Asia Shipping Sector
In no one's interest to "rock the [rates] boat"
● Credit Suisse hosted lunch with SS Teo, Chairman of Singapore’s second largest (and the world’s 19th largest) liner company Pacific International Line (unlisted), where he shared his thoughts on rates, profits and bunker prices.
● He concurs with our view that, at present rates, liner companies are comfortably “above water” and – to keep the maritime metaphors consistent – have no interest in “rocking the boat” by discounting these further.
● Recognition of the recent ~20% fall in bunker price and moderating macro risks should see stock performance return to the sector, with potential for peak period surcharges to drive industry profit expectations higher.
● We continue to believe that the liner sector is oversold, with sector P/B still < 0.8x – or around the levels that were recorded last in Dec-11, when the outlook was for continuing losses. Since then, industry fundamentals have enjoyed a step change for the better and we reiterate our OVERWEIGHT rating, with recommend for NOL, OOIL and EMC in declining order of preference.
Rates and bunker provide breathing room
With A-EU rates around 1,600/TEU and T/Pac at cUS$2,200/TEU, Mr Teo estimates that all companies should be making money, especially with bunker having fallen from US$740/t in March to US$580/t today.
Prospective views are:
June PPS/July GRI – Rate increases on A-EU are the stuff perhaps more of hopes than realities, with volumes unlikely to demonstrate any growth. If liners can get half of the US$350/TEU PPS that they are after, Teo believed that they would be happy. The 1st July GRIs that Maersk and Hapag Llloyd have announced are wishful thinking. The 1st July US$600/FEU PPS on T/Pac is likely to have more legs, given the fundamentally stronger nature of that trade lane. He added that the Walmart contract was inked at about US$1,700/FEU (up about 13% on 2011 levels) but that this was base cargo that most lines would use as filler, with most other contracts signed above this level.
This compares with the 10-15% annual T/Pac increase that we have modelled for most of the liner companies under our coverage. Trade volumes – Asia to USWC volumes are expected to grow 5-8% in 2012 (again consistent with our views), although Asia-Europe could see YoY run rates drop by 5-10% as demand declines (we expect +/- 1% for the year as a whole). Elsewhere, recovery in a number of Gulf countries since isolated downturns last year are driving Middle Eastern volumes higher, with LatAm, Intra-Asia and African markets also growing strongly.
Supply & demand – While there is excess capacity in the system, Teo’s sense is that liners are not introducing excess supply because of the cost of bunker, where they make no money at the current price unless they are sailing >80% full. His view is that East-West trades will be dominated by >10k TEU vessels belong to no more than a dozen major liner companies. However, because of the challenges faced in filling these year round, the lay-up cycle will become more pronounced and earnings cycles will be short and sharper.
Slow-steaming - High bunker and low rates have driven slow steaming to become the norm: previously liner companies required eight vessels per loop on A-EU when steaming at 25kts, today that number is 11 at 16-18 kts. This is a 35% reduction in capacity that he does not see as returning as new generation vessel engines are optimised for this speed. Older vessels are being forced to travel at <50% of horsepower capacity and this has driven higher maintenance costs, which has limited the benefits to earnings that has stemmed from the lower fuel consumption.
Bunker prices – Forward prices for 1Q13 are US$570/t, so little upward pressure seen. He believes that the large amount of speculatively-financed oil floating at sea, and subject to margin calls, could see increased selling activity with Brent subject to further price downside (and bunker with it). Japanese power plant demand for bunker (given its nuclear power plant closures) and alternative highervalue uses at new generation refineries, though, are likely to limit bunker availability and, hence, price downside from here, in our view.
Container boxes - Prices for a new TEU have risen at about US$100 a month since 12 Febto around US$2,700 at present. He believes that the market is still short of the number required with demand running through to about September. He highlights that boxes in marshalling facilities number < 500k at present vs. close to 2 mn in the middle of 2009 and that any strike action (such as that possible on the US East Coast, given the deterioration of wage negotiations between employers and the International Longshoreman’s Association) would slow the velocity of TEUs through the system placing upward pressure on demand.
Source/Extract/Excerpts/来源/转贴/摘录: Credit Suisse