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Shipping Expensive, Carriers Not?

Optimism for the global shipping industry...

CONTAINER shipping companies have not been immune to the disruptive factors roiling markets at the moment, says Frank Holmes at US Global Investors.

Those factors are rising interest rates, soaring inflation and a potential recession, not to mention war in Eastern Europe.

However, we remain bullish on the global shipping industry for a number of reasons. Below are charts showing how carriers look to be in positive territory heading into year-end.

The equity research team at Goldman Sachs recently released a report highlighting corporate commentary from its annual conference held in London. Companies across the transport, leisure, construction and business services industries attended, with key takeaways focused on the global transport markets, specifically air travel and shipping.

Below is one of the most compelling charts from the bank's report.

Spot rates for containers leaving major Chinese ports are off their peaks from earlier this year as consumers' spending habits have shifted from goods to services, but there are two things to keep in mind here. Number one, despite the decline, rates are still highly elevated on a historical basis, which we believe could result in shipping companies posting another profitable year. And number two, it appears that rates may be trying to turn up again as we enter the peak summer shipping season.

Similar to other industries, shipping is seeing higher rates of volatility due to sporadic Covid lockdowns, the conflict in Ukraine, surging inflation and other challenges. As a result, shares of container shipping companies have fallen from their March highs.

It's important for investors to keep in mind, though, that shipping is a long-term growth story, particularly in emerging and developing economies.

Many countries, most notably in Asia, are undergoing significant economic change as millions of individuals and families join the middle class, a group whose members spend between $11 and $110 a day. According to the World Data Lab, more than 1 billion Asians are expected to join the global middle class by 2030.

We believe this could be constructive news for companies involved in the global shipment of goods. As you can see below, sea port volumes in China have steadily been rising over the years as more and more households have entered the middle class and insisted on buying consumer goods – from furniture to appliances to gadgets – that reflect this socioeconomic change.

Dry bulk cargo includes the shipment of commodities and raw materials such as iron, steel, wheat, sugar, coal and cement.

As the global population continues to expand, the more of these materials will need to be moved across the globe for use in infrastructure, manufacturing, food and other applications. Again, we believe this could benefit companies responsible for carrying dry bulk.

IHS Markit's dry bulk demand forecast through 2024 sees year-over-year growth is expected to go sideways in 2022 due to sky-high inflation. But demand growth could resume in the following two years as prices stabilize. This means is now may be a good time to get exposure.

Frank Holmes is chief executive officer and chief investment officer of US Global Investors Inc., a registered investment adviser managing approximately $4.8 billion in 13 no-load mutual funds and for other advisory clients. A Toronto native, he bought a controlling interest in US Global Investors in 1989, after an accomplished career in Canada's capital markets. His specialized knowledge gives him expertise in resource-based industries and money management.

See the full archive of Frank Holmes.

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