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Transport Weekly
Published on 15 March 2013 in "I am an Analyst" and reproduced by courtesy of Charles de Trenck
BDI 880 +6%: The BPIY continues at rebound levels of mid-12 and is up about 3% on the week (slope of rebound is slowing), with long term concerns on China coal and ore inventories remaining. Reference ore prices came off quite a bit this week. Comments going around recently were that China is not going to buy ore at recent peaks. Moreover steel inventories are pretty chunky even if ore levels are down … A question would be the new run rate needed for inventories, which does not have to be at previous averages, and given lower growth trajectory for China…. Keeping a quick track on the dollar index, it is up about 3.6% YTD. Strong dollar is usually negative for shipping/commodities… only that shipping is so down at this point I would not hold this relationship key, except for its general impact to the commodities world… TANKERS behaving better… some are cautioning to keep an eye out for news on Suez Canal and Egypt
Investment stance: Gold shares still getting killed. I have stayed long dollar long US, but most things I have held that are China-related has been weak, ex anti-pollution themes. My health, anti-pollution focus brings me to flagging [XXXX] and how fast (after being ignored since IPO) it has gotten on the map. Macro wise (like GLNG after the Japan earthquake), it makes sense to look for names that can play the theme on China Cleanup. For me it has been Platinum. But I think clean engines… clean-up equipment companies all fit into a China eco-friendly theme that will be around for a very long time
MAIN APPROACH UPDATE
My approach has remained the same throughout – be conservative in a highly volatile sector.
Shipping, Logistics, Ports for me have always been about staying in tune with the pulse of world trade. On the whole, I don’t pay attention to WTO statements, national GDP data, senior management statements, rate hike announcements, etc. I believe in running real time series and cross-referencing what their inter-relationships are saying.
When is a correlation important? When could it breakdown? What is the raw volume data looking like? What time of the year is it? What’s our visibility like right now? Where is the value? In what currency or value marker terms? I have believed gold has been a more true marker of value and that it has shown US equities in general to be in the cheaper range, while not discounting the need to own some gold long term to defend against central bank fiat currencies gone wild. At the same time I have seen value in holding more dollars than other FX in recent months even if I always believe we should have a diverse holding of currencies and commodities.
My main support from oversold levels in the last few years has been certain areas of the US property market.
When it comes to shares I have stayed away from focusing on individual stocks “in and of themselves” and preferred to recommend making our own ETFs. Even in a weak market for shipping there has been a way to get exposure. I need companies with track records, reasonable managements and reputations, liquidity, market leadership, defensive exposure to liabilities (despite the Fed, Central Banks and commercial banks (up until 2008-09) telling the whole world to gear up on mind-numbingly low interest rates. I believe currently in long term ETF bundles for:
- Energy/infrastructure: Canada, coal, oil…companies oversold and unloved and generally trading at lower ends of multiples, whether Warren likes them or not…
- Shipping/Logistics/Traders: Market leaders and from levels that were relatively low long term. There are a few good leaders in Europe in this space. There are a couple in the US, and a few in Asia. For corporate governance/ethical reasons, I try to stay away from some companies with bad names (and abusing common sense such as in Ethanol…)
- US Consumer/healthcare: Without supporting big pharma overall, I have looked for defensive yield, good management. I have traded around positions in some of the big heavyweights of US retail/discounters
- Health: For a double dose and core concentration, I am increasing where and when I can clean living focus companies. There are not many listed and they trade at premiums. I have learned that sugar based consumer product and beverage companies are the biggest sells out there. America will have to change!
- Tech: I see this as consumer, and I have looked for bellwethers on sell-offs
China Rebar Inventories…
Source: Bloomberg
Note: Shanghai steel inventories higher in recent weeks but way below ‘10. BUT checkout Wuhan at 100% over ‘10 levels!
What happens to a stock when it’s got the right theme (note the share volumes out of nowhere)
Source: Bloomberg
CONTAINERS/PORTS/LOGISTICS
Data for Asia-Europe remains weak, with 2012 at about -4% (always getting revised…)...Hopefully 2013 can be better, but issues such as how weak the Euro is against the dollar and Italian and other crises could have positive or negative impacts. My view has been that the dollar is in steady rebound mode. If the dollar continues higher this could make Asia a little less competitive if Asia currencies tend to gravitate around dollar strength. On the flipside and to a less impactful degree for the Asia trade, this could help this could eventually help Europe export more. In the Transpac, although 2012 growth was not negative, the 2% type growth from Asia to the US was lower than 3-5% growth many of us had expected several months back. … Interestingly, US inventories were reported to be higher. LB and LA ports reported better Feb container port data with LA +17.0% and LB +36.6%. CMA is key driver of LB growth.
Asia Outbound Current Pattern (we’ve been relatively flat in big picture for some time now)
Source: Charles de Trenck
Note: 4Q12 picture not complete/still seeing revisions… 1Q13 needs March data to see proper direction given Chinese New Year interuptions
Question: How often do we get a jump like this in inventories?
(as we had in US this week…is it cause sales about to jump more? Or will volumes have to slow a little more?)
Source: Bloomberg
APL shelves the 53footers: Launched in November 2007, APL's custom-strengthened 53ft ocean capable containers are to be retired from the carrier's South China to Los Angeles service due to poor returns. “The economics just didn't work,” according to APL Americas' CEO, Gene Seroka. 53ft containers are basic to US domestic transportation. The 53 footers have about 60% more capacity than 40 footers Until APL's launch of the hybrids, standard 53ft containers were not strong enough for ocean voyages.
