Shipping Equities gain from structurally improving sector outlook

25 July 2017, Global – Although we are not out of the woods yet and newbuild vessel deliveries are expected to rise h/h while the rate of scrapping has fallen, the global shipping sector is looking a lot better than its dire straits in recent years. Never in the last 30 years history of shipping has the global vessel orderbook-to-fleet ratio been so low at 10%. This has reduced the risk of protracted oversupply in most vessel segments in the next 2 to 3 years unless there is a resurgence of substantial newbuild vessel orders.

The dry bulk shipping sector has the smallest orderbook-to-fleet ratio and also the smallest demand-supply growth gap going forward among the major shipping segments. At the other end of the spectrum, the LNG and LPG shipping segments have the highest orderbook-to-fleet ratio and largest demand-supply growth gap respectively.

The equity markets have been quick to price this in, as reflected in the 30% rally in the Asian shipping stocks on average in the past 12 months. Excluding OOIL (316:HK) and COSCO SHIPPING Holdings (1919:HK) whose share price performance was boosted by their M&A, the top 3 stocks with the strongest share price performance in the past 12 months are the dry bulk shipping companies Pacific Basin (2343:HK), Korea Line (005880:KS) and Sinotrans Shipping (368:HK) while the tanker shipping companies have generally underperformed the sector. Improving earnings could drive the Asian shipping stocks higher, particularly from next year.

The average sector valuations have rebounded to slightly over 1.0x Price/Book. Major large cap shipping stocks that are trading at a discount to their book values are COSCO SHIPPING Energy (1138:HK), Mitsui OSK (9104:JP) and Nippon Yusen Kaisha (9101:JP) while SITC (1308:HK), COSCO SHIPPING Holdings (1919:HK) and Hyundai Merchant Marine (011200:KS) have the highest valuations among the Asian shipping lines.

 

GLOBAL SHIPPING CAPACITY GROWTH IS EXPECTED TO TICK UP TO 4% THIS YEAR BUT STILL WELL BELOW THE HISTORICAL AVERAGE GROWTH PACE OF 11%

The global shipping capacity has been growing at 11% per annum in the past 30 years. The downshift in the pace of global trade growth as well as the cumulative industry oversupply has led to a deceleration of the global shipping sector’s capacity growth since 2011.

The shipping industry’s capacity growth hit its lowest point last year at 1% and is likely to grow around 4% this year.

Capacity is still growing ahead of the global shipping demand and the number of newbuild vessel deliveries is expected to rise h/h in 2H17. However, this industry oversupply trend is likely to reverse in the next 2 years in most of the shipping segments. 

Chart: Global shipping capacity in the past 30 years (1988 to 2017)

Chart: Global shipping capacity in the past 30 years (1988 to 2017)

 

THE GLOBAL ORDERBOOK-TO-FLEET RATIO HAS FALLEN TO 10% – ITS LOWEST LEVEL IN THE PAST 30 YEARS

Although we are not out of the woods yet and newbuild vessel deliveries are expected to rise h/h while the rate of scrapping has fallen, the global shipping sector is looking a lot better than its dire straits in recent years.

Never in the last 30 years history of shipping has the global vessel orderbook-to-fleet ratio been so low at 10%. Only 186 million dwt of new capacity remains to be delivered as at July 2017.

This has reduced the risk of protracted oversupply in most vessel segments in the next 2 to 3 years unless there is a resurgence of substantial newbuild vessel orders.

Chart: Global orderbook-to-fleet ratio in the past 30 years (1988 to 2017)

Chart: Global orderbook-to-fleet ratio in the past 30 years (1988 to 2017)

 

DRY BULK SHIPPING HAS THE LOWEST ORDERBOOK-TO-FLEET RATIO WHILE LPG SHIPPING FACES THE GREATEST OVERSUPPLY AMONG THE MAJOR VESSEL SEGMENTS

From having the largest orderbook-to-fleet ratio of nearly 80% among the major shipping segments during the global financial crisis in 2009, the global dry bulk shipping sector’s orderbook-to-fleet now ranks the lowest among the major shipping segments at only 7.5%.

Chart: Global bulkcarrier orderbook-to-fleet ratio (1996 to 2017)

Chart: Global bulkcarrier orderbook-to-fleet ratio (1996 to 2017)

 

Chart: Orderbook-to-fleet ratio of each major shipping segment (2017)

Chart: Orderbook-to-fleet ratio of each major shipping segment (2017)

 

The dry bulk shipping sector also has the smallest demand-supply growth gap going forward among the major shipping segments.

At the other end of the spectrum, the LNG and LPG shipping segments have the highest orderbook-to-fleet ratio and largest demand-supply growth gap respectively.

