Seven Capital: Quarterly Reports – 1Q_2022

Uncertainty in Global Economy
It is very safe to say that the macro environment has become very clouded in recent weeks. The Russian invasion of Ukraine has sent commodities into a tailspin, the latest round of lockdowns in China are another headwind for global growth and last week we got a Federal Reserve rate hike.

Prices for some of the world’s most pivotal products – foods, fuels, plastics, metals – are spiking beyond what many buyers can afford. The high commodity prices will likely lead to further pressure on already accelerating inflation, forcing consumers to cut back spending, boosting the prospects for more recessions.

Interest Rates Raised
The Federal Reserve raised interest rates by a quarter percentage point for the first time since 2018 and signaled hikes at all six remaining meetings this year, launching a campaign to tackle the fastest inflation in four decades. Fed Chief Jerome Powell dismissed talk about the possibility of recession. Officials also pledged to start shrinking their $8.9 trillion balance sheet at the “coming meeting.”

Until we see clear signs of an inflation deceleration, either because the economy is slowing, or because various transitory factors begin to dissipate, the message from the Fed may continue to be unfriendly. Money market traders are betting on a further 225 bps of increases (nine of a quarter each) this year, assuming the FOMC raises borrowing costs at each of the six remaining meetings.

The relentless rise in U.S. Treasury yields continued to send waves through global markets, pointing to a period of costlier borrowing that could hurt both economic growth as well as the appetite for riskier investments. As of today, the 12-Month USD Libor is standing at 2.27%, the 5-Year USD Swap is at 2.80% and the 10-Year Treasury yield is at 2.72%.

The Coal Industry is Booming
Coal is losing market share in power generation but not the ability to power the planet. While the International Energy Agency (IEA) has yet to tabulate the final number for last year, it predicted in a December report that 2021 would be the highest on record for coal-fired power production. And the IEA believes coal demand may still have demand records ahead even as countries push for renewables.

Last year, the world burnt the largest amount ever of coal to produce electricity. And under current trends, total global consumption, which on top of power generation also includes industrial uses such as in steel and cement, will hit a record high this year, according to the International Energy Agency. Beyond this year, the IEA forecasts some additional small demand increases for 2023 and 2024, setting fresh record highs in both years.

Dry Bulk Sector Outlook
We maintain our optimistic outlook on the dry bulk sector and expect the recent weakness to be a mid-cycle dip, as low growth supply is likely to be the main driver of the dry bulk market this and next year.

Oil Price Outlook
Oil prices continued their relentless rally in the first quarter of 2022 as a result of the increased demand and limited supply and the jitters the war in Ukraine brought and the sanctions to Russian entities that followed. WTI – West Texas Intermediate – ended the first quarter at $100 per barrel, while Brent UK ended at $107 per barrel both posting an increase of 34% and 39% respectively compared to the end of 2021.

Oil’s surge toward $100 a barrel for the first time since 2014 is threatening to further dent growth prospects and drive up inflation. Much of the world will take a hit as companies and consumers find their bills rising and spending power squeezed by costlier food, transportation and heating. Spikes of this magnitude have always triggered recessions in the past.

Crude Tankers Outlook
Suezmax and aframax spot earnings were lifted the last weeks giving the crude sector something to smile about, although VLCCs remain in the doldrums.

Growing US crude production and exports could provide a welcome boost for the tanker sector. Increasing US crude production could be a potential boost for tankers as more shipments to Asia would use up to three times the number of VLCCs for equivalent cargoes from the Middle East.

Nevertheless, the situation might delay a long-awaited tanker recover as the soaring energy prices will keep denting demand. China could buy more Russian oil, and European buyers turn to the Middle East, boosting tone miles. But the much-awaited rebound in the tanker markets will be further delayed and be more muted than otherwise expected.

The favorable tanker fleet supply profile with the low orderbook and few prompt slots gives a glimmer of hope for the long-awaited recovery.

Product Tankers Outlook — Light at the end of the tunnel?
Europe is heavily reliant on diesel imports from Russia and the anxiety that Europe may run out of diesel is growing. The continent has only about 40 days supply of the fuel in its stockpiles. Oil companies are shunning petroleum from Russia and instead are seeking shipments from as far afield as the Middle East, Asia and the U.S.

Traders are snapping up ships to haul millions of barrels of diesel westward from Asia and the Middle East as oil supply chains react to Russia’s invasion of Ukraine. This has led to an MR tanker rally in the last days with rates jumping 60% to $56,000 per day.

A historically low orderbook at 5% of the existing fleet combined with the high prices of N/Bs — relative to the poor performance of the freight market so far— still remain an encouraging sign . A discouraging sign is that over 50% of the ordered vessels are expected to hit the water within 2022 adding pressure to the fragile freight market.

Shipping Financial Markets Reprt 1Q 2022