APM Terminals to operate Turkish terminal: APMT (Maersk) will build and operate the Aegean Gateway Terminal under a 28-year concession, with a $400m and in a phase I 1.5m TEU facility for mid-15 start. Bulk will also be part of operations. The port lies in the petrochemical complex of Petkim in Nemrut Bay, close to Izmir, the second-largest industrial city in Turkey. The initial 1.5m TEU capacity at the new container terminal is about 50% more than the current city port of Izmir at about 700,000 TEU a year. With a depth alongside of 10 m, Alsancak can handle vessels no larger than 2,500 TEU.
CSCL takes a share in APM (Maersk) Belgium terminal: CSCL is taking 24% in Zeebrugge from APM Terminals. The 2-berth terminal handles about 380,000TEU but capacity is for 1m TEU. SIPG has 25% as well. APM soldfor EUR27.2min 2010 the 25% stake.
SITC 94$m in 2012: I wasn’t too happy about the timing of the IPO, though my level of concern was never at the level of Rongsheng or HPH in terms of lack of compunction from company and bankers on IPO process/timing. Another issue was the positioning of the company’s image. That aside profit seemed to please in 2012. SITC said revenues rose to $1.2bn in 2012 from $1.1bn the year before and given about +15% in volumes. SITC’s revenues from China fell from $489m in 2011 to $439m in 2012. S Korea revenues more than doubledto $131m. Japan was + 2% to $428m. Japan is known for being a killer trade with SITC being a main culprit. In addition China- Japan relations will hold back growth here. SITC’s capacity for the year 2012 amounted to 1.8m TEU, up from 1.5m in 2011, it said. It also expanded its land-based logistics business, revenue climbing to $739.6m, from $673.6m in 2011.
RCL still in red….Horizon still in red: I neglected to mention RCL of Thailand posted a $62.7m loss for 2012. I notice shares rebounded in last couple of days though…Horizon Lines over in the US (that little carrier we spent some time a few years ago flagging for some excesses from Beltway Bandit types over in Washington DC) also reported its 2012 loss at $46.1 m.
Container bonds: China Shipping Group issued, according to reports, two batches of short-term notes worth about Rmb3.5bn ($562.9m) to fund container manufacturing and shipbuilding. Gee, didn’t CSCL just sell a whole bunch of containers to book some needed disposal gains. My head is spinning. The first tranche of the Rmb2.5bn paper, due in six months, pays an interest rate of 3.85%. The paper is jointly underwritten by China Development Bank and China Everbright Bank. Rmb700m of the new credit will “replenish the working capital of China Shipping Industry.”
BULK/COMMODITIES
Diana disappoints: Diana reported 4Q12 net income of $5m against $20m for the same period last year. Judging by the share reaction investors were not happy. It certainly has been a tough market out there. Vessel operating expenses were +30% (daily vessel op ex +6.8% to $7,128/day) against operational stats showing utilization in 4Q12 at 96.3% against 4Q11 at 99.2% 30 vessels end-12against 24 vessels end-11. TCEs were $17,681 in 4Q12 against $25,714 4Q11.
Also see http://seekingalpha.com/article/1274661-diana-shipping-s-ceo-discusses-q4-2012-results-earnings-call-transcript?part=single
Speaking of Bulk, and rebounds….It is interesting to see Precious Shipping enjoying a little of a rebound
Source: Bloomberg
Is gold price fixing investigation next? According to the Guardian and the WSJ, the London financial sector isbracing for another official investigation into alleged price-fixing following reports that a US regulator is considering launching an inquiry into the City's gold and silver markets. The Commodity Futures Trading Commission is discussing whether the daily setting of gold and silver prices in London is open to manipulation. The CFTC is examining whether prices are derived sufficiently transparently. The system of setting gold prices in London is unusual and involves a twice-daily teleconference involving five banks – Barclays, Deutsche Bank, HSBC, Bank of Nova Scotia and Société Générale – while silver is set by the latter three. The price fixings are then used to determine prices worldwide….
ENVIRONMENT
See comments on Beijing and China pollution front page and China sections….
The cost of compliance – sometimes out of reach: Lloyd’s List makes a good point that new environmental regulations coming into play over coming ears will see owners forced to instal ballast water technologies, and possibly seek to purchase exhaust gas scrubbers and take other fuel efficiency measures… But they may not be able to get the funding to do it! AP Moller Maersk expects rule compliance will cost the shipping industry $20bn a year. .. Newbuilding loans often come with clauses, or covenants, that dictate vessels must remain fully compliant with all maritime regulations. Owners that struggle with rule compliance, such as the pending ballast water convention, could find banks use this to foreclose on loans rather than provide more capital. …
BNSF to test LNG locomotives: BNSF, a subsidiary of Berkshire Hathaway, is said to be the second-biggest user of diesel in the country, after the US Navy. And now it is working on with the two principal locomotive manufacturers, GE and EMD, under Caterpillar, to develop natural gas engine technology that will be used in a pilot LNG locomotive program. The WSJ ran a big story on BNSF this week. This follows stories back in January raising questions about BNSF monopoly in the Bakkenfields and proposed pipelines debates, in other words the Keystone XL pipeline…
One of Warren’s better investments in recent years
(with some behind the scenes questions on market “influence and pipelines….market dominance issues)
Source: Reuters
TANKERS/SHIPBUILDING
Scorpio more share sales: Scorpio continues to raise funds from investors with a further 29m shares tranche of its common stock at $8.10 per share, a discount of 35 cents. Shares again reacted well post placement. The move aims to raise $235m to fund its acquisitions war chest, to pay for further acquisitions and provide working capital, as well as for general corporate purposes.
DSME going into Jackups: DSME is aiming to build up jackps, to take share away from Keppel and Sembcorp Marine that have about a 70% market share. … The need to diversify and be flexible is paramount given a lackluster pipeline for ships over coming years.