Chart: Demand and net capacity growth forecasts of each major vessel segment (2017)

Chart: Demand and net capacity growth forecasts of each major vessel segment (2017)

SPOT MARKET FREIGHT RATES HAVE GENERALLY REBOUNDED FROM LAST YEAR’S LOW LEVELS

Although the shipping industry is still digesting the oversupply accumulated in recent years, most vessel segments’ freight rates have started to recover, led by the dry bulk shipping sector with the Baltic Dry Index (BDI) rebounding by 90% y/y ytd.

Only the LPG shipping segment suffered rate declines of 18% y/y ytd this year as it has the largest demand-supply growth gap among the major vessel segments this year.

Chart: Year-on-year change in spot market freight rates in each major vessel segment (1H17)

Chart: Year-on-year change in spot market freight rates in each major vessel segment (1H17)

 

EQUITY MARKETS HAVE BEEN QUICK TO PRICE THIS IN

The equity markets have been quick to price this in to a large extent, as reflected in the 30% rally in the Asian shipping stocks on average in the past 12 months.

Excluding Orient Overseas International OOIL (316:HK) and COSCO SHIPPING Holdings (1919:HK) whose share price performance were boosted by their M&A (see our report below for the details), the top 3 stocks with the strongest share price performance in the past 12 months are the dry bulk shipping companies Pacific Basin (2343:HK), Korea Line (005880:KS) and Sinotrans Shipping (368:HK) while the tanker shipping companies have generally underperformed among the Asian shipping stocks. Improving earnings could drive the Asian shipping stocks higher, particularly from next year.

Sweeter deal for acquirers COSCO (1919:HK) & SIPG than for target OOIL (316:HK)

Chart: Asian shipping stocks 12-month share price performance

Chart: Asian shipping stocks 12-month share price performance

 

AVERAGE SECTOR VALUATIONS HAVE RETURNED TO BOOK VALUE

The average sector valuations have rebounded to slightly over 1.0x Price/Book. Major large cap shipping stocks that are trading at a discount to their book value are COSCO SHIPPING Energy (1138:HK), Mitsui OSK (9104:JP) and Nippon Yusen Kaisha (9101:JP).

SITC (1308:HK), COSCO SHIPPING Holdings (1919:HK) and Hyundai Merchant Marine (011200:KS) have the highest valuations among the Asian shipping lines.

Chart: Price/Book valuations of Asian shipping stocks

Chart: Price/Book valuations of Asian shipping stocks

 

KEY RISK IS THE RESURGENCE OF SUBSTANTIAL VESSEL ORDERS – THE APPETITE FOR NEWBUILDS HAS INCREASED THIS YEAR ALTHOUGH STILL WELL BELOW HISTORICAL LEVELS

The appetite for newbuild vessel orders has increased, rising 27% y/y in 1H17, a turnaround from the 2 years of decline in 2015 and 2016.

However, the 24 million dwt of newbuild shipping capacity ordered in 1H17 is still well below the 106 million dwt average level of newbuild vessel orders in the past 20 years.

Given the excess global shipbuilding capacity, it is important to monitor the vessel ordering trend as aggressive newbuild ordering could easily cap the shipping industry’s recovery again.

Chart: Global newbuild vessel orders in the past 20 years (1998 to 2017)

Chart: Global newbuild vessel orders in the past 20 years (1998 to 2017)

 

THE PACE OF VESSEL DEMOLITION HAS DROPPED

Only 18m dwt of shipping capacity has been scrapped year-to-date. This is 42% lower than the same period last year. The rate of scrapping used to be x% in the past 10 years but this is likely to be only 2% in 2017.

With oil prices remaining low, recovering freight rates and the postponement of the implementation of the International Maritime Organization (IMO) Ballast Water Convention to 2019, the urgency to scrap the older ships will ease in the next 2 years.

Chart: Total shipping capacity scrapped (2007 to 2017)

Chart: Total shipping capacity scrapped (2007 to 2017)

 

Chart: % of global shipping fleet capacity scrapped (2007 to 2017)

Chart: % of global shipping fleet capacity scrapped (2007 to 2017)

 

Related Articles:

Global Dry Bulk Shipping Outlook – Is the current Baltic Dry Index (BDI) rally sustainable?

Global Container Shipping Outlook 2017: Capacity discipline is needed to support & lift freight rates; increased industry concentration helps

Rising South America-Asia trade lifts bulk shipping ton-mile demand and freight rates

Hard to break Maersk dominance but COSCO (1919:HK) may soon become world’s 2nd largest

Global Shipping: Qatar Crisis to drive ton-mile demand and freight rates up

Disclaimer: The contents of this website are strictly for information purposes only.  This website does not contain any investment, financial, tax, legal or insurance advice; you should always seek such advice only from professionals who are qualified, licensed and regulated in the respective relevant field.  Please read our Terms of Service before accessing or using this website.