Asian Equities Analyst, Logistics & Transport, Tracking Traffic

Daniel Hellberg

Asian Equities Analyst, Logistics & Transport

Tracking Traffic

Focusing on Asian logistics, transportation, and travel companies

Equity Bottom-Up

<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/180/980/original/BANNER-BoxDec20.png?1609781008" class="editor-image img-responsive" data-smartkarma-image-id="180980"></figure></section>Within container shipping space, recent share price performance suggests investors believe the benefits of the cyclical upturn will mainly accrue to carriers like <a href="https://www.smartkarma.com/entities/evergreen-marine-corp-ltd" target="_blank" data-smartkarma-citation="entities:15428:1" rel="noopener">Evergreen Marine Corp (2603 TT)</a>.To maintain a positive view on container carriers in the near- and medium-term, investors must embrace several key assumptions regarding demand, supply, and fuel prices. We lay out five of these key assumptions and the risks associated with them. We conclude that investors may not fully appreciate all the risks facing the sector in early 2021.

Within container shipping space, recent share price performance suggests investors believe the benefits of the cyclical upturn will mainly accrue to carriers like Evergreen Marine Corp (2603 TT).To maintain a positive view on container carriers in the near- and medium-term, investors must embrace several key assumptions regarding demand, supply, and fuel prices. We lay out five of these key assumptions and the risks associated with them. We conclude that investors may not fully appreciate all the risks facing the sector in early 2021. 

The Shaky Assumptions Behind Recent Strong Performance of Asian Container Carriers

<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/178/836/original/BANNER-CARGO.png?1608075975" class="editor-image img-responsive" data-smartkarma-image-id="178836"></figure></section>Strong North American imports continued in November, and it appears the usual peak season may be stretching into mid-December and even January. Average freight rates in November -- spot and contract combined --  rose by about 13% YoY for a second consecutive month. But bunker (fuel) prices are also up compared to earlier in 2020. A spike in fuel prices in Q420 will likely eat into the nice gains in profitability shown by many carriers in Q220 and Q320. Shares of carriers have performed very well after bottoming in the first half of the year, but in our view valuations now look stretched. Betting on further gains after these stocks have doubled and tripled over the course of a few months is very risky, in our view.

Strong North American imports continued in November, and it appears the usual peak season may be stretching into mid-December and even January. Average freight rates in November -- spot and contract combined --  rose by about 13% YoY for a second consecutive month. But bunker (fuel) prices are also up compared to earlier in 2020. A spike in fuel prices in Q420 will likely eat into the nice gains in profitability shown by many carriers in Q220 and Q320. Shares of carriers have performed very well after bottoming in the first half of the year, but in our view valuations now look stretched. Betting on further gains after these stocks have doubled and tripled over the course of a few months is very risky, in our view. 

TRACKING TRAFFIC/Containers & Air Cargo: Volumes, Rates & Bunker All Firmer | Valuations Get Weird

<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/172/990/original/BANNER-CARGO.png?1605979844" class="editor-image img-responsive" data-smartkarma-image-id="172990"></figure></section>Average container rates popped in October, up almost 14% YoY according to our proprietary model. Container volumes out of Asia and into the North American West coast remained firm, too.Carriers (and their customers) have once again begun complaining about a shortage of containers at key origins in Asia. We believe this equipment shortage also supports firmer container rates.Firming rates and volumes, combined with relatively low fuel prices, are delivering a surprisingly good year to container carriers, Covid19 be damned. But we feel most of the good news has been reflected in share prices, many of which have more than doubled from lows in H1 2020.

Average container rates popped in October, up almost 14% YoY according to our proprietary model. Container volumes out of Asia and into the North American West coast remained firm, too.Carriers (and their customers) have once again begun complaining about a shortage of containers at key origins in Asia. We believe this equipment shortage also supports firmer container rates.Firming rates and volumes, combined with relatively low fuel prices, are delivering a surprisingly good year to container carriers, Covid19 be damned. But we feel most of the good news has been reflected in share prices, many of which have more than doubled from lows in H1 2020. 

TRACKING TRAFFIC/Containers & Air Cargo: October Rates Pop | LA Volumes Strong | Box Shortage?