STX OSV to stay listed…: This has been one of the most unexciting takeovers in recent memory. Shares were at lows and they remain at lows. Meanwhile Fincantieri which failed to get much more than 4.9% shares in OSV to add to its 50.7%, will rename STX OSV as Vard
COSCO….oh COSCO, when will you learn
My mother would have said… “COSCO, you couldn’t organize yourself out of a paper bag if you wanted to…”
Months after saying it had some re-organization ideas planned to avert issues such as the Shanghai Stock Exchange placing trading limits on it due to potentially running into a third year of losses, COSCO Holdings ( H and A shares) this week came up with a plan to sell its 100% COSCO Logistics division back to COSCO Beijing. But Bloomberg later in the week quoted that over $4bn could be raised! The timing would be awful, and one might wonder what the company would look like after selling $4bn in assets!
Planned sale of COSCO Logistics with recurring earnings power $100+m range, with long term upside: …Here we go again. This is the division that was injected into COSCO Pacific (49%) to boost assets before IPO of COSCO Holdings, while also earning extra fees for senior directors. Then the 50% was sold back to COSCO Holdings...and now it may get sold back to Parent. COSCO had bought the other 51% from its parent in 2007 prior to its Shanghai IPO. …Not only is this is a poor band aid, it is also a look-see into a history of asset shuffling.
Event (WSJ summary) HK— China COSCO Holdings plans to sell its logistic unit to its state-controlled parent, China Ocean Shipping (Group) Co., as part of the Chinese shipping giant's efforts to improve its financial results in 2013 and prevent a possible delisting from the Shanghai Stock Exchange.
Initial thoughts (Tuesday): It is not any one transaction, but in the pattern that the full picture of the COSCO Logistics drama can be seen.
Original COSCO Holdings IPO process and valuations… a few long term questions on GROUP as whole here:
- Asset transfers back and forth
- COSCO Logistics continuous transfers between divisions
- Wei Jiafu role
- Add ship asset timing gaffes – the big ones on the ships at wrong prices
- Bulk division massive underperformance (and check those fees please)
- Accountant issues… PWC as accountant for life
…
COSCO Logistics follow on thoughts (Wednesday)
….COSCO Holdings dropped a fair amount (about -5%) on the back of its nonsensical logistics unit planned sellback (according to everyone else, check market response) to its parent to book an intended disposal gain to avoid (or partly cover losses against…) Shanghai Stock Exchange chastisement, and due to its guidelines on loss making companies, etc. As the week wore on it became clearer that more asset sales may be needed, potentially up to over $4bn (??), according to Bloomberg.
….CIMC also fell in with COSCO Holdings as a stake sale was mentioned in press as a potential strategy by parent. By Wednesday it was the turn of COSCO Pacific to sell off at about -4% on early morning trade.
As to CIMC – I would not off the bat agree that it should start a new business in ship leasing, as per recent reports, since it has no core competence there. … and especially as it is competing against its partial parent, COSCO, …the other being China Merchants…. But if it is going to get cheap money from China Inc, and for container ships mostly built in China, and aim for economy of scale as it appears to be aiming for. …Perhaps there will be a role for it as ship lessor down the road. It is certainly too early to tell now. But as such I am fascinated to see what happens next on this front. Who knows – maybe COSCO will do a sale-charterback of some selected ships to vehicles such as CIMC – and at some point where CIMC could be more independent of COSCO (and that be a good thing). Who knows? As observers we need to see if CIMC becomes a ship lessor of scale, and if it gets the portfolio management thing…
As to COSCO Pacific – there was a 1 day delayed effect and selling started on Wednesday rather than Tuesday for the parent, potentially in response to the messed up strategy of the various parents. Who knows…
I continue to ask for mainstream press to take a proper look at the COSCO Group of companies. Even the easy pieces such as the crazy sale of logistics back to Beijing parent can still not be covered in any great depth. The SCMP put one small paragraph on it on day 1, followed by a Bloomberg story on day 2. The WSJ tried to do a better job. But there is still no understanding of the process and failures of the Logistics division, which was first pre COSCO Holdings IPO injected into COSCO Pacific at 49%, etc (I have explained this process before*) ...This division and stakes in it have been transferred back and forth with investors at times paying money for it. Now it is taken away from investors. For all we know the Beijing parent may sell it back to investors again later in another IPO!
For its own merits and failures, one forwarder had this to say about COSCO Logistics upon hearing of its intended sale back to parent:….
“Cosco Logistics? What is it? Sell what? Over the years Cosco has spawned logistics companies like Kenwa, who "jumped ship" joined CSCL as a slot charter semi NVOCC and changed their name to Rich Shipping. Cosco Air had one if the first A licenses for air freight. But had no sales offices anywhere in the world and went from being one of the only master loaders to being one of the only ones not moving any significant cargo. This is an organization that wasted the good years and ends up without a clue.”
*At first the logistics division was an internet concept back in ’99 – ‘00, running off the back of B2B relationships of the Group’s back end, along with legacy businesses accorded COSCO and other China state companies, legacies such as running off printers trade documents for a fee, as well as other captive China business. Ironically this was foisted onto investors first by Sinotrans Logistics, again at wrong valuations (because China was going to have to phase it out, and this was not properly explained to investors by bankers, while syndicate rules by bankers limited what analysts could say in deal research, for instance…). COSCO Logistics got the tail end of this. As COSCO Logistics grew, and as logistics in China grew by leaps and bounds with COSCO underperforming some of this BUT still growing, COSCO got higher valuations for injecting its stake at first in COSCO Pacific, on its way to playing a shell game for investors managed by investment banking franchises that won the COSCO Holdings mandate from COSCO leaders such as Wei Jiafu. What Weijiafu wanted was a big IPO for COSCO Holdings…one which raised lots of money for a company that had been fattened up – so they injected a COSCO Logistics stake first into COSCO Pacific. … Later on COSCO Pacific would sell its COSCO Logistics 49% stake to COSCO Holdings – and now COSCO Holdings is selling its larger COSCO Logistics stake back to its parent. … WHAT DID SHAREHOLDERS GET FOR THIS 10 YEAR HISTORY OF COSCO LOGISTICS? ….
