Container Freight Rates and Asian Shipping Stocks Monitor – Week 13 of 2017

27 Mar 2017, Global - We received a number of queries on why we focus more on tracking the weekly China Containerized Freight Index (CCFI) rather than the more commonly cited weekly Shanghai Containerized Freight Index (SCFI). While every index has its own benefits and limitations, we view the CCFI to be more representative of the container shipping freight rate changes felt by the liners covering 14 major trade lanes while the SCFI is limited to head-haul spot market freight rates from Shanghai to the base ports of 15 individual shipping routes. The Shanghai Shipping Exchange also noted that “the CCFI is deemed as the world’s second most influential freight index after the Baltic Dry Index and has been cited in the UNCTAD statistics”. In addition, the CCFI has a longer data history than the SCFI. Most importantly, we found that there is a much stronger positive correlation between the movements of the CCFI and the Asian liners’ average freight rate movements. We use Orient Overseas International Limited (OOIL) as an example to illustrate this:

There is a 0.95 positive correlation between OOIL’s average freight rate on the Asia-Europe trade and the CCFI China-Europe Freight Index. The positive correlation between OOIL’s average freight rate on the Transpacific trade and the CCFI China-West Coast North America Freight Index is also strong at 0.91. In comparison, the positive correlations between OOIL’s average freight rate on the Asia-Europe/Transpacific trade and the SCFI Shanghai-Europe/SCFI Shanghai-West Coast America freight rate are relatively less significant at 0.76/0.59 even if we adjust for the lag of the time series. In recent years, OOIL’s average freight rate movements also tend to lag the SCFI movements by 1 to 2 quarters.

OOIL’s share price also has a stronger positive correlation with the CCFI China-Europe Freight Index (0.51) than with the SCFI Shanghai-Europe freight rate (0.05). However, interestingly and rather counter-intuitively on the Transpacific trade, OOIL has a stronger positive correlation with the SCFI Shanghai—West Coast America freight rate (0.49) than with the CCFI China-West Coast North America Freight Index even though the carrier tends to lock in a substantial portion of its Transpacific business into annual contracts so its near term earnings are less leveraged to the spot market freight rates.

Chart: OOIL’s Asia-Europe average freight rate versus the CCFI China-Europe freight index and the SCFI Shanghai-Europe (base port) freight rate

Container Freight Rates and Asian Shipping Stocks Monitor: CCFI vs SCFI

Chart: OOIL’s Transpacific average freight rate versus the CCFI China-West Coast North America freight index and the SCFI Shanghai-West Coast America (base port) freight rate

Container Freight Rates and Asian Shipping Stocks Monitor: OOIL CCFI

Chart: OOIL’s share price versus the CCFI China-Europe freight index and the SCFI Shanghai-Europe (base port) freight rate

Container Freight Rates and Asian Shipping Stocks Monitor: OOIL SCFI

Chart: OOIL’s share price versus the CCFI China-West Coast North America freight index and the SCFI Shanghai-West Coast America (base port) freight rate

Container Freight Rates and Asian Shipping Stocks Monitor: OOIL Transpac CCFI SCFI

Back to highlighting the key developments in the past week:

GLOBAL CONTAINER SHIPPING TRADE

+ Freight rates trend: The overall freight rates slipped w/w but are still higher y/y. The overall China Containerized Freight Index (CCFI) fell 1% w/w in the week ending 24th March but was still 12% higher y/y. However, in the spot market, the overall Shanghai Containerized Freight Index (SCFI) rose 2% w/w and was 89% higher y/y.

+ Freight volumes trend: The global container shipping trade growth remained robust in January and February 2017, with the world container throughput index of the RWI up 5% y/y (seasonally-adjusted). This is significant as we have not seen such a strong growth since 2012. If this pace of growth continues, it will exceed our expected global container shipping demand growth forecast of 3.4% this year and surpass our projected global container shipping net capacity growth of 3.7%, reducing the risk of industry oversupply and pressure on freight rates.

Chart: Global container shipping demand and supply growth (decline) and idle fleet ratio versus freight rate growth (decline)

Container Freight Rates and Asian Shipping Stocks Monitor: Global container ddss

TRANSPACIFIC TRADE LANE

+ Freight rates trend: Freight rates weakened w/w on both US West Coast and US East Coast lanes. The CCFI fell 1% and 2% w/w on the US West Coast and US East Coast trades and were still 20% and 6% lower y/y respectively, mainly reflecting the depressed rates at which the liners signed their annual contracts. Spot freight rates (based on the SCFI) fell 4% w/w for both US West Coast and US East Coast freight but were still 69% and 58% higher y/y at US$1,288/FEU and US$2,625/FEU respectively. The liners are still expected to sign higher freight rates for their annual contracts that typically run from 1st May but significant rate declines in the coming weeks could potentially drive more shippers to delay their contract signing, in the hope of locking in lower annual contract rates or increasing their reliance on capacity in the spot market if they expect spot freight rates to trend lower for the rest of this year.

+ Freight volumes trend: The Transpacific container shipping trade volume fell 4% y/y in January and February 2017 (versus the 4.3% growth for the full year 2016) which was disappointing.

Historically, the Asian container shipping companies’ share price performance have a positive correlation with the Transpacific container shipping volume growth (decline) and Transpacific container shipping freight rate growth (decline).

