Analyst expects “major downturn” in container shipping in 2006
Credit Suisse First Boston warned in a report on Asian container shipping that a “major downturn” in the liner shipping market is probable in 2006, with ship capacity increasing much faster than cargo volumes.“It’s a cyclical business,” the investment firm said. “Unless economic growth and global trade is unexpectedly strong going into 2006, and port congestion effectively reduces the growth in global capacity, we believe that 2006 will see a major downturn in container shipping.”
Credit Suisse First Boston’s analysis is based partly on forecasts of overall capacity and traffic made by Drewry Shipping Consultants. It predicts the global container fleet will soar about 14 percent in 2006, while traffic will rise only 9 to 10 percent.
“We forecast that freight rates will fall substantially in 2006, which will mean a sharp earnings decline for the container shipping companies,” Hong Kong and Singapore-based analysts wrote in the firm’s investment report.
The analysts therefore urged investors to use conservative valuations of Asian shipping stocks such as China Shipping Container Lines, Evergreen Marine Corp., Yang Ming Marine, Wan Hai, Neptune Orient Lines, Orient Overseas (International) Ltd., Hyundai Merchant Marine and Hanjin Shipping.
On Monday, Ray Miles, chairman of CP Ships, told investment analysts the current bull run of the liner shipping industry could end in 2006 if demand weakens.
He said industry forecasts show “a big gap” between expected supply and demand in 2006, with ship capacity predicted to go up about 14 percent in 2006 and traffic growth forecast to rise about 8 percent. Miles cautioned that the prospect of a downturn in 2006 was still uncertain.
Credit Suisse First Boston also confirmed that 2004 has been strong in terms of profitability for container shipping lines, with freight rates up substantially.