Our research suggests average container rates rose by 6% in September, boosted by improved Transpacific volumes. While inbound to US demand appears strong through October, estimates from the Port of LA suggest early November will see a modest YoY decline in throughput. 
Bunker (ship fuel) prices remain below year-ago levels and carrier profitability in Q3 (and early Q4) likely remains high compared to 2019. Germany's <a href="https://www.smartkarma.com/entities/hapag-lloyd-ag" target="_blank" data-smartkarma-citation="entities:21649:1" rel="noopener">Hapag-Lloyd AG (HLAG GR)</a> lifted full-year guidance this week, reflecting confidence in near-term market conditions. 
After almost tripling earlier in 2020 on a combination of strong demand and limited capacity, it appears air cargo pricing for key Asian carriers has moderated compared versus peak levels in Q2. 
While current conditions appear buoyant, we believe the sharpest YoY improvements in profitability for container carriers (and air cargo) are probably already behind us.

Our research suggests average container rates rose by 6% in September, boosted by improved Transpacific volumes. While inbound to US demand appears strong through October, estimates from the Port of LA suggest early November will see a modest YoY decline in throughput. 
Bunker (ship fuel) prices remain below year-ago levels and carrier profitability in Q3 (and early Q4) likely remains high compared to 2019. Germany's Hapag-Lloyd AG (HLAG GR) lifted full-year guidance this week, reflecting confidence in near-term market conditions. 
After almost tripling earlier in 2020 on a combination of strong demand and limited capacity, it appears air cargo pricing for key Asian carriers has moderated compared versus peak levels in Q2. 
While current conditions appear buoyant, we believe the sharpest YoY improvements in profitability for container carriers (and air cargo) are probably already behind us. 

TRACKING TRAFFIC/Containers & Air Cargo: Box Rates Firm | LA Down in Nov? | Air Cargo Pricing Eases

August numbers show a spike in container volumes on key routes, but average achieved freight rates were still just so-so (but improving compared to Q2 2020).
Forward data from the Port of Los Angeles (PoLA) shows strength in rest of September and into the October peak season. Carriers are also benefitting from relatively low fuel prices. 
Conclusions: We still have not seen the strong bump in rates reported by the mainstream financial media, but container pricing is better than in Q2 and volumes have clearly firmed and fuel prices are reasonable -- all positives for the carriers. But the biggest gains -- in both carrier profitability and share prices -- are likely already behind us.

August numbers show a spike in container volumes on key routes, but average achieved freight rates were still just so-so (but improving compared to Q2 2020).
Forward data from the Port of Los Angeles (PoLA) shows strength in rest of September and into the October peak season. Carriers are also benefitting from relatively low fuel prices. 
Conclusions: We still have not seen the strong bump in rates reported by the mainstream financial media, but container pricing is better than in Q2 and volumes have clearly firmed and fuel prices are reasonable -- all positives for the carriers. But the biggest gains -- in both carrier profitability and share prices -- are likely already behind us. 

TRACKING TRAFFIC: Containers & Air Cargo: August Volumes Jump | New PoLA Data Firm Through October

Denmark

A.P. Moeller-Maersk A/S is a conglomerate with diversified holdings. The Company operates a fleet including container vessels, tankers, supply ships, special vessels, APM terminials, and oil drilling rigs.  A.P. Moeller-Maersk also operates industrial business and explores for and produces oil and gas. The Company is active worldwide.

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AP Moeller - Maersk A/S (MAERSKB DC)

The Shaky Assumptions Behind Recent Strong Performance of Asian Container Carriers

Container carriers have performed very well since mid-2020, and we concede we underestimated the strength of spot rates in recent weeks. But...

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Volumes and average freight rates firmed again in November, but so did fuel prices. Many shares of container carriers also jumped (again) this...

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TRACKING TRAFFIC/Containers & Air Cargo: October Rates Pop | LA Volumes Strong | Box Shortage?

Container rates rose again in October, and fuel costs remain low. Although carriers likely continue to enjoy solid profitability, we believe shares...

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TRACKING TRAFFIC/Containers & Air Cargo: Box Rates Firm | LA Down in Nov? | Air Cargo Pricing Eases

Container volumes and pricing firmed in September, and fuel prices remain relatively low, but trading conditions are unlikely to improve much from...

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TRACKING TRAFFIC: Containers & Air Cargo: August Volumes Jump | New PoLA Data Firm Through October

August numbers show better volumes, rates just so-so (but improving) Forward data from P

Tracking Traffic

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