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Stock Strategist Industry Reports

Waters Remain Choppy for Shipping Stocks

Slowing demand and oncoming supply will generate volatility in marine shipping.

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Our view of the volatile marine transportation industry hasn't substantially changed since our last industry outlook, published in October 2008. Although the past eight months have been tumultuous, with customer bankruptcies, canceled contracts, and letters-of-credit issues, spot-market prices have rebounded to their autumn levels after a precipitous fall, primarily due to increased Chinese imports. These higher rates have subsequently boosted vessel values, enhancing ship owners' financial positions.

We continue to believe that China's industrialization will proceed mostly unabated over the long run, and the positive effects of its infrastructure-focused stimulus package don't surprise us. Recent production increases at major world steel mills will likely require additional iron ore--a major dry-bulk shipped commodity. That said, we think China's iron ore deliveries (which comprise nearly 50% of shipped iron ore) are due for a pullback, and we remain skeptical that cancellations within the massive order book for new ships and scrapping of older vessels will fully offset supply increases over the next several years. Vessel utilization has undoubtedly bounced back since its collapse in late 2008, but we expect further boom and bust cycles as supply becomes constrained by short-term factors such as port congestion and shipyard delays. Over the long term, we expect market pricing to stay relatively in line with its current level.

Adam Fleck does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.