Buying (shorting) the Asian shipping stocks when container shipping volume and freight rates rose (fell) y/y yielded substantial returns for equity investors.

Implications on stocks:

Listed Asian carriers with the largest capacity exposure to the Transpacific trade are K-Line (50% of total capacity, 1.1x P/B), NYK (38%, 0.8x P/B), Mitsui OSK (38%, 0.8x P/B), Evergreen (33%, 1.0x P/B) and OOIL (32%, 0.8x P/B).

Chart: Asian container shipping stocks index versus Transpacific container shipping volume growth (decline)

Container Freight Rates and Asian Shipping Stocks Monitor: Asian Shipping Stock vs Transpac

Chart: Asian container shipping stocks index versus Transpacific container shipping rate growth (decline)

Container Freight Rates and Asian Shipping Stocks Monitor: Asian shipping vs Transpac

ASIA-EUROPE TRADE LANE

+ Freight rates trend: The CCFI slipped 1% w/w on the Europe trade lane but was still 53% higher than last year’s dismal levels. However, spot freight rates (based on the SCFI) held fairly steady w/w at US$815/TEU and were 298% higher y/y. If spot freight rates can be maintained at these levels or higher, we expect to see a marked improvement in the Asian liners’ revenue contribution from the Asia-Europe trade in 1H17.

+ Freight volumes trend: The Asia-Europe container shipping trade volume rose 5% y/y in January 2017, an improvement from its 1% growth in full year 2016. However, we will have to wait for February’s performance to better ascertain the demand outlook given the trade distortions from the different timing of the Lunar New Year holidays y/y.

Historically, the Asian container shipping companies’ share price performance have a positive correlation with the Asia-Europe container shipping volume growth (decline) and Asia-Europe container shipping freight rate growth (decline).

Buying (shorting) the Asian shipping stocks when container shipping volume and freight rates rose (fell) y/y yielded substantial returns for equity investors. This correlation coefficient is higher for the Asia-Europe trade than for the Transpacific trade.

Chart: Asian container shipping stocks index versus Asia-Europe container shipping volume growth (decline)

Container Freight Rates and Asian Shipping Stocks Monitor: Asian container shipping volume

Chart: Asian container shipping stocks index versus Asia-Europe container shipping rate growth (decline)

Container Freight Rates and Asian Shipping Stocks Monitor: Container shipping rate growth

Implications on stocks:

Listed Asian liners with the largest capacity exposure to the Asia-Europe trade are Yang Ming (33% of total capacity, 1.9x P/B), Evergreen (29%, 1.0x P/B), Hyundai Merchant Marine (28%, 1.6x P/B), COSCO Shipping (28%, 2.1x P/B).

INTRA-ASIA PACIFIC TRADE LANE

+ Freight rates trend: Freight rate movements were mixed w/w on the major Intra-Asia Pacific trade lanes. The CCFI held steady on the Japan and Southeast Asia routes but fell on 2% w/w on the Hong Kong and Korea routes and 1% on the Australia/New Zealand routes. On a y/y basis, the CCFI was lower y/y for the Korea trade lane but 4% higher for the Japan, Southeast Asia and Australia/New Zealand routes. Spot freight rates (based on the SCFI) fell 3% w/w on the Southeast Asian routes but rose 1%-2% on the Japan and Australia/NZ routes and surged 36% w/w on the Korea route. On a y/y basis, spot freight rates rebounded strongly on the Japan, Korea, Southeast Asia and Aus/NZ routes but weakened further on the Hong Kong route.

Chart: Intra-Asia Pacific container shipping freight rates (Week of 24 March 2017)

Container Freight Rates and Asian Shipping Stocks Monitor: Container shipping freight rates

Implications on stocks:

Listed Asian carriers with the largest capacity exposure to the Intra-Asia and Oceania related trade lanes are SITC (100%, 1.8x P/B), Wan Hai (49%, 1.1x P/B), COSCO Shipping (21%, 2.1x P/B), and OOIL (10%, 0.8x P/B).

VESSEL CHARTERING MARKET

Vessel chartering demand has picked up, lifting the containership timecharter index by 8% m/m. Historically, there has been a positive correlation between the Asian container shipping stocks and the containership timecharter rate as the rising timecharter rate likely signal a pick-up in shipping volume and the liners’ optimism in carrying more freight.

Chart: Asian container shipping stocks index versus Containership timecharter index

Container Freight Rates and Asian Shipping Stocks Monitor: Timecharter

BUNKER FUEL PRICE TREND

Bunker fuel prices fell 8% w/w to US$327/ton but the ytd bunker fuel price is still 27% higher than 2016 average levels. Interestingly, the Asian container shipping stocks tend to have a positive correlation with the bunker fuel price which seems counter-intuitive since they have not been able to pass on the higher bunker fuel costs effectively to their customers due to their lack of pricing power resulting from the industry overcapacity.

Chart: Asian container shipping stocks index versus Bunker fuel price

Container Freight Rates and Asian Shipping Stocks Monitor: Spot bunker fuel price

Note: All the P/B valuations stated above are based on current share prices and the average consensus estimates in calendar year 2017.

Source: Crucial Perspective estimates, Alphaliner, Bloomberg, Clarksons, Container Trades Statistics, Journal of Commerce, Loadstar, RWI – Leibniz Institute for Economic Research and the Institute of Shipping Economics and Logistics, Shanghai Shipping Exchange.

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