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Shipping outlook 2008
Containers: Downside risks to earnings
Supply/demand fundamentals indicate overcapacity in 2008. We
forecast profitability on the Transpacific route to increase slightly on a yy
basis given liners’ strategy of restoring profitability by charging floating
bunker surcharges and controlling capacity, while we estimate rates on
the Asia-Europe route to see downside risks given the capacity
pressure. Earnings improvement is difficult in 2008 with US economy
still a risk to the sector.
Oil tankers: Consensus already low; upside surprise
Consensus freight rate is already low due to concerns over high crude
prices and large new deliveries. However, with the first IMO cut-off date
for single-hull tankers, 2010, now coming closer, we see more upside
risk in rate estimates than downside given the possible acceleration of
ceasing trading of single-hull tankers.
Dry bulk: One more good year ahead
2007 was an extraordinarily profitable year for dry bulk shipping
companies. While we forecast demand for dry bulk commodities to grow
slightly slower in 2008, we project tonne-mile demand to grow stronger
due to increased coal consumption by traditional Asian coal exporters,
with Japan and Korea sourcing coal from further areas, and limited
vessel availability. Therefore, we estimate freight rates to be higher on
average in 2008 than in 2007, given the continuing favorable
supply/demand fundamentals. However, upward trend will likely reverse
in 2009 when new deliveries speed up significantly.
BUY on CSD and HOLD on CSCL; Initiate CCH with a HOLD
We see upside risks to consensus earnings estimate for CSD due to the
higher-than-expected domestic coal freight rate increase and tanker rate
increase. We forecast CSD will post strong earnings growth in 2008-
2010. CCH will be the key beneficiary of a firming dry bulk shipping
market in 2008. With an estimated 50% vessel days in 2008 covered at
high rates, we think CCH will register strong earnings growth in 2008,
but earnings will probably peak at the same time. We lower our TP for
CSCL due to concerns over Asia-Europe freight rate and cost increases.
Contents
Shipping stock valuations and price performance ......................................................... 3
Container shipping: Watch the demand growth ............................................................ 5
Supply/demand fundamentals indicate overcapacity in 2008. We forecast rates on the Transpacific
route to increase on a y-y basis given liners’ strategy of restoring profitability by charging floating
bunker surcharges, while we estimate rates on the Asia-Europe route to see downside risks given the
capacity pressure
Tanker shipping: High crude prices and deletion of single-hull ..................................... 9
Consensus is already low due to the concerns over high crude prices and large new deliveries.
However, we see more upside risks in rate estimates than downside given the possible acceleration of
phasing out of single-hull tankers
Bulk shipping: When will the tide turn? ........................................................................ 12
We think supply/demand fundamentals will continue to favour bulk vessel owners/operators with further
increases in the average rate in 2008, resulting in earnings growth. Looking into 2009, we estimate the
rate upward trend to likely reverse when new deliveries speed up.
Devil’s advocate: Risks to our investment case........................................................... 17
Company updates........................................................................................................ 19
China COSCO 20
China Shipping Container Lines 23
China Shipping Development 29
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