CitiGroup says container shipping is “On the Brink of Profitability; Sustainability in Doubt”

CitiGroup says container shipping is “On the Brink of Profitability; Sustainability in Doubt”

Analysts: Rigan Wong, and Ally Ma

Positive guidance and outlook – Recent commentary from major liners suggest a positive 2010 outlook and return to profitability for some, dispelling investor concerns of multi-year, industry-wide losses.

Demand and rate hikes were phenomenal, but increasingly difficult to push up –Recent demand was driven by a strong inventory re-stocking cycle and caught many liners by surprise. Rates climbed by 15-30% in the first 2 months of 2010, but recent March hikes failed to pass on smoothly. Continued volume strength and further hikes in freight rates will hinge on the extent of G3 consumption, the stage of inventory build-out, and liners’ holding power of large idle fleet.

What should investors do? – Within the shipping sector, selected container shipping stocks have outperformed YTD (NOL +19% vs. industry +11%) on expectation of Transpacific rate hikes and undemanding valuations. While 1Q10 results may beat expectations and bring shares higher from current levels, investors may turn cautious thereafter on the sustainability of volume strength and rate hikes, as well as perennial industry oversupply.

ML Note:
Just happen to see this.

Meanwhile, I spoke to a friend from the industry. His take is this: "Yes Vol has increased and carrier also restoring rate esp Euro/us cargo. But fact remain that no. of idle ships still large which will threaten freight level if carrier start pulling back idle ship."

Hence I see freight rate increasing in the near term, but agreed with Citi take that sustainability will be an issue especially if economy does not pick up fast enough. On the other hand, I see short term supply pressure to remain, that will boost freight rate in the near term.
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ML is a licensed stockbroker with one of Asia Leading Stock Broking firm. To contact him, please email: icewolfmike@gmail.com