A structural overcapacity of container shipping and irrational competition among liners have forced the industry to dump prices even in the face of losses. The best hope we have is for the arrival of temporary sanity. The question is, has that time come?
The evidence suggests not yet, and if the summer shipping peak is weak, the 1 July rate hikes will not last. Nevertheless, we believe carriers will take stronger action from October, leading to possibly more sustainable rate restoration in late 2013/early 2014. We remain Neutral on the sector, with our top picks in OOIL and SITC. We downgraded EPS and also target prices across the board on a tougher competitive environment.
Tough luck, tough markets
Demand for Asian goods has been weak so far this year, with European imports down 2% yoy in 1Q13, partially offsetting a 6.5% increase in imports to the US West Coast. For the full year 2013, we are expecting flat European imports and just 3% growth in US imports. Under such conditions, carriers would need to exercise collective discipline, but while the Big 3 have been responsible, the others have not exercised the restraint that is necessary to protect freight rates. Cargo interests are in the driver’s seat and while 1Q13 rates were still above last year’s, rates have deteriorated materially as the year progresses.
October a turning point?
Once the peak season passes, spot rates will probably weaken again and carriers should be finally motivated to suspend more loops, idle their affected vessels, and not just rely on piecemeal sailing omissions to manage their capacity deployment. If this happens, we can hopefully expect more sustainable spot-rate increases towards late 2013 and early 2014. This would be quite consistent with what happened in: (1) late 2009 and early 2010; and (2) late 2011 and early 2012.
Sector and stock strategy
Despite a lack of immediate-term catalysts, we have Outperforms on OOIL and SITC as their risk profiles are lower, valuations not lofty and books intact as full-year losses are not expected. However, momentum investors can wait for more supply discipline to emerge, as this will prepare the ground for potentially more successful rate hikes from late 2013. We are cautious on CSCL and NOL, where full-year losses are expected, unless share prices correct further.
Publish date: 25/07/13