…
As George Clooney said in one of his films on CBS News early days newscaster Edward Murrow….Goodnight and GoodLuck (http://www.youtube.com/watch?v=kCaBCdJWOyM)
“Anyone who isn’t confused really doesn’t understand the situation.”
CHARTS OF THE MONTH … Check out the number of buy ratings here (also look at Sing MRT vs HK MTR)
SMRT Snapshot of broker ratings
Source: Bloomberg
No love lost for Singapore’s mass transit after it mishaps
Source: Bloomberg
CHINA NOTES
Pollution in China remains one of my key themes. I believe China’s leadership will be defined by what it does here, given that many local and some senior leaders openly allowed for decades the dumping of inordinate waste and unchecked wasteful production all over China. 10 years ago my main complaint was allowing for economic growth to be above what was necessary while allowing antiquated steel, coal, etc capacity to run alongside newer, cleaner production facilities. The list of mistakes is long. China needs to go into full reverse on this.
A couple of years ago, my friends at Environmental Services (Eisal) flagged China Everbright International as being on the right theme, though others have raised concerns on cash flow which must be examined long term….
Taicang strong growth…: Taicang terminal reported a total container 4.01m TEU throughput in 2012, or +39%. So farYTD Taicang is about +18% for Jan-Feb. Suzhou port has focused on Taicang for several years, now with MTL (51%) and COSCO Pacific (39%) as ownershttp://www.tac-gateway.com/eng/index.jsp
Ningbo Port planning Rmb 1bndomestic bond issue: A three-year bond, underwritten by Bank of China International, is the second tranche of a Rmb2bn quota approved by China’s securities regulator in 2010. Ningbo Portraised the first Rmb1bn in April 2012 at a fixed interest rate of 4.7% per annum. Rates of the new issuance will be decided after bookrunning is complete, Ningbo Port said in an exchange filing. …. SIPG.bonds: SIPG will sell 3bn RMB in one-year bonds, according to a statement on the Shanghai Clearing House’s website on 5 March.
Qingdao Port ore terminal: Qingdao Group has started the operation of its new 400k ton iron ore terminal at Dongjiakou port, SinoShip and others reported. This is one of the largest iron ore terminals in the world with annual capacity of 40 m tons. Dongjiakou becomes the first Chinese port that could officially have the technical capacity to receive Valemaxes.
Iron Ore: As of March 8, combined iron ore inventories at 30 major Chinese ports declined by 2.98m tons from a week ago to 66.54mtons, the lowest level since mid-January 2010 according to data from mysteel.com. Iron ore stocks decreased to 77.75 m tons at 34 Chinese ports compared with the previous week, according to the China Securities Journal…. See the steel inventory charts. This has been expected and is a continuing trend. One reason given is that ore prices are on high side and buying would only come in at lower price points. One additional thought, as seen with US oil inventories a few years ago, is with industry deceleration comes a need to seek normalization around new averages as the old averages get thrown out the window.
From Caixin
(http://shanghaiist.com/2013/03/12/infographic_chinas_new_super_ministries.php)
Author: Charles de Trenck / Publisher: SCMO
Goldilocks: For Mature Audiences Only
Published by Transport Trackers on 20 March 2012 and reproduced by courtesy of Charles de Trenck
- Global growth is back… or is it?
- The 90s-00s had seen a 10% rate of containerization
- In a real sense the Greenspan Illusion 2002-07 was +2-3%
- Peak distortion was +5%
- Until the ‘00s acceleration containerization centered around 8%
- Recently averages have been closer to 5%
- Our working assumption is long term 7%, short term 4-7%
- Med-case on vessel supply is normalization by 2016
- We are at about 1m TEU of capacity marginalized now
- We also have many quasi-obsolete ships….
- Obsolescence can be down to wrong size ship
- Gap between weak and strong is huge (operational and financial)
Figure 1: Mapping Deviations From Long Term Growth, ’95 – ‘ 12E
Source: Transport Trackers
Containerization: A New Phase of Lower Growth Since 2008…
Goldilocks… For Mature Audiences Only. We’ve been dying to use this title. Growth has decelerated long term. In essence we are in Year 3 of China’s export story deceleration. And yet, the US is now recovering a little better than expected 6 months and Europe has stabilized a little. A recovery US economy has raised a lot of hopes. But this is not an ordinary recovery by any stretch. Not in terms of economic activity and neither in terms of container shipping.
The bad news for some time has been there are too many ships. The silver lining is that there are too many of the wrong ships out there. But to get to the silver lining we still need the consolidation of the coming years. Keynesian over-spending has not helped, as it has kept demand artificially higher, which may offer false hope to owners of certain vessel types.
Some vessel owners and operators have pointed out that the average useful life of vessels in coming years could fall to 20 years from 25 years. Of course we are not going to get accountants and owners to recognize this. But effectively there are many ship types that could head to the scrap heaps given small nudges. Many ships in the range of 5,000 – 6,000 TEU could be severely marginalized if they consume too much fuel or are owned by financially weak owners. At the moment, according to Alphaliner and others, we are at about 1m TEU of idled vessel capacity. This is against a standing fleet of about 15.5m TEU according to March 2012 Clarkson data.
