• ITVI.USA
    15,859.850
    -49.550
    -0.3%
  • OTLT.USA
    2.773
    -0.003
    -0.1%
  • OTRI.USA
    21.460
    -0.150
    -0.7%
  • OTVI.USA
    15,864.700
    -50.600
    -0.3%
  • TSTOPVRPM.ATLPHL
    3.520
    0.380
    12.1%
  • TSTOPVRPM.CHIATL
    2.960
    -0.660
    -18.2%
  • TSTOPVRPM.DALLAX
    1.610
    0.250
    18.4%
  • TSTOPVRPM.LAXDAL
    3.340
    -0.130
    -3.7%
  • TSTOPVRPM.PHLCHI
    2.100
    -0.250
    -10.6%
  • TSTOPVRPM.LAXSEA
    3.860
    -0.220
    -5.4%
  • WAIT.USA
    126.000
    -2.000
    -1.6%
  • ITVI.USA
    15,859.850
    -49.550
    -0.3%
  • OTLT.USA
    2.773
    -0.003
    -0.1%
  • OTRI.USA
    21.460
    -0.150
    -0.7%
  • OTVI.USA
    15,864.700
    -50.600
    -0.3%
  • TSTOPVRPM.ATLPHL
    3.520
    0.380
    12.1%
  • TSTOPVRPM.CHIATL
    2.960
    -0.660
    -18.2%
  • TSTOPVRPM.DALLAX
    1.610
    0.250
    18.4%
  • TSTOPVRPM.LAXDAL
    3.340
    -0.130
    -3.7%
  • TSTOPVRPM.PHLCHI
    2.100
    -0.250
    -10.6%
  • TSTOPVRPM.LAXSEA
    3.860
    -0.220
    -5.4%
  • WAIT.USA
    126.000
    -2.000
    -1.6%
American Shipper

Lower fuel prices bring no liner relief

Lower fuel prices bring no liner relief

Related News
  Ship financing industry braces for its own crunch

   Falling oil prices haven’t stemmed the negative sentiment surrounding the container-shipping sector with some analysts warning investors to steer clear for now.

   Johnson Man Leung, a shipping analyst at JPMorgan Securities (Asia Pacific) Ltd., said that a scenario of surplus vessel capacity growth, slowing demand and rising fuel costs has created the industry’s toughest challenge in 12 years with container stocks now trading on average at a 40 percent discount to their net book value.

   “We recommend that investors avoid this sector as valuations seem too low for shorting while a lack of catalysts does not make the container stocks attractive to buy either,” said Leung in a report published today.

   Leung said the high capacity growth this year — some 1 million TEUs added in the first eight months — has finally caught up with demand growth, dented by spending cutbacks by U.S. and European consumers. JPMorgan said container demand growth is possibly the worst since 1996 and as such has lowered its growth forecast for 2008 to 7.9 percent, down from the previous expectation of 10.2 percent. For 2009, the analyst now expects growth of 7.6 percent instead of 10.4 percent. The growth for 2010 has been set at 9.6 percent.

   “Slowing demand growth does not allow the sector to absorb the amount of capacity buildup planned for the double-digit growth we have been used to seeing since 2003. The challenges for the container-shipping sector may continue well into 2009 as we have not seen any convincing signs that the U.S. and Europe economies will rebound before the end of 2008,” Leung said.

   Worryingly for lines, Leung said the declining volumes in the major east-west arterial routes could spread to the intra-Asia trade — “the last fortress in the sector.” — and that cascading of Asia/Europe tonnage to intra-Asia services could bring pressure on freight rates there too.

   Leung thinks a rebound may occur in 2010 as capacity growth should decelerate in 2009. Shipowners, chastened by the sector’s less-than-rosy outlook and the credit squeeze, have only ordered 950,000 TEUs of new capacity in this year to date, compared to 2 million TEUs over the same period last year. Capacity is expected by JPMorgan to grow 14 percent in 2009 and drop to 12 percent in 2010.

   Ultimately, container shipping’s fortunes will be dictated by consumer confidence, Leung said. “A rebound of the global economy could lead to significant re-rating of the sector as most of the container shipping stocks are not likely to lose those levels of value as implied in their share price. The leading sector to container shipping is retail business in U.S. and Europe and hence the return of consumer confidence should signal an imminent rebound of the container trade.”

   On a brighter note, bunker prices, which have come down 16 percent since the early July peak, should eventually follow crude’s retreat of almost 30 percent. Leung explained that bunker’s low supply and high demand from the influx of new containerships has made it more valuable than crude in recent months. JPMorgan's long-term crude price is $110 per barrel, which could work out to be about $600 per ton for the bench market 380cst bunker price at Singapore.

   It remains to be seen what impact the current financial crisis will have on shipping companies, but the JPMorgan analyst said container stocks will likely be pushed further down when the first losses are reported and if cash flow challenges emerge at companies with significant borrowings.

   “Liquidity could also be a concern to the container-shipping sector as some players have large commitment in capital expenditure and operating expenditure on an already fairly leveraged balance sheet. Some container shipping companies could be in distress if the sector does not rebound in 2010.”

   Leung’s “coverage universe” comprises China COSCO Holdings Ltd., China Shipping Container Lines, Hanjin Shipping, Hyundai Merchant Marine, Neptune Orient Lines (NOL), parent of APL; Orient Overseas International Ltd. (OOIL), parent of OOCL; Pacific Basin Shipping; Precious Shipping; Sincere Navigation Corp.; Thoresen Thai Agencies; U-Ming Marine Transport Corp.; Wan Hai Lines; and Yang Ming Marine.

   The JPMorgan report follows other similarly depressing analysis from the likes of investment bank UBS and Global Insight, a U.S.-based economics organization that also revised downwards its near-term forecasts for ocean container trade.

   “We do not expect 2008 to be a good year for container shipping companies, and one should expect to read about red ink on shipping companies’ financial accounts in the third and fourth quarters,” said Paul Bingham, managing director of Global Insight’s trade and transportation group. ' Simon Heaney

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