Container shipping dominated the headlines last week, with Maersk, MSC and CMA CGM proposing a mega-alliance called P3, on top of the upcoming 1 Jul rate hikes. Share prices responded positively, but are now pulling back. Should we be bullish on container shipping again?
We have no doubt that the rates will rise on 1 Jul, but without more serious capacity discipline, the rate hikes could fade quickly. We are Neutral on shipping overall and have Outperforms only on lower-risk OOIL and SITC. Our top pick remains Pacific Basin as its valuations are compelling and dry bulk rates should bottom this year.
Asia-Europe rates fell by 3-3.5% wow last week, while transpacific rates fell 1.5-2%, perpetuating the weakness seen since the beginning of the year. Drewry described the rate collapse as ―panic‖, with carriers slashing rates to ―protect market share‖. However, given that carriers are driven by pressing financial necessity, we believe the Asia-Europe rate hikes on 1 Jul 2013 should also be partially successful.
Nevertheless, we share Drewry’s view that ― this year’s peak season between Asia and North Europe is unlikely to be good enough to justify the maintenance of vessel capacity at its current level, although no carrier or alliance looks as if it is ready to take remedial action yet‖. This suggests potential downside for rates after the 1 Jul hike. Also, the proposed P3 alliance will not take effect until 2Q14, and over the next six months, 37 vessels over 10,000 teus will be delivered.
Capesize rates jumped 40% wow for earnings to hit over US$10,000/day, driven by a combination of steel mills' restocking and relatively lower iron ore prices. Sources suggest that Chinese steel mills are not done with their restocking yet. Panamax rates also rose with plenty of coal cargoes out of the US Gulf and US East Coast. Supramax and handysize rates inched up slightly but the market was relatively quiet with a few coal fixtures reported out of Indonesia.
The shares of STX Pan Ocean were relisted again on 18 Jun after its 5 Jun suspension on the back of its bond defaults and application for court rehabilitation. Its share price fell 41% on the KRX and 61% on the SGX, to well below our target price of S$2.40. Given the lack of catalysts for the stock, we maintain our cautious stance. (Read Report)
Source : CIMB Research