Here is what the fleet growth looks like long term. The dotted red line is the long term trend. The bold red line is the actual capacity data. The problem was the bold line exceed the long term trend just as demand decelerated globally – meaning the problem is not fully over unless demand really takes off (and more vessels taken out). We may have strong players come out better, and we may have rebounds. But a full cleaning is still needed.
Figure 2: Container Capacity Growth in TEU, 1994-12E
Sources: Clarksons; Transport Trackers
The problem of too many ships is not going away unless 2012-13 sees a very strong economic recovery leading container demand to jump from 4-7% to above 10%. When we overlay demand onto capacity the problem crystalizes.
Figure 3: Long Term Demand vs Supply… and the big gaps, 1995 – 2012E
Sources: Clarksons; CI; Carriers; Transport Trackers
In terms of vessel supply there are too many ships headed for the long-haul trades. We have all known this. However, there is one small positive structuraldevelopment, though there are still too many ships. Recently, most analysts would have said that 10,000+TEU ships were ALL headed for the Asia-Europe trade. But this month MSC deployed a 12,000TEU vessel into the Transpacific, which offers the potential for less ships to flood into the Asia-Europe in this critical 2012-13 period (when there are too many of these ships). However, it is still not expected that there will be a flood of 10,000+ TEU ships flowing into the Transpacific before 2014-16, as most terminals will be able to properly handle these ships.
Nonetheless this is a small positive development. Back to reality: About 50% of vessels in the orderbook are 10,000+ TEU ships. In terms of the 2012 orderbook, which will still be at least a couple percent above demand there is little that can be done as most ships are close to fully paid. But by 2013-14, we should expect the orderbook to be stretched out into further years. And by 2015-16, we should have been through the difficult period of dealing with marginal tonnage and experience better demand – supply balance. Unless… (play Jaws music here). One significant difference will be the capex gambits will cost more with 10,000+ TEU and 14,000+ TEU ships, narrowing the field of players.
For the immediate future here is a snapshot of the fleet distribution and orderbook, with a focus on seeing (upper pie chart) that there are a lot of 4,000 – 7,500TEU ships (about 40%) in fleet which may have trouble identifying their use, especially if fuel consumption is not good. And then, in the orderbook (lower pie chart), there is a need to focus on about half being 10,000+TEU ships destined for long-hauls.
Figure 4: Types of Ships in the Fleet (10,000+ TEU at 10%..., but…)
Sources: Alphaliners
Figure 5: Types of Ships on Order(…just about half are 10,000+ TEU…so still a problem ‘12-‘13)
Sources: Alphaliners
And here is a snapshot by carriers:
Figure 6: World Fleet and Orderbook Distribution in TEU (Jan/Feb 2012)
Sources: CI; Transport Trackers
It is interesting to see that the top 5 and top 10 generally have larger than average ships on order than the world fleet. On average a ship on order has a profile of 7,275TEU per ship – but 3 of 4 13,000 TEU per ship avg size orders for their OB are in the top 10. CMA, Hapag and Hanjin pop up as having the greatest concentrations of big ships on order. This can mean different things of course, without further analysis, but generally speaking it means that their wagers were in the long haul and Asia-Europe trades. So, who will still feel the need to order more? For delivery when? Will they have the patience to wait for 2015-16?
Demand and Rates
Our view was that the negative volume momentum data was running out in 4Q11 and it was a 50-50 shot as to the base would build higher or stay flat. It depended somewhat on equities and how people felt following a long bout of declining demand growth post the big post crisis rebound. Asia-Europe we expected, and still expect, to be a little weaker than the US. 2012 at the moment should see mid-single digit demand growth long haul, coming up from zero growth experienced into end 2011.
Figure 7: Long Haul Container Demand Growth, Jan ’06 – 1H12E
Sources: FEFC; CTS; JOC; Transport Trackers
For Rates, we agree they have/had to move up, but…. We are in the part coming from the bottom of the cycle where rate increments – “GRIs” – should have some success. However, it is always pretty much about partial, not full implementations. So given that rates in 2011 fell about 9% across the board while nominal fuel costs rose some 30%, it makes complete sense rates should rebound.
Below is our long term tracking of global rates
Figure 8: Global Average Rates and Long Haul ex-Asia Rates vs Global Demand, in Percent 1980 -2012E
Sources: CI; Carriers;Transport Trackers
Rates out of Asia will rebound faster than global rates, as is the usual pattern. But also higher rates are “merely” recouping the lost ground from higher bunker fuel prices. In fact 380 CST bunker is pretty much at record levels above $730/ton, which is where they were in 2008 when WTI was at $140+ versus current $100+. Of course there has been the Cushing oversupply issue. But also this has meant hedging has not been effective. Brent also was still higher in 2008 peaks than current levels. The issue of bunker costs and vessel efficiency is an entire report by itself. But we would emphasize that players with better fuel utilization ships will do better than those operating legacy ships. At the moment we are looking at bunker usage being about 30% more efficient on newer design vessels. If oil prices stay high this will offer an immense advantage to those positioned with more efficient vessels.
Author: Charles de Trenck / Publisher: SCMO
Big Steel, Price Swings of Yesteryear… and Dominance Role Reversals
Reproduced from a 19 April 2010 article by courtesy of "Transport Trackers"
Given the recent stories on steel and price hikes we took a quick look sample historical reactions to price hikes. In April 1962, John F. Kennedy panicked after US steel companies proposed to raise steel prices $6/ton, as the proposed rises threatened his economic program. He went on TV, after earlier planning a multi-pronged campaign against Big Steel, to denounce the steel companies price change decision (“in ruthless disregard…” Please refer to http://www.youtube.com/watch?v=x‐sIYl5C4mY). ...
