Samudera Shipping (SGX: S56) rose 12.5% in Singapore this morning. Which can be taken as a little odd for it's clear that the massive container shipping boom of the last few years is over. We can check that with the Freightos container shipping index, which is down from well over $10,000 to $1,400 or so for a container China to Europe/US (it's a composite index). As with AP Moeller Maersk this threw off vast quantities of cash while the boom lasted. The question now is what happens next? And yes this is entirely different from the recent action in Sembcorp Marine, driven as that was by historic corruption problems in Brazil.
The shipping business is very much a boom and bust one. For generations there's been a cycle of low investment leading to higher freight rates, that creates a boom of ship building, rates crash, investment stops and so the whole cycle starts all over again. It's always possible to hope that the cycle will be better managed next time but the costs of entry into the business are low enough that as far as we can tell the cycle is going to continue.
Samudera Shipping, S56, share price from SGX
So, one question becomes what should a shipping line do with the cash built up at the top of the cycle? One answer is as with Moeller Maersk, who decided to throw most of it back to shareholders in a special dividend. Samudera is using the other possible - sensible - route to capital deployment. Back in January it announced it was upgrading, modernising, parts of its fleet. Two newbuild box, or container, ships. The point here being that as the cycle turns then it will be those with the lowest operating costs - which means new ships, more efficient engines and so on - who are able to stay in the business and in profit.
It's not wholly obvious which is the best strategy here because of course the future is unknown. We would have bet that shipping would come down off the top of the boom. It has - but now we need to see how deep the bottom of the cycle is going to be. Returning cash to shareholders, upgrading the fleet, both are viable options. Only time will tell which is the best of those two.
