Container Freight Rates and Asian Shipping Stocks Monitor – Week 12 of 2017

22th March 2017, Global - We publish our weekly update on Container Freight Rates and Asian Shipping Stocks Monitor, highlighting the industry's latest positive and negative drivers.

WHAT’S POSITIVE?

+ The liners’ capacity deployment on the major East-West trade lanes remains conservative in March. The scheduled weekly sailing capacity is only 1% higher y/y for the Asia-Europe trade and steady y/y for the Asia-North America trade.

+ The global container shipping fleet capacity has fallen marginally ytd and risen only 1% y/y to 20.2m TEUs which is positive. This is because the amount of containership capacity scrapped (0.16m TEUs) rose 194% y/y and more than offset the amount of capacity added by the delivery of newbuild vessels in January and February this year.

+ The liners have managed to achieve a 64% y/y increase in their longer-term contract rates on average for mid-June 2017 sailings from China to North Europe, based on 1,500 contracted rates for global large-volume shippers.

+ There will be a marked reduction in direct port-pairs when the new alliances are implemented from 1st April 2017. Specifically, the Transpacific trade lane is expected to have 150 fewer direct port-pairs while the Northeast Asia-Mediterranean and Southeast Asia-Mediterranean trade lanes are expected to have 78 and 22 fewer port-pairs. This, coupled with the deployment of ultra-large containerships, will help lower the liners’ unit costs.

WHAT’S NEGATIVE?

+ Container shipping freight rates fell w/w in the spot market on the Transpacific trade lane. 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). The liners are still expected to sign higher freight rates for their annual contracts that typically run from 1st May. However, significant spot freight 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 continue to trend lower for the rest of this year.

+ The largest alliance player in the Asia-Europe trade, 2M (including Hamburg Sud following Maersk’s recent acquisition) plus Hyundai Merchant Marine, which have a combined capacity share of 40% on the Asia-Europe trade, are expected to increase their weekly average capacity on the Asia-North Europe trade by around 23% with effect from 1st April 2017. This could put significant pressure on the Asia-Europe spot freight rates, reversing the capacity discipline observed in recent months, unless shipping volume growth picks up significantly in the coming months.

+ The level of idle capacity has fallen 4% since late February 2017 and amounts to 6.8% of the global containership fleet, down from 7.1% in late February and down 1ppt y/y. The industry could suffer from overcapacity again if more idle ships return to operation this year.

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 17th March but was still 13% higher y/y. In the spot market, the overall Shanghai Containerized Freight Index (SCFI) fell 2% w/w but was 87% higher y/y.

+ Freight volumes trend: The global container shipping volume surged 10% y/y in January 2017, a marked acceleration from the 3% growth in the full year 2016. However, we will need to see February’s performance before we can ascertain the global container shipping demand outlook due to trade distortions from the different timing of the Lunar New Year holidays y/y.

TRANSPACIFIC TRADE LANE

+ Freight rates trend: Freight rates weakened w/w on both US West Coast and US East Coast lanes. The CCFI fell 4% and 2% w/w on the US West Coast and US East Coast trade and were still 19% and 4% 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 6% w/w for both US West Coast and US East Coast freight but were still 76% and 64% higher y/y at US$1,424/FEU and US$2,887/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%, 0.9x 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, Volumes & Asian Shipping Stocks Monitor Week 12 of 2017: Asian Transpacific Volume

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

Container Freight Rates, Volumes & Asian Shipping Stocks Monitor Week 12 of 2017: Asian Transpacific Rate

ASIA-EUROPE TRADE LANE

+ Freight rates trend: Freight rates held steady w/w on the Europe trade lane. The CCFI held steady w/w and was 54% higher than last year’s dismal levels. However, spot freight rates (based on the SCFI) fell 5% w/w to US$819/TEU but were still 300% 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, Volumes & Asian Shipping Stocks Monitor Week 12 of 2017: Asia Europe Volume

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

Container Freight Rates, Volumes & Asian Shipping Stocks Monitor Week 12 of 2017: Asia Europe Rate

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%, 0.9x P/B), Hyundai Merchant Marine (28%, 1.6x P/B), COSCO Shipping (28%, 2.3x 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 was steady or higher on Japan, Hong Kong, Korea and Southeast Asia routes but fell on the Australia/New Zealand routes. On a y/y basis, the CCFI was lower y/y for the Korea trade lane but 3%-5% higher for the Japan, Hong Kong, Southeast Asia and Australia/New Zealand routes respectively. Spot freight rates (based on the SCFI) fell 2% and 4% w/w for the Japan and Australia/NZ trade lanes but rose for the other trade lanes w/w. On a y/y basis, spot freight rates rebounded strongly on the Japan, Southeast Asia and Aus/NZ trade lanes but weakened further on the Hong Kong route.

Chart: Container shipping freight rates (Week of 17 March 2017)

Container Freight Rates, Volumes & Asian Shipping Stocks Monitor Week 12 of 2017: Freight rate

Implications on stocks:

Listed Asian carriers with the largest capacity exposure to the Intra-Asia and Oceania related trade lanes are SITC (100%, 1.9x P/B), Wan Hai (49%, 1.1x P/B), COSCO Shipping (21%, 2.3x 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, Volumes & Asian Shipping Stocks Monitor Week 12 of 2017: Timecharter

BUNKER FUEL PRICE TREND

Bunker fuel prices fell 1% w/w at US$357/ton but are 61% higher y/y ytd. 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, Volumes & Asian Shipping Stocks Monitor Week 12 of 2017: Bunker fuel

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, Shanghai Shipping Exchange.

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