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Asia Pacific: Transportation: Shipping Summary

Core Content

This report provides an analysis of the container shipping market in the Asia Pacific region, with a focus on the Asia-Europe and Transpacific trade routes. It outlines the current market conditions, including spot rates, capacity changes, and the outlook for 2015 and 2016. The report also evaluates the performance of key container shipping companies and their exposure to different trade routes.

Main Points

Asia-Europe Trade

• Spot Rates: Asia-Europe spot rates hit record lows in June 2015, with headhaul rates at US$284/TEU (down 76% yoy), but realized headhaul rates are US$900/TEU (down 30% yoy), indicating that carriers are still earning higher than spot rates suggest.
• Capacity Increase: Capacity has increased by 9% yoy, mainly due to the introduction of larger ships by alliances like Ocean 3 and CKYHE.
• Load Factors: Load factors have dropped 10ppt to 85%, contributing to rate discounts for last boxes filling mega ships.
• Breakeven Costs: Breakeven costs have decreased due to more efficient mega-ships and lower bunker fuel prices.
• Market Outlook: The 2015 peak season is expected to be muted, with load factors unlikely to reach the 95% needed for sustainable rate increases. However, profits are expected to improve in 4Q15 and 2016.

Transpacific Trade

• Resilience: Transpacific trade has shown stronger volume growth and higher load factors (90%-95%) compared to Asia-Europe.
• Contracted Rates: Annual contracted rates have remained flat or slightly higher due to strong demand and lower fuel costs.
• Rate Increases: The Transpacific Stabilization Agreement (TSA) has announced rate increases and peak season surcharges, which should support rate stability.
• Margin Outlook: Transpacific margins are expected to improve in 2015 due to lower fuel prices and eased congestion costs.

Key Companies

• Buy Ratings: OOIL, NOL, and Evergreen are highlighted as Buy due to their strong Transpacific exposure and limited European exposure, which helps mitigate Asia-Europe weakness.
• Sell Ratings: China COSCO (A) and CSCL (A) are Sell due to higher exposure to Asia-Europe and less resilience in the face of overcapacity.

Key Information

• Fuel Prices: Bunker fuel prices have declined 37% yoy, contributing to lower operating costs and higher margins.
• Supply-Demand: The Asia-Europe trade has faced a supply-demand mismatch due to overcapacity and negative trade volume growth.
• Vessel Upsizing: The introduction of larger ships has increased capacity but reduced the margin gap between large and average vessels.
• Supply Adjustments: There is potential for supply adjustments in 2015, such as service cancellations and loading caps, which could help balance the market.
• Market Structure: The container shipping market is more consolidated than dry bulk, with four alliances controlling the Asia-Europe trade.

Outlook

• 2015: Asia-Europe is expected to see muted peak season and lower profitability, while Transpacific and Intra-Asia routes are more resilient.
• 2016: Supply-side adjustments are expected to reduce capacity growth to 5%, and container volume demand is anticipated to surpass vessel capacity.
• Key Drivers: Lower fuel prices, structural trade shifts, and capacity adjustments will be the main factors influencing the market outlook.

Risks

• Macro Uncertainty: Uncertain global economic conditions and supply-demand outlook.
• Fuel Volatility: Bunker fuel prices can impact operating costs and profitability.
• Supply Delays: Delays and cancellations could affect supply and market dynamics.