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Cautious outlook for container shipping

by Charles de Trenck

Mr. Charles de Trenck is a Hong Kong-based shipping and ports analyst with Global Shipping Research at Salomon Smith Barney. His experience includes 10 years in Asia research. He received a Master of Arts in East Asian Languages and Cultures from UCLA in March 1993; a Master's Degree in International Management from Thunderbird's American Graduate School of International Management in 1988; and a Bachelor of Science in Chinese and Asian Studies from Georgetown University in 1985.

The basic thing to remember about forecasts is that they are moving targets and may appear in line with events for a few months at best. The following forecast for 2002 was generated in October-November 2001.

Our forecasts have three sub-industries in mind: container shipping lines, container ports and tankers. Container shipping lines and container ports are somewhat related. In Asia, the two appear linked by China export growth and US import growth. The main driver is US consumer demand.

Tankers tend to be more late cycle. Ultimately tankers also have a link back to US growth. But the main driver is industrial demand and OPEC volumes.

In a nutshell, our forecast for the upcoming year has called for the industry outlook to continue deteriorating-despite capacity management excercises. Container shipping offers the worst outlook. And we expect the current fallout in 2H01 and its spread in 1H02, to impact port operators to a certain extent as well. Certainly more so than in the past. However, it is important to note that by definition port operators are defensive relative to shipping lines. After all, ports get paid for moving empty boxes and shipping lines usually shell out money to move an empty box.

Salomon Smith Barney's views in a nutshell:

  • We remain cautious on the outlook for the container shipping sector for 2002. But we do see a silver lining for tankers despite being cautious near term
  • For container shipping, we expect gross capacity (before lay-ups) and demand volumes to grow 14.5% and 2.5%, respectively, in 2002

  • Over-capacity and demand weakness in 2001E -02E have thrown the industry into the worst tailspin in a decade or more (German banks may be worst hit given their loan book exposure)

  • We expect industry downturn and capital rationing to lead to more consolidations--we would prefer small M&As to larger deals

  • On the tanker front, we expect negative momentum in tanker rates to continue as a result of lower volume demand and OPEC volume cuts

  • But look for tanker rates to bottom-out by 4Q02. Major silver lining for tankers is increased scrapping given November '01 data

  • LNG transport is still a bright spot in shipping due to long-term and steady cashflows. MISC is the only LNG transportation play in Asia

  • China ports remain a growth story during industry downturn. But falling box prices likely to pressure box leasing rates and Chinese container manufacturer margins

  • Hong Kong container volume recover in 2002 after essentially flat growth in 2001 could be muted but could also depend on Shenzhen's ability to handle volume recovery in the Transpacific trade.

  • A rapid swing in the Transpacific Eastbound from low-single digit growth to high single-digit growth or higher could lead to improved volumes out of Hong Kong in 2002 given the fact that new Shenzhen capacity is not likely to be up and running until 1Q03 at the earliest.