Platts, explained in an interview with FreightWaves in September that COVID “reduced refinery runs because demand for jet fuel was really down … so, when refineries cut back, they made less high-sulfur fuel. As a result, they had more than enough capabilities to destroy that high-sulfur fuel [to produce refined products].”
That kept HFO prices higher than expected. At the same time, the loss of jet-fuel demand was a headwind for VLSFO pricing. “For every barrel of jet fuel you have to get rid of, around 70% winds up going towards diesel. Of the amount going towards diesel, some components get pushed down towards VLSFO,” explained Joswick.
He predicted that the VLSFO-HFO spread would ultimately widen and “the question is how quickly the airlines recover.”
The sooner there’s a vaccine, the quicker airlines recover. The sooner airlines recover, the quicker scrubbers could start to pay off more.