Citi: Asian lines’ profits drop 40% in Æ11
Two separate analyst reports issued in the last week suggest the financial sector is conflicted on what it expects from the top Asian container shipping lines in the coming months.
On Friday Citi's Asia Pacific shipping analyst group advised investors to sell shares of every line it analyzes, including Evergreen Line, OOIL (parent of OOCL), Yang Ming, Wan Hai, NOL (parent of APL), China COSCO (parent of COSCO Container Lines) and China Shipping.
Also last week, DnB NOR Asia, in a sector report on shipping, recommended selling shares in OOIL and STX Pan Ocean. However, DnB NOR Asia suggests buying shares of a handful of other lines, including Hanjin Shipping, COSCO, China Shipping, and Wan Hai. And unlike Citi, DnB NOR Asia recommends holding shares of NOL and Yang Ming.
In advising investors to 'take profits' from the upswing in fortunes of container lines this year, Citi said it is apprehensive about the fourth quarter prospects.
'The debate is whether the upswing is fundamentally sustainable or just the result of a combination of some temporary positives,' the report said. 'We feel the tide is to turn after peaking in the third quarter, and long-haul carriers' 2011 (estimated) profits may fall by 40 percent, on average. We envisage Asia exports to slow significantly in fourth quarter 2010~2011, given slackening consumer demand and the end of inventory replenishment.
Currently red-hot, long-haul freight rates may have sizable downside, due to influx of previously idle vessels, large new deliveries and an easing in box shortages.'
Citi further said a number of short-term or unusual events have conspired to push rates ahead of what the demand curve would suggest.
'Current freight rates have been running ahead of freight supply/demand balance and are exaggerated by a few temporary factors: a) pent-up demand and inventory restocking, b) nearly 20 percent less containership capacity through idle vessels and extreme slow steaming, and c) a big shortage of container boxes as global boxes production halted for one year since financial crisis,' the Citi report said.
Most of Citi's evaluations of individual lines focused on the uncertain demand picture looming after peak season, and that lines profits are closely tied to the spending of consumers in North American and Europe.
The report did point out Evergreen's 'contrarian' policy on fleet growth in the past year, and said the Taiwanese line's current push to order new ships makes sense long-term but may make it look unattractive to investors in the short term. The report also pointed out OOIL's cash rich position and its conservative approach to the market, but said diminishing freight rates could hurt its profits in the fourth quarter and in 2011.
DnB NOR Asia, however, is more bullish on the prospects for the fourth quarter and beyond.
'We believe container shipping is on a seasonal recovery in terms of rates, and on a cyclical recovery in terms of operating cash flows generated,' DnB Nor Asia said. 'We note that rates peaked in the fourth quarter of 2008, and with the recent general rate increases and peak season surcharges, we expect a return of rates back to 2007 levels. The recovery in rates is also having an impact on reported earnings. On an aggregate basis, we note that earnings troughed at a loss of $2 billion in first half of 2009. This has since recovered to turning positive, and we expect this to reach back to peak 2007 levels by the second half of 2011.'
The DnB NOR Asia report said it expects supply and demand to be largely in equilibrium thanks to a long period of ship ordering inactivity.
'In terms of supply and demand, we expect a balanced market in container shipping as deliveries peak in the second half of 2010,' the report said. 'Limited ordering activity resulted in the container shipping order book to stagnate at 26 percent of current fleet, a reasonable level considering the recent volume demand we have been seeing in the container shipping market. In terms of freight rates for the various trade lanes, we have turned more positive, accounting for the strength earlier this year driven by box shortage concerns, the acceptance of peak season surcharges on selected sources, but a moderation of growth going into the slow season for the fourth quarter of 2010.'
DnB NOR Asia favors the purchase of COSCO, not only because of the container line but also because of its COSCO Pacific subsidiary, which derives half of its revenue from container leasing (an industry likely to be very lucrative due to the current container shortage). ' Eric Johnson