Bank: Early container recovery æunlikelyÆ
Although liner-shipping companies “staged a surprisingly strong rebound and outperformed over the past quarter,” a new report from the Hongkong and Shanghai Banking Corp. predicts “early recovery within container shipping is unlikely.”
The report from HSBC analysts Azura Shahrim and Mark Webb, said trade recovery has been driven mainly by shorter-haul intra-Asia trade versus the Asia/U.S. and Asia/Europe trades.
However, growth in the major east/west trades “may be mainly due to restocking activity and will thus likely slow down in the coming months. Finally, we believe that even if trade rebounds strongly, massive capacity (new orders coming; supply from idle fleet; extra vessels employed by steaming), especially on longer-haul trading routes, will put pressure on rates and cause them to remain range bound in 2010-11.
“There is massive and chronic oversupply. We estimate a 46 percent gap in 2010 between fleet capacity and demand. The idle fleet, at 10 percent, is still triple the level of previous downturns. We calculate that vessel utilization will only return to 2007 levels by 2016. Low entry barriers and commoditized products also create a poor industry structure.”
The authors say they believe liner carriers operating in the transpacific “will be able to push through higher rates when signing new annual contracts in May.” After Asia-to-U.S. rates fell 24 percent in 2009, HSBC is predicting rates will rise 20 percent in 2010 and 4 percent in 2011.
“Similar to Asia/Europe trade route, we are not expecting rates to recover strongly in 2010-11 given the supply overhang. Firstly, a number of liners (at least five major liners) have announced plans to re-introduce and/or bring new tonnage into the transpacific trade route,' the analysts said. 'We are concerned that strong rebound in trade demand experience in January/February may not be sustainable and absorb the extra capacity brought in.”
HSBC forecasts Asia/Europe rates to grow 35 percent in 2010 over 2009 after dropping a 41 percent in 2009. But it predicts rates will reverse again next year on the Asia-to-Europe lane, dropping 7 percent in 2011 “as a greater number of larger size vessels arrive into the market.”
It suggests to investors it is time to sell overvalued liner stocks, saying they are selling at 1.2 times book value, the sector’s long-term average “despite the lackluster outlook.”
“We believe the only stock worth buying amongst our container coverage is OOIL,” saying it is better positioned because of a decision to dispose of its property development business.
“Our other favored shipping company is bulker Pacific Basin,” the analysts say. “Instead, we believe the airline sector offers a far more compelling cyclical buy at the moment, and our top picks are Cathay Pacific and Korean Air.” ' Chris Dupin