An industry known for its volatility has entered a new period of extreme swings in earnings.

New research carried out by Jonathan Chappell, a shipping analyst at Evercore ISI, an investment bank, highlights the extreme volatility seen across five segments over the past 18 months.

“Shipping markets are known for being notoriously volatile given low barriers to entry, a long capacity tail of small owners, macro sensitivity, and exposure to geopolitics. But the roller coaster of spot rate moves over the last few years has embedded an entirely new magnitude of peak-to-trough (and back) moves into the projection equation,” Chappell wrote in a note to clients.

For VLCCs, capesizes, and LNG carriers rates have moved by more than 600% since August 2022, while LR2s and VLGCs have topped out at more than 200% from trough to peak.

The already robust volatility across bulk shipping segments will remain elevated for the foreseeable future

During the same 18-month period, there has been a 100% swing for the ClarkSea Index, an indicator widely seen as a key shipping barometer, being a weighted average of tanker, bulk carrier, containership and gas carrier earnings managed by Clarkson Research Services.

Chappell suggested the extremes experienced were largely related to shifting trade routes and “vast disruptions” associated with events, such as Russia/Ukraine, Panama Canal water levels, and Red Sea disruptions.

Of the chart carried below, Chappell wrote that it serves as more of a warning than a thesis.

“Be careful extrapolating temporary rate spikes across a quarter or a year, as models can change quickly and underwriting the anomaly is a sure way to get the duration/magnitude of a thesis wrong,” Chappell warned.

Looking at data from Drewry, volatility for the container trades from August 2022, when rates were already down by nearly $4,000 from their peaks, the swings experienced have still been enormous, clocking in at nearly 400%.

Speaking with Splash, Chappell commented: “With geopolitics, extreme weather conditions, and an uncertain macro backdrop continuing to play a greater role in shipping demand and trading routes, we would expect the already robust volatility across bulk shipping segments to remain elevated for the foreseeable future.”

“Higher volatility is likely to be something that defines the period ahead,” concurred Ulf Bergman, senior economist at Shipfix, a chartering platform, citing the plateauing of the Chinese economy, geopolitics and climate change as reasons for a “perfect storm” for brewing volatile conditions.

Stanko Jekov, managing partner at London broker SSY, writing the introduction to the company’s recently published annual markets commentary, noted: “What we can be sure of is that 2024 will be another year of increasing volatility given the already tight market fundamentals in most of our segments.”

By Sam Chambers. 14 February 2024.