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 said the maximum sulphur content in marine fuel must drop to 0.5% from 3.5% 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," said Kartsonas. "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 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 the fund's portfolio manager Kenneth Tveter. 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% to 5% 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.
"You can try and pick winners in the shipping segment of the equity markets, but to get a pure play you need the derivatives market," Tveter said. "The new fund will look at all the parts of refining that will be affected by the new regulations. In another sign of the impact of IMO 2020, China said on July 4 that it planned to launch a futures contract for low-sulphur fuel oil by the end of the year.
According to data from Symmetric, which tracks investment funds, hedge fund ownership of some shipping stocks rose in the first quarter. Their ownership of Nordic American Tanker rose to 12% from 8% in the fourth quarter last year, while hedge fund stakes in DryShips rose to 13% from 5%.
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