SINGAPORE (Apr 24): Deutsche Bank is turning positive on Asia Pacific’s shipping sector with the strongest preference for the container sub-segment, followed by tanker and dry bulk.
This comes on the belief that industry conditions have now fundamentally turned, with the peak in deliveries of mega vessels and the recent acceleration of industry consolidation in recent years, which in turn means operators have the potential to achieve stronger price discipline.
In a report last Wednesday, research analyst Sky Hong says his skepticism towards the container sector, led by what he considers a “false signal” from Hanjin Shipping’s bankruptcy, was vindicated by a muted peak season and the subsequent near record-low rates.
“When Hanjin's vessels returned and mega vessel deliveries accelerated, not only the 3Q17 peak season muted, the rates currently have re-dipped into loss-making territory and re-approached record lows except in 1H16 when rate totally collapsed,” recalls the analyst.
Hong nevertheless thinks the container shipping sector has now reached a turning point with mega vessel deliveries having peaked out in 1Q18, and is currently set to taper off in the coming quarters, in his view.
This, along with the coming peak season and stronger liners’ discipline on rising industry concentration, should help to lift rates, he adds.
“While investors are concerned on trade war, the products on the taxation list are not mainly containerised cargoes and probably make up less than 5% of the total containers moving from China to US,” says Hong.
The analyst also believes positive forces are building up for the tanker sub-sector after a disappointing winter peak season, as supply has begun to respond positively in addition to the potential break-up of Iran’s nuclear agreement in the coming May, which he says may trigger faster recovery of the market.
Meanwhile, dry bulk is still ranked lowest by Deutsche but Hong still continues to like the sub-sector as he expects a multi-year upcycle to occur.
“Newbuild supplies will continue to taper off while scrapping is set to rise on upcoming new regulations. Net-net, we expect supply growth to drop to 1.1% in 2018E and -0.7%/-1.6% in 2019/20. For demand, we expect it to hover around 3% going forward. China’s appetite for imported iron ore will remain robust while OBOR and US’s infra spending might drive additional upside,” he explains.
