Saturday, June 20, 2009

Shipping companies still face uncertainties for rest of year

The possibility of container shipping companies returning to a sustainable business environment in the near term is still uncertain although there are some positive developments regarding term freight rates.

Freight rates, usually determined by demand for goods from Asia to the West, have dropped 50% to 80% since the last quarter of last year due to the global economic crisis.

In an effort to mitigate the fall, large shipping companies have come out with several rate restorations and increases after the first quarter this year.

AmResearch investment analyst Hafriz Hezry said only about 30% of customers actually paid the full amount of the increase in container shipping freight rates announced in April by major companies.

“It’s a good effort by shipping companies, but under the prevailing market condition, importers and exporters can still go for cheaper spot rates,” he told StarBiz, adding that the increase in rates might see more supportive results just before Christmas and the Chinese New Year.

He said the bearish outlook for container shipping was also partly contributed by oversupply of vessels.

Hafriz said only 4% of the total global container fleet was over 25 years that could be scrapped. “And the demand for container shipping is also quite fragmented as it differs from country to country. This is also a factor delaying the recovery of the sector.”

CMA CGM, one of the top three global shipping giants, announced rate restoration on the Asia-Europe trades that would see an increase of US$300 per 20ft equivalent units effective July 1.

Similarly, Singapore-based Neptune Orient Lines has raised its freight rates for its Asia-Europe trade.

AP Moller-Maersk, the world’s largest container shipping company, said the outlook for the rest of the year would be subject to considerable uncertainty, especially due to the development in the global economy.

“Specific uncertainties that are related to the development in container freight rates are transported volumes, the US dollar exchange rate and oil prices,” it said in a recent interim management statement.

Compared with the first quarter, it said crude oil prices for the remainder of the year were assumed to be slightly higher, just as the diminishing decline in freight volumes in the container trade was expected to reduce the fall in freight rates.

“These conditions, combined with an increased effect from cost savings, are expected to improve the group’s earnings in the second half his year.

“A continued loss is expected in the second quarter and it cannot be ruled out that the total result for this year could be negative,” it said.

MISC Bhd, despite the earnings drag from its loss-making container division, would still enjoy positive bottom line as its earnings would be buffered by a stable revenue stream from liquefied natural gas and its offshore and heavy engineering division, which made up almost 100% of the group’s earnings, according to AmResearch in its latest sector update.

The bigger casualties of the fall in container freight rates are Halim Mazmin Bhd, which will be going private later this year, and Nepline Bhd, which posted a net loss of RM2.9mil for its first quarter ended March 31.

On the dry-bulk segment, which has seen a significant improvement to 3,763 points on June 15 from its lowest level last year at 663 points on Dec 5, Hafriz is confident it would be quite stable this year due to the concentration of iron ore exports to China, the world’s biggest iron ore consumer.

“This is due to China’s stimulus package, which focuses on the construction sector that uses a lot of steel,” he said, adding that China consumed about half of the sea-borne iron ore trade last year.

Source: StarBiz

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