Since the dot-com collapse five years ago, there has been rising concern about bubbles in everything from real estate to oil to hedge funds to investment bubbles themselves. Any sector with a sudden burst of investor enthusiasm is suspect. Which brings us to a most unlikely potential bubble: shipping—the ancient and quotidian business of moving goods around the globe.
In the fall of 2003, Moneybox readers were introduced to the mighty Baltic Dry Index, a measurement of the cost of shipping goods by sea. The steady rise of global trade, and particularly the advent of China as an economic force, boosted the demand (and expense) for berths on cargo ships, thus hiking the index. From a low point of 900 in September 2001, the Baltic Dry had nearly quadrupled by the fall of 2003. The Baltic Dry powered higher, topping 5,000 in January 2004. After falling sharply in the middle of 2004, it spiked again, hitting a new record high of 6,200 last December.
The rising demand for shipping in 2004 created a demand for the stocks of shipping companies. This list of IPOs for the past 12 months contains plenty of shipping news. Last October, U.S. Shipping Partners, which owned eight boats, raised about $135 million. Arlington Tankers, a Bermuda-based tanker company founded in 2004, went public in November. In February 2005 came Dryships, a Greek dry-shipping company founded in 2004 that, according to ipohomes.com, had only two employees. March brought another Greek bearing IPO gifts: Diana Shipping. In June, there were three shipping IPOs: Aries Maritime, a Greek company formed in 2005 with 12 ships; Eagle Bulk Shipping, a one-year-old company with eight dry-bulk carriers; and TBS International. Several more are waiting to float their stocks. TAL International, dry-bulk shipper Genco Shipping & Trading (16 boats), and Golden Energy Marine (nine boats) have all filed for IPOs. The offering of Quintana Marine, an eight-vessel company created earlier this year, is expected to price this week. In June, Bergesen Worldwide, the Norway-based company that is the largest privately owned shipper in the world, announced plans to sell a big chunk of its stock to the public in Europe.
It's easy to understand the source of the shipping enthusiasm. If China's impressive growth continues at the same pace of recent years, and if the global demand for oil continues to rise at the same pace it has in recent years, the reasoning goes, the shipping business should continue to boom. And the promoters are getting exuberant. Antonios Backos, a partner at New York law firm Healy & Baillie, declared in a recent article: "Let the Good Times Roll." Euromoney's 2nd Annual Global Shipping Finance Summit (Registration: 999 pounds sterling) boldly claims, "There's never been a better time to be involved in the shipping industry as an owner or financier."
Here's the problem. This exuberance comes at a time when shippers are paying less to send their goods. Daily rates for the largest oil tankers in June were down 20 percent from the year before, according to the Wall Street Journal. And the Baltic Dry indexis off more than 60 percent from its December 2004 peak.
Worse, the quality of the public offerings tends to decline as booms lengthen. The flood of me-too dot-com stocks that came public in the spring of 2000 were nearly all stinkers. And already, as Leia Parker reported in the Wall Street Journal this week, insiders are starting to fret about the recent crop of shipping IPOs, companies that "have big ambitions but little track record." It seems like anyone who owns a canoe is doing an IPO.
Meanwhile, there are signs that investors are growing skeptical. Earlier this month, Chinese shipper Cosco Holdings went public in Hong Kong in a massive $1.22 billion IPO and promptly sank. Last week, South Korean shipper STX Pan Ocean had to accept a lower price for its $540 million IPO in Singapore. And many of the stocks of the companies that recently went public are sagging.
Clearly, investors in shipping companies—and the brokers who book freight—are looking beyond the horizon. It takes a long time to turn an oil tanker around, and the shipping market is slow to respond to sudden upturns in demand. Prices for freight rose so rapidly in 2003 and 2004 in part because it takes a long time to commission new oceangoing tankers and container ships.
When demand rises more rapidly than capacity, of course, the natural response by companies is to increase capacity. But now there's concern that capacity growth could outstrip demand. If China's growth slows dramatically, and global demand for oil doesn't materialize as projected, in a few years there may be a lot of empty ships haunting the seas, like so many Flying Dutchmans. And investors in many of these newly public companies could be left high and dry.