How the "Golden Waterway" Could Help Shippers Cash In

No one could have ever guessed that an ordinary, 11-year-old ship like the Yong Sheng could make headlines. Even so, this 19,000-ton cargo vessel operated by China's state-controlled COSCO Group is in the spotlight, because it's about to make history.

A historic journey

On Sept. 11, the Yong Sheng will become the first Chinese container-transporting vessel to sail to Europe through the Northern Sea Route (NSR) -- the Arctic Ocean shipping lane north of Russia, which once was blocked by thick ice. It will reach its final destination -- Rotterdam -- just 35 days after it left Dalian, a port in northeastern China. The traditional route through the Suez Canal takes 48 days.

Apparently, as more sea ice disappears each summer, new shipping passages open up. They not only could redraw the global trade map by shortening the maritime distance among Chinese, European, and North American markets, but also create new prospects for the maritime industry. Industry insiders refer to this passage as the "the Golden Waterway"and expect that, over the long term, its commercial potential could transform the global shipping industry.

What's in it for shippers

The Chinese Yong Sheng is not the first ship ever to sail along this Arctic sea lane. According to the Russian-run NSR Administration, 46 transit voyages were successfully completed during the 2012 season, up from a mere four in 2010.

These figures may not look that impressive when measured up against the 17,000 vessels that plied the Suez Canal last year. Nevertheless, the NSR is definitely a boon for ship operators for several reasons.

It's economical and eco-friendly
Compared with southern shipping routes, the NSR can shave weeks off intercontinental voyages enabling shippers to cut back on fuel consumption and operating expenses.

It's safer
Besides the Suez Canal, which is controlled by politically unstable Egypt, the traditional shipping lane that links the Chinese ports to western Europe passes through the South China Sea and the strait of Malacca, as well as the Indian Ocean.

In recent years, territorial spats over the waters and islands of the South China Sea have roiled relations between China and neighborhood countries. On top of that, China's over-dependence on the Strait of Malacca as a transit way for its oil imports lays its energy supply on the line.

Last but not least, piracy attacks across the entire Indian Ocean have been a real thorn in shippers' side. In 2009, Navios Maritime Partners had one of its vessels taken by pirates and held for two whole months.

It's more lucrative in terms of charter rates
As Dryships (NASDAQ: DRYS  ) CEO George Economou has mentioned, "ship owners can charge a daily hire rate for an Arctic voyage that's up to four times higher than the Suez route".

Who benefits from Arctic shipping?

Container ships of the sort that carry television sets, furniture or iPads from factories in China to European and U.S. markets are less likely to rush into exploiting the Arctic seaways. They usually need to make multiple stops along the way to load and unload merchandise, and the lack of proper pier and port infrastructure in most of the Arctic is a stumbling block.

The companies that are most likely to cash in on Arctic shipping operate dry bulk carriers or tankers that haul iron ore, fertilizer, crude oil and liquified natural gas.Greek shipping tycoons seem particularly poised to benefit from the melting ice sheets, since they more or less hold the reins of the global dry bulk and energy shipping industry. Needless to say, they have already invested in specialized ice-class ships capable of plying the Arctic waters.

Dryships has four ice-class dry bulk vessels on order, with remaining yard installments of $26 million in 2013 and $99 million in 2014. However, as of Aug. 19, the company had not secured financing for these construction costs. Dryships is drowning in debt, mainly because of the general difficult market conditions over the past couple of years that caused its revenues to plummet.

On the other hand, leading dry bulk operator Diana Shipping (NYSE: DSX  ) is one of the healthiest players in the space, even though it has also been feeling the pinch of depressed charter rates. Diana has been spending money like water to deploy its fleet, aiming at capitalizing upon a market turnaround. Last year, it bought two ice-class Panamax carriers for $29 million each. It expects to take delivery of the vessels over the next six months – right on time for the 2014 Arctic travel season.

Another potential winner is energy transporter Tsakos Energy Navigation (NYSE: TNP  ) -- one of the largest independent ice-strengthened tanker owners worldwide. Out of its 49 vessels, 21 are tankers with ice-class capabilities. Earlier this year, Tsakos sealed a two-year charter contract for one of its product tankers, which is expected to generate revenues of $14.5 million over its duration. This ship is traveling from Europe to Japan using the Northern Sea Route.

What's the catch?

At the risk of coming across as cynical, to say the least, I have to admit that the global warming phenomenon benefits shipping magnates. However, it's not all sunshine and unicorns, since a few weak spots could still prevent Arctic shipping from taking off.

Even though ice-class ships are capable of traveling the Arctic routes during the summer months, the iciest parts of the NSR still often require the use of specialized, icebreaking-equipped vessels, which are few in number. Russia uses icebreakers to escort ships in exchange for fees that exceed Suez Canal tolls.

In addition, the lack of shore-side infrastructure and the inadequate means of rescue in the Arctic region, raise safety concerns that drive up insurance costs.

That being said, I think that, as soon as Russia wraps up its regional development projects, the NSR could offer a viable and cost-effective alternative to the Suez Canal. Diana Shipping is definitely worth keeping tabs on for upside returns. I expect the company to make good use of this shortcut in hopes of reducing its break-even levels.


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