Monday, March 10, 2014

Major Canal Revenue Hardly Indicates Global Shipping Health

I read a brief blurb in a financial publication that some hedge fund managers track oddball data to generate alpha.  The specific mention of the Suez Canal's revenue as an indicator of the global shipping industry's health caught my eye.  I wondered if there is anything to this relationship.  I didn't have to wonder for very long.

I checked out the websites for the Suez Canal Authority and the Panama Canal Authority.  I needed to see if one canal is a more useful indicator than the other.  I discovered that each canal breaks down their tariff structure by type of ship, hull status (single vs. double), size, and other factors.  The reasons are obvious for those of us with experience in maritime logistics.  Different size ships require different handling procedures and must be arranged in queues that maximize the throughput of a canal's available capacity.  The immediate conclusion is that a canal's gross annual revenue indicates little about the health of specific ocean carriers that specialize in bulk petroleum, LNG, containers, vehicles, and other types of cargo.

The Suez Canal Authority does not publish annual financial statements on its website.  They do publish annual summaries of traffic by ship type but I cannot tell from reading those reports whether they are audited by an independent accounting firm.  A Google search of "Suez Canal revenue" reveals that major news services dutifully report changes in the canal's revenue, but these rely on the Egyptian government's announcements.  The World Shipping Council's presentation on the Suez Canal notes that only 7.5% of the world's total ocean trade passed through the canal in 2007.  I cannot take this canal seriously as a robust global indicator.

The Panama Canal Authority publishes its annual audited financial statements under the "Financial Information" tab on its website.  The statements are calculated in balboas, the Panamanian currency.  Comparing them the USD for each annual reporting period is easy for analysts who can translate each year's revenue into the prevailing historical exchange rate on the day that period ended.  That would be an apples-to-apples comparison.  The World Shipping Council's presentation on the Panama Canal does not mention that canal's portion of world trade.  That is not sufficient for me to take this canal seriously as an indicator.

The incomplete data picture for these two canals, both from their own sources and a primary industry source, mitigate their productive use as indicators for the health of the global shipping industry.  Financial analysts should not waste one more day using major canal revenue as a proxy for the shipping sector.  They should instead use references like IHS Global Insight's liner industry valuation study for the World Shipping Council.  Comparing numbers of vessel types on order to the numbers being mothballed or scrapped will indicate whether the industry is committing capex to expansion.  Analysts can also use the IAPH statistics on port traffic to see trends in end-to-end transit worldwide data.  Combining these sources with the Baltic Dry Index illustrates whether tonnage and traffic trends match up with market prices.  Canal revenue data is just distracting noise compared to global data.