Shipping companies, refineries, freight derivatives or diesel cracks? Investment funds are placing their bets as the shipping sector prepares for new rules limiting sulphur emissions from ocean-going vessels.
Ever since the International Maritime Organization (IMO) said the maximum sulphur content in marine fuel must drop to 0.5 per cent from 3.5 per cent from 2020, shipping companies have been wrestling with how to comply without driving up costs at an uncertain time for global trade.
Some shipowners are installing exhaust-cleaning systems known as scrubbers so they can continue to use high-sulphur fuel and some are switching to low-sulphur marine diesel, but all expect a period of turbulence when the “IMO 2020” rules come in.
Investors in turn are coming up with strategies and launching funds with exposure to parts of the oil and shipping industries they expect to benefit from the new emissions caps.
John Kartsonas, managing partner of Breakwave Advisors, said while broader concerns about trade have dented investors’ views on shipping, IMO 2020 was likely to drive freight rates higher.
Breakwave launched an exchange-traded fund last year to invest in dry-bulk freight derivatives, hoping to benefit from IMO 2020.
“Rarely you see such a potentially massive disruption,” Mr. Kartsonas said. “Delays, a reduced active fleet supply, slow steaming and port congestion can push freight rates to decade highs, and beyond.”
The Baltic Exchange’s Main Sea Freight Index, which tracks rates for ships carrying dry-bulk commodities, slumped after the financial crisis to 700 points from a record 11,793 points in 2008. It’s now at about 1,500 points.
Dry-bulk ships make up more than a fifth of the world’s ocean-going vessels and many are among the most-polluting ships.
At hedge fund Svelland Capital in London, one strategy is to focus on petroleum products likely to be affected by the rules.
“IMO 2020, together with the ballast water treatment, will turn shipping upside down and create supply shock,” chief investment officer Tor Svelland said.
Svelland Capital is launching an “IMO direct exposure fund” in July aimed at investors who want to take positions based on IMO 2020, but are less familiar with oil derivatives.
“This is the largest regulatory change in the oil space ever and it will have a massive effect far outside of shipping,” said Kenneth Tveter, the fund’s portfolio manager.
For now, there is no consensus on whether there will be enough low-sulphur fuel to meet demand come 2020. Of the roughly 60,000 vessels worldwide, industry consultants estimate only 3 per cent to 5 per cent are likely to have scrubbers by 2020.
It is also unclear what will happen to demand for high-sulphur fuel – all of which means the price gaps between different fuel grades, as well as the different types of crude used to make them, are likely to change.
Dutch asset manager Robeco is also focusing on fuel, but it’s investing in oil refineries that are well placed to produce large quantities of low-sulphur diesel.
“We are invested in refiners since earlier this year and this has been one of the drivers for that investment,” said Fabiana Fedeli, global head of fundamental equities.
Robeco is selecting complex refineries, plants with lots of units that can turn low-value fuel oil into higher-value products such as distillates, octane and low-sulphur fuel.
Hedge fund CF Partners in London is focusing on price gaps between different crudes. It expects sweet crude with higher levels of distillates such as Nigeria’s Bonny Light or U.S. shale to be more in vogue than heavier, sour crude.
CF Partners is also getting exposure to U.S.-flagged ships known as Jones Act carriers after a law requiring goods shipped between U.S. ports to be transported in U.S. vessels.
Elvis Pellumbi, manager at CF Partners, said the fund was buying stocks in shipping firms such as Overseas Shipholding Group. Mr. Pellumbi’s fund has US$400-million under management, of which 30 per cent is investments related to IMO 2020.
George Kaknis, portfolio manager at hedge fund LNG Capital, said he was looking at shipping firms such as American Shipping Company.
“The more shale is produced out of the U.S., the more these guys are kept busy and the more the day rates go up,” he said.
Other shipping firms investors said they were looking at with IMO 2020 in mind include Scorpio Tankers, Navios Maritime Acquisition, DHT, Frontline and Euronav.
While some shipowners have installed cleaning systems, others see them as potentially high risk as some ports have already banned or restricted scrubbers that pump waste water into the sea, and more may follow suit.
Some investors say the upfront cost of installing scrubbers – about US$2-million to US$3-million each – also means it would take longer for them to pay off, especially if the price gap between low- and high-sulphur fuels narrows.
“We don’t believe that those who have invested in scrubbers will achieve the amazing returns they have been advertising,” said Mr. Pellumbi at CF Partners. “Refiners have/are adapting their production slates to produce more of the right product.”