When most people think of commercial shipping they think of the great Greek shipping tycoons who made a mint in the 1960s and 1970s: Aristotle Onassis, Stavros Niarchos and John Latsis. Since then, the shipping industry has been all but ignored by professional investors, but I think that it's time they paid attention again. The fact is that the European shipping industry is undergoing something of a renaissance and now offers a number of exciting opportunities.
Consider China and its booming economy. China imports commodities such as iron ore, coal and oil from the rest of the world, and exports inexpensively made manufactured goods, such as textiles, toys and electrical goods. The result? Business for companies involved in shipping these goods back and forth is booming. Shipping freight rates have doubled in the last two months and Chinese ports are so busy that ships often have to queue for a week to pick up their cargo. AP Mller-Maersk, little known outside its native Denmark, is in the sweet spot of this boom. Maersk's fleet is double the size of its nearest competitor and it takes the lion's share of global container shipping trade. It also manages port terminals all over southeast Asia and in the US. Its chairman, Maersk McKinney Mller, Denmark's richest man by virtue of his 56% stake, will retire this month. I would expect his successor to divest peripheral assets, make better use of debt financing, and improve investor relations.
Whilst Maersk is probably the best play on dry' cargo rates, there are also opportunities for investors in the wet' oil-tanker market. These ships deliver oil from exporting countries, such as Saudi Arabia, Russia, and Nigeria, to the likes of US, Japan and China. Owing to factors ranging from political unrest in Venezuela and Nigeria, problems with nuclear power in Japan, and congestion on the Bosporus, oil-tanker rates have remained high all year. So for owners of oil tankers it has been a vintage year. Look at Frontline. Majority owned by Norway's richest man, John Fredriksen, the firm controls the world's biggest fleet of oil tankers and is on track to make shareholders around $500m profit in 2003. It has also paid out $330m in dividends this year. Yet it is still valued at just $1.5bn. And things could get even better for Frontline's shareholders. Stringent new regulations from the EU will start to phase out single-hull oil tankers from European waters. Given that only 35% of the world's oil-tanker fleet would be exempt from these regulations, and that shipyards are fully booked for the next three years, anyone who, like Frontline, owns a fleet of modern double-hull carriers, is sitting pretty. Also note that Frontline management is currently restructuring with a view to returning up to another $1bn of cash to shareholders. The prospect of a 66% dividend yield next year should not be ignored.
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Fredriksen also owns a majority stake in Golar, a pure-play on the fast-developing liquefied natural gas (LNG) market. Golar has a fleet of just 11 vessels, but management aims to treble this over the next five years to cope with booming demand. With their own gas fields depleting, the US and the UK in particular are having to import more and more gas from producers such as Trinidad and Malaysia. LNG is an area set for explosive growth. As a result, the number of ships required to transport the gas will need to increase dramatically. Nearly all LNG carriers are booked out on 20-year contracts, as are the majority of ships being built over the next three years. To veteran observers, the nascent LNG shipping market looks like the next big thing' and Golar investors have maximum exposure to it.
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So there we have it. Shipping is a growth industry, competition is benign, valuations inexpensive and management increasingly friendly to shareholders. This strong tail wind should see all three stocks sail into 2004