If one thinks about it, a ton of steel was $20 ‐ $40 in the 1920s while an ounce of gold was fixed at $20.67/oz before the Fed appeared to get a present from Roosevelt in 1933 through the re‐fixing of gold at $35/oz. Steel per ton could loosely be put at $600 ‐ 800/ton today against about $1,100/oz for gold. Just an observation: Steel is up by a factor of about 20x in a century; gold is up by a factor of about 40x... We are not experts in steel and commodities, simply interested bystanders wanting to know more about many of the products going on ships, and their drivers.
Margins for the US steel industry were estimated, in an article of the day citing AP Business News, 10 April 1963, at about 4% net profit margin in 1962, down 15% from 1963. In comparison, US steel in 2009 had a negative EBIT margin over 15%, though this had come after a five‐year streak of EBIT margins averaging just under 10% prior to 2009.
Kennedy’s 1962 frontal assault on Big Steel led US steel companies to drop prices even below levels they had tried to raise them from (the attack coming when margins were 4%). By 1963, a number of papers came out on economic effects in the steel industry, with none other than Townsend’s Greenspan (remember Greenspan’s consultancy firm?) preparing a paper for the Society National Bank of Cleveland, among other papers, showing that US GDP between 1955‐62 increased 20% in real terms but that the steel industry, one of the centerpieces of the US economy at the time, was slowing in real terms, given only a 5% expansion during the period.
The article citing Greenspan (an analyst at Wellington submitted to the Financial Analysts Journal for November 1963) went on to speak of the US loss of market share to foreign producers. … In other articles we saw talk of 2.5 – 3.5% wage increase complaints from steel bosses. But overall, we got the feeling from most discussions that a lot of people walked around assuming flat costs, especially raw materials sourcing. Another thing people/ organizations did, as seen in many articles of the time available for viewing today via Google, is repeat verbatim press blurbs, so quite often price rise announcements simply stated the quantum of rise with no reference to base price (ie, it’s difficult to get one’s bearing on price points). … From reading articles from the 1920s on steel, on comparatively more turbulent times for steel prices than the late 50’s and early 60s, the price of steel had about doubled between pre‐ and post‐ WWI from about $20/ton to about $40/ton.
We had noted in recent weeks, some research reacting to iron ore price increases without appropriately adjusting for cost increases 1 . We still think more work needs to be done on this front, but some, among others, have flagged the impact of higher spot iron ore and quarterly contracting for some of the mills that historically relied more on annual contracting. Margin squeezes and demand patterns after price rises appear important questions/topics...
1 We could not believe one note we read from a large broker in late March ‘10, which raised steel price estimates for 2010 by LSD percentage points and put the average forecast for steel/ton for 2010 far below current price, with barely a mention of margin squeeze or indication of forward iron ore pricing views given the numbers laid out…. But we have seen other notes more recently doing a better job of forecasting margin squeezes. Still we would like to have seen a theme piece on steel looking at elasticities of demand in China and globally based on higher ore, coal, steel, etc..No doubt, someone is doing it. … Our long term view is that China needs to bring down production and demand which feeds into the construction of empty or low vacancy buildings, and stop stimulating for the sake of stimulating…China has taken baby steps in this regard, though in some sense even these steps have at times appeared more than that of the US Fed…But that’s just our view.
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So what’s changed in 50‐100 years of looking at price data and relationship?
Short answer: Not much, and everything. Today, repeating of press blurbs and sensationalism in headlines is perhaps still based on similar practices as in past. There are a lot more moving parts, to be sure. In the past, we could go years without a price change in an input. Later (in 60s, 70s??), some of that price stickiness was even down to command economy features, even in the US economy…Back then you’d get a US president dedicating speeches against price rises. Today we have infinite price changes of inputs and outputs, issues of over‐demand out of China, cheap capital from central banks, and…2The politics of steel perhaps haven’t changed as much as one would think, though. The politics were bad in the 1960s… and they are bad now.
What’s changed the most, in our view, is the order of things not just turning upside down (which Hegel or Marx would have understood/liked), but steel (and oil, etc) geopolitics are going in multiple directions at the same time.
In the heyday of the rise of the US as a superpower, it was about US dominance taking over from the British, etc. Everyone “knew their place...” 3The new good guys (US) were producing and dominating the market for key outputs. Sourcing contracts were in place and it was done more efficiently than the new bad guys (USSR) were doing it. Today, China (which was briefly aligned with the then bad guys) is producing more, if not most, efficiently, yet. And now it is sourcing at spot rather than on contract from developed and developing countries alike.
US Hot Rolled Midwest Avg $/ton, 1980 – Current (Monthly Series)
Source: Bloomberg
Notes
1 We could not believe one note we read from a large broker in late March ‘10, which raised steel price estimates for 2010 by LSD percentage points and put the average forecast for steel/ton for 2010 far below current price, with barely a mention of margin squeeze or indication of forward iron ore pricing views given the numbers laid out…. But we have seen other notes more recently doing a better job of forecasting margin squeezes. Still we would like to have seen a theme piece on steel looking at elasticities of demand in China and globally based on higher ore, coal, steel, etc..No doubt, someone is doing it. … Our long term view is that China needs to bring down production and demand which feeds into the construction of empty or low vacancy buildings, and stop stimulating for the sake of stimulating…China has taken baby steps in this regard, though in some sense even these steps have at times appeared more than that of the US Fed…But that’s just our view.
