■ Container freight rates fell to extremely low levels this year, and remain unprofitable, but we think the ingredients are coming into place for a modest recovery in 2016.
■ The Asia-Europe (AE) trade was the weakest link this year, but forward indicators suggest restocking is near as European retail stocks have dropped so much.
■ Idled ships have rise to almost post-GFC highs, underlying carrier determination to push rates higher. We believe spot rates could recover between now and summer.
■ Our top pick is OOIL, but we also have SITC as an Add.
Time to trade the sector
Although freight rates remain very low, and carrier results in 4Q14 and 1Q15 will be bad, the share prices are no longer declining, suggesting that the market believes the risks are in the price. This sets the stage for share price recovery once the fundamentals of the industry improve; we expect rates to recover over the next six months into summer.
Asia-Europe trade should recover in 2016
Asia-Europe (AE) volumes fell 4.7% during 9M15, after growing 8.1% yoy in 2014. But restocking is imminent as retail inventories in Europe have declined so much, while retail sales remain strong. The European Commission's indicator of the retail industry’s intention to place orders has risen to positive levels for four consecutive months. This has traditionally been a good forecaster for when trade volumes might improve.
Transpacific trade should remain on a positive trajectory
Transpacific (TP) volumes grew 5.7% yoy during 9M15, and growth is expected to continue into 2016 as fundamentals continue to look strong. Retail sales have continued to grow modestly, and while inventories have risen, they are not excessive and are an indicator of the confidence of the US retail sector. On a more macro level, US Leading Economic Indicators continue to show a positive yoy trend, housing starts continue to rise and unemployment remains low.
Intra-Asia trade volumes should grow faster in 2016
During 7M15, the Intra-Asia (IA) trade grew only 1% yoy, impacted by the weaker AE trade volumes. But if both the AE and TP trades grow in 2016, the IA trade should also see higher volume growth, particularly between China and Southeast Asia.
Structural supply growth remains troublesome
The structural oversupply in container shipping is getting bigger, and this will ultimately smother freight rates as carriers have no incentive to keep ships idle. But every now and then, idle rates do spike, opening an window for freight rate recovery.
Historical data suggest that share prices can rebound quickly when conditions are right, but also fizzle out fast
. We think share prices may recover and reach a peak by April or May, three months ahead of the freight rate peak which we expect to be around the July or August peak season. If we are wrong and freight rates fail to pick up, the downside for investors is protected because OOIL’s P/BV valuation is already at its trough
. (Read Report)
Source : CIMB Research
Labels: Shipping Sector