Shipping stocks surge, but analysts warn bleak outlook

Updated: 2012-10-13 07:27

By Sophie He (HK Edition)

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 Shipping stocks surge, but analysts warn bleak outlook

Cargo containers are stacked at a container terminal at Kwai Tsing in Hong Kong. Shipping shares soar recently in the stock market, but analysts caution the jump is unlikely to be sustainable. Lam Yik Fei / Bloomberg

Shipping shares have recently become the new darlings of investors, who ride on rising freight rates and expectations for further increase. However, analysts caution that the outlook for the industry is bleak.

The Baltic Dry Index (BDI), a benchmark for global commodity-shipping rates, rose 3.2 percent in London on Thursday. The index has increased by 37 percent since September 12.

Boosted by the rising rates, share prices of the shipping sector surged in Hong Kong on Friday. Shares of China COSCO jumped 8.26 percent, China Shipping Container Lines rose 7.69 percent; COSCO Pacific increased by 2.81 percent while Orient Overseas Container Line was up 1.58 percent.

But an analyst warns that the jump of share prices across the sector is unlikely to be sustainable, judging from the overall daily charter rates, which show that shipping firms are still in quite a difficult position.

"I think it (the surge of share price in the sector) is likely to be a short term effect," Geoffrey Cheng, an analyst at BOCOM International told China Daily.

Cheng explained that the current situation is very similar to one which occurred a year ago. In the fourth quarter of 2011, the stock prices for shipping and container ship firms increased on expectations of re-stocking of iron ore, as the international iron ore prices were declining and the inventory (of steel companies) were low.

"The average BDI in the fourth quarter of last year surged to 1,800 points, and the average BDI for the full year was 1,550 points," he said.

Cheng also pointed out that the recent increase of BDI was mostly due to the charter rates hike for capesize ships, but the overall daily rent is still very low, indicating that the operating environment for shipping firms is still very difficult.

"Although the BDI increased significantly recently, but it is still below 900 points, compared with last year's average, you can tell the current operating environment is still not good."

Commenting on shipping firms, he prefers container ship companies, as currently their freight is around 50 percent higher than it was a year ago and the ports' recent throughput data shows that the demand is solid.

Cheng's view echoed BOC International's analyst Du Jianping, who said in a report that the shipping industry is at the bottom of the cycle, although the pressures from supply-side are expected to gradually ease in the future, and the demand growth slowdown is likely to postpone the turning point of the industry.

"Dry bulk shipping market is set to rebound in its peak season - the fourth quarter, but it is still very hard for the industry to record profit for the full year as the freight rates will continue to be suppressed by the weak demand and over capacity," Du said in her report.

(HK Edition 10/13/2012 page2)