2Thisremindsus of a versionof “Stay” mostnicelyupdatedby JacksonBrownebackin the‘70s… (today… “wegottruckerson CB…”) from http://www.youtube.com/watch?v=jtuvXrTz8DY (1978 performance linked here)
3 …Until we got thinks like the Leontief Paradox… This takes us back to the Leontief Paradox on Heckscher Olin theorem problems, which was based on Leontief in 1954 (quite early on …) finding that the US, the most capital‐abundant country in the world, exported labor‐intensive commodities and imported capital‐intensive commodities in contradiction to the Heckscher‐Ohlin, which held that “a capital‐abundant country will export the capital‐intensive good, while the labor‐abundant country will export the labor‐intensive good.”
Author: Charles de Trenck / Publisher: SCMO
So you want to be an Intra-Asia Trade player?
Reproduced from a 12 March 2010 article by courtesy of "Transport Trackers"
Container veteran Niels K Balling contributed this think piece on Intra-Asia containers. We leave his title in place as it reminds us of the song by the Byrds, and later sung by Patti Smith (So You Wanna Be a Rock and Roll Star). Mr Balling notes, in passing, that the intra-Asia market is so big and complex that trying to boil it down in this fashion perhaps does not do it justice, so he apologizes in advance...
The Southeast Asia/North Asia countries comprising the core Intra-Asia market have become the largest container trade in the world, by far (despite some over-counting a few years back in a now infamous looking at the market by a well-known report we refer to sometimes). We exclude the Asia/Australia and Asia/India and Middle East trades as they are independent trades served by independent assets.
Key issues:
Total REAL profit pool of the core Intra-Asia trade is destined to remain miniscule
Only niche operators will be able to cover the cost of dedicated capital deployed to this theatre
Roughly 1/3rd of the trade volume is handled by main line operators on trunk routes
Rest evenly split between dedicated major services, feeder services, niche operations and domestic protected trades
The Main Line Operators (MLOs) provide negative marginal pricing to offset equipment positioning needs they have anyhow, and to build container terminal volumes that generates lower total terminal handling cost. In other words sunk cost discounted to zero (or less), combined with marginal pricing for growth purposes to achieve lower variable cost. That's not entirely crazy as the volume gain often will generate more value through terminal handling discounts than the real Yield of Intra-Asia cargo. And the discount may apply to the TOTAL volume thus leveraging the discounted Intra-Asia business to great effect.
Any dedicated operator (as some of the traditional Intra-Asia shipping companies will tell you) can never recover the cost of normal operations against such network economics.
Next come feeder (about 15% of Intra-Asia volumes) and the quasi feeder operations. The latter comprises about 55% of dedicated Intra-Asia services. These are services deployed for combined Intra-Asia trade and MLO network purposes. The feeder and quasi feeder operations work on the same discounted cost basis.
The only reason for existence of 3rd party feeder operators is that they can do it cheaper than the main line operators despite the latter counting on their own sunk cost. How can the 3rd party operators survive? In most cases it comes down to lower asset and capital costs - for as long as it lasts.
In other words on a net, net basis a relatively large part of the major Intra-Asia trades are served based on dedicated shipping services to their operational scope without any hope of rate or cost differentiation against the main line operators' network economics. They cannot bring specific financial value to the table that can support a dedicated operation. And they die – and get reborn – regularly.
Overall Intra-Asia has a negative profit pool due to the sunk cost approach by main line operators. That's a great trade facilitator and may continue to support rapid volume expansion of Intra-Asia container volumes.
But where's the money for the shipping investors?
There's a lot of money available in this profit pool. If one knows where to look. There are several niche opportunities as well as classic arbitration windows available.
The niches are fairly obvious, especially within the Refrigerated foodstuff area. This is becoming an interesting niche because of slow steaming by main line operators. Certain products, like bananas, are highly transit-time sensitive and need fast, reliable transport. The arbitrage opportunities are however an even more interesting and growth opportunity generating.
The Intra-Asia trade to a large extent is an outgrowth of the coastal economic development within Asia. Part of the success of Asia is that logistics costs were always low. This is no more a given. Redistribution within Asia is becoming more costly, though sea represents the cheaper option and contributes to reducing costs. Just think of haulage cost in Japan to outlier areas. Or Taiwan, Korea cost for trucking to other consumer areas. And/ but... China is now joining the game.
The Intra-Asia trade regionally is essentially similar to domestic haulage in the US and Europe.
There are no major green issues yet except Japan, where basic economics already make it very compelling to distribute to say Southern Japan via China by ship rather than paying huge costs over road and ferry via Tokyo or Kobe. In other words, use shipping to avoid domestic land based transport.
Intra-Asia will continue to provide growing opportunities for transport arbitrage opportunities, for new entrants. And Intra-Asia transport costs will continue to remain low based on intelligent MLOs going beyond normal yield management to leverage their network for ever better marginal cost throughout their global operations.
For both types of operators Intra-Asia will continue to expand in value.
For new entrants the advice is that deep understanding of their market of choice will make the difference between survival and quick demise.
Author: Niels K Balling / Publisher: SCMO
How Inflation Hits Asia’s Traders
Reproduced from a 2008 article published in the <em>Far Eastern Economic Review</em> <em>(now deceased</em>) — Reproduced by courtesy of <em>Charles De Trenck</em> — At the time, Mr. De Trenck was head of Asia transport research at Citigroup and had been following shipping since the mid-1990s.
A piece I wrote for the <em>Far Eastern Economic Review</em> last year (“Shattering Shipping Myths,” June 2007) might have seemed overly pessimistic at the time. I sketched out a scenario where demand for manufactured goods from Asia and China fell off steeply as a result of a property bust in the United States, as food andenergy costs rose further. Events have unfolded faster than I expected, largely because shipping demand in Europe slowed quickly and there was a sharp decline in U.S. inbound volume. The one bright spot has been a healthy rebound in U.S. exports.
