I would invest in modern LR2s, in the age range between resale newbuilding and five years old. The sector is relatively small but it has undergone a transformation over the past decade. It has evolved into a multi-region and multi-route shipping segment, as the bottleneck in refining capacity has created the need for LR2s to travel further than before, stretching the fleet’s availability and allowing for triangulated earnings opportunities.
This article is part of a series written by people across shipping in response to this question about how to deploy a hypothetical TradeWinds Sustainable Shipping Fund:
How, where and why would you invest $1bn for the best return in sustainable shipping, as the industry grapples with the need to cut carbon emissions, improve efficiency and keep cargoes moving in a world facing multiple economic and political challenges? The investment will be made now and ideally held for the next seven years to the end of the decade. As an added bonus, give one policy or regulation you would like to implement from 1 January 2023 to benefit shipping?
Modern LR2s are fuel efficient and will be relied upon to carry refined products over further distances in the coming years, especially as demand for refined products is expected to continue growing while new refining capacity is limited.
Meanwhile, the fleet is one of the most concentrated in terms of ownership, providing for relatively firmer spot market dynamics while at the same time keeping optionality open for trading in the crude market if opportunities arise.
Current three-year time-charter rates allow for a 50% earn-back of the investment, which allows for a significant reduction in carrying value and enhancing the long-term return potential. Accordingly, I would acquire a fleet of modern LR2s, deploy them on three-year term charters, reduce my holding cost by 50% after the charter term and prepare to trade them in the spot market afterwards.
One policy to benefit shipping would be to consolidate all maritime shipping laws under the International Maritime Organization, with the various regional and state entities tasked with enforcing the regulations.
Rather than the IMO, European Union and US having different rules and policies, consolidating them under one authority and enforcing them by the member nations would create a more streamlined framework.