Shipping, as ever, is a window into global trade and the global economy. Looking deeper into the global container industry can today elicit a better understanding of shifting trade patterns, rising production costs and declining consumer demand. And in comprehending the current slowdown in Asian exports and in global trade in general, we should now be looking at the slackening pace of economic activity and its impact in terms of how far along we are on the downward slope, and more importantly, how might growth trajectories shift us further down or back up.
Right now, we should be close — a matter of months perhaps — to a bottom in terms of export deceleration from Asia to the U.S. As for the European side of the equation, we are perhaps another six to 12 months away from a bottoming of export growth rates. Yet there are likely to be some notable differences from previous downturns. In?ation — coming after a long period of low interest rates — combined with China and commodity booms and a shifting role for the dollarare all part of this potent cocktail.
Using the economic slowdowns of the 1970s and 1980s for comparison is not straightforward given that global supply chains for manufactured goods were still relatively embryonic back then. Even so there is much to learn from what happened to bulk and tankers after the 1970s boom. What we should try to track is the difference between trade growth by volume and value, focusing on the ?ows of manufactured goods. Today, containerized trade transports far higher amounts of high-tech goods, as well as steel parts and agricultural commodities than was the case 20 years ago. With container trade tracking, we can look at both container port performances and vessel transport growth in order to better triangulate patterns.
China’s container port volume growth is slowing more than nominal trade statistics indicate. Total port volumes grew 17% in May and 15% in April, this level representing a signi?cant slowdown from the 23% levels one year ago. Shanghai, Shenzhen, Hong Kong and Qingdao have all seen overall volumes signi?cantlybelow the current average. Trade export values in dollars grew 28% in May and 22% in April (versus averages of around 28% one year ago). The difference represents a decline of about four percentage points.
China container ports have seen volume growth rates shift down from percentages in the mid-20s range to percentages in the mid to high-teens (when we exclude Hong Kong), representing a decline of about seven percentage points. The change in differential is at least a few percent, with the issue of the yuan only indirectly related. When we adjust to include Hong Kong in the calculation, which we must do at some stage given that Hong Kong still handles substantial chunks of China trade, up to 10 percentage points of growth are lost in the differential between value and volume.
Since 2007, trade volumes on container ships out of Asia have slowed to low single digit growth, but the value of trade relative to the volume of trade — the rise of prices in the system — has shifted up. The Asia export value data taken against container export volume growth, shows a distinct pattern: The value of goods’ exports is increasing faster than the volume of goods. The China export data, which of course represents the single largest component of Asia exports, shows the trend even more clearly.
The China trade and Asia container data for May give a clear warning that the value-volume differential is growing rapidly in 2008. This is starting to look a little like inflation with Chinese characteristics — which takes us back to the potent in?ation cocktail of low real rates and high commodities prices brewing in recent years.
That China volume growth would slow down somewhat was expected. And yet everyone has continued to think of China as the world’s workshop for cheap goods without realizing that volumes can lose out to higher prices. China’s input costs have shot up as have transport costs, of which one-third are fuel costs, while developed country demandin volume terms is shifting down more rapidly than can be seen using conventional terms such as store sales. Could it be that in?ation as glossed over with cpi-adjusted statistics is the wrong measure to use? Our tracking of the value-to-volume gap tells us instinctively this has been one of the built-in problems in tracking trade for years. It did not matter when volumes and values were similar. But it matters now.
The markets recently learned the U.S. consumer has shifted down demand, especially in volume terms. No doubt the U.S. consumer will stage rebounds in demand, especially if oil prices come back below some magic number such as $100. But what if the American consumer is forced to dispense with his or her disposable consumer society behavior for a couple more years because the pocketbook has shrunk and goods are structurally higher in price?
Inflation that has progressed from commodities to ?nished goods — higher steel prices to higher ship prices, to higher prices of Chinese goods — should work in reverse once demand slows. But not before bringing down average volume demand growth rates further. Until 2007, long-term growth of volumes from Asia to the U.S. was about 10%, with 2007 itself already coming at zero. The current run rate for 2008 is looking to be minus 2% if we stop decelerating in the ?rst half of 2008. To put that in perspective, long-term global containerized trade has runningaround 9% to 10% , with the U.S. driving the largest portion of that growth until 2006 and 2007, and Europe taking over in 2007.
Now the picture we are getting in 2008 is worse than expected in volume terms. Into the U.S., growth not only has slowed into ?at or negative year-on-year growth for a few months, but we are now down for the last 12 months on average. We have to go back to 1995 and 1996 to ?nd the same kind of volume slowdown. And Europe inbound container volume, which has seen long-term growth closer to 15% and about 19% in 2007, has also decelerated rapidly and is now running at the 10% level in 2008, and even that level is thanks to some continued pocketsof strength in the newer markets of Eastern Europe. The areas of weakness encompass most of old Europe.
To make matters worse, new ships are increasing the supply of shipping capacity. Demand in volume terms has decelerated about 10 percentage points on the key Asia-export trade lanes, while the more expensive recently ordered ships (regardless of operation speeds) will only be coming on line faster in the coming two to three years.
In?ation is still on the rise. Input, production and transport costs have all gone up. The question is when and how prices might fall as excess capacity forces shippers to compete for scarce customers. For the moment, we can’t assume cost pressures will ease soon. Thus we can’t assume demand volumes are finished declining — though we can speculate as to a potential deceleration in declines. As demand declines, there will be great opportunities to lower transport costs, and also to identify investment opportunities once lower growth gets priced in. But Asia needs to face the fact the run rate of demand is shifting down and that we don’t know just yet how this story will end.
Author: Charles De Trenck / Publisher: SCMO