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Looks like there might be value to be had in the container derivate market… Report Oct 28

By • Oct 28th, 2011 • Category: Containers

The Coracle Container market podcast for Oct 28, 2011 in association with GFI

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Thank you for downloading the container market report from Coracle Online and GFI for October 28th 2011. This report will look at the derivative and physical markets and if you want to learn more about the Liner Trades, please head to CoracleOnline.com and use promo code PODCAST to get a 10% discount.

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We start with the paper market and the Shanghai North West Europe route where the big fall seen on the spot market – the SCFI Europe was down 28 – didn’t have a serious impact on the forward curve. The next twelve months on paper fell only by $10, and is now valued at $ 864. This is still a 33% premium to the falling spot market. More important since liner companies are not withdrawing capacity, and with a large number of very large container vessels to be delivered, we remain of the opinion that selling at a 33% premium to the spot still makes sense. Hedging your fleet can make the difference between loosing serious money or breaking even.
On the Shanghai USWC route the stabilisation of freight rates had hardly any impact on the forward curve. On average the next twelve months increase by $1 in value. What is interesting to see is that the steep contango seen on the route to Europe is not seen on the route to the USWC. Here there is only a 12% premium. Given the rise in index and the smaller premium, we would say buying USWC is attractive for shippers that want to reduce their upside risk.

On the physical market we start with the Shanghai Europe route and it seems like the BCO’s are enjoying the ‘Hurry, sale ends soon’ prices offered by the carriers. With only a few strands of hair remaining, how long will it be before the rate haircuts stop? Sooner or later the industry will be bald and there will be no areas to shave rates off. Speaking to a number of our contacts in Asia, volumes for the remainder of the year remain weak and many are expecting marginal improvements in volume over the next two weeks and flat volume growth until the end of December. This wane in demand is reflected in the fact that many factories are shutting down in mid-January, a week before Chinese New Year, for a month as production has come off due to a weakening EU economy. As a result, for shippers who want to do volume, they are able to procure rates around $500/teu as we hear that the average utilisation levels remain at 80%.

Things are looking slightly better on the Transpacific trade lane, although there is still not much respite. Forwarders don’t expect a sudden surge in demand from US consumers as the sentiment has been dampened by the weakening economy and many retailers are happy to sit on lower inventory levels prior to Christmas compared to last year. Despite the slight increase in rates this week on the SCFI, it only reflects the better volumes post China’s Golden Week holidays, which is expected to only last until the end of this month. With many expecting at least another one or two services to be suspended before the end of this year, the speed of decline on this trade lane will be much more muted compared to that of Asia – Europe.

Three observations came to mind while observing the industry recently, which we would like to share with you:
1) The conference system put under the market.
Current rates on the route Asia Europe are way lower than the lows seen in 2009. In June 2009 liner companies were moving containers for a negative margin of $44 (calculated by subtracting the Maersk BAF off the SCFI spot rate). Today liner companies are making a negative margin of $141. Common sense would say that making a $100 / container less than the worst seen in 2009, should be enough to have vessels getting laid up. However this is not happening. Traditionally the conference system provided a floor in the market. When the margins were getting squeezed, joined reductions of supply provided a floor under the market. This joined action is no longer allowed now that the European Conference system has been abolished. The whole industry is under investigation for market abuses (i.e., the joined supply squeeze) that took place in 2009. Unfortunately liner companies do not want to independently pull capacity. As a result, rates continue to fall. Since the conference system can no longer provide a floor in the market, it would make sense to buy put options in the
freight derivative market. These put options can create a synthetic floor in the market and will avoid that liner companies make the losses they are currently making.

2) Wealth of European consumers
The first hundred billion voluntary haircut of Greek debt has taken place. Now that the first step has been taken, we can expect Greece to knock for a second time on the door for an extra haircut. Meanwhile everything that has happened in Greece tends to be followed by similar demands from Portugal, Ireland, Spain, Italy. Since the haircut is voluntary, Credit Default Swaps won’t perform, but Europeans will lose on their pension savings. Similarly, banks will have to raise extra debt / equity, and all together hundreds of billions of Euros will get spent on maintaining the current status quo. Common sense would tell us that these hundreds of billions of Euros won’t be spent on imported goods from China. Europeans simply don’t have the money, and demand for containerised freight can stay low for a long period of time. Meanwhile, the first signs are already there that the current solutions have not helped the rest of Europe. Italy gave out a new government bond for 10 years, and had to pay a higher interest rate than expected. They paid 6.06%, whereas the last done was 5.86%. We fear that consumers have to pay more for their mortgage, leading to less to spend on imported goods from China.

And 3) Q3 Results
The Q3 financial results we have seen from liner companies have all been negative. CSCL losses hit 951 million Yuan for Q3, compared to a 2.2 billion Yuan profit in Q3 last year… Cosco holdings reported a net loss of 2.1 billion Yuan for the third quarter. We are still waiting for the Q3 results for the non Chinese liner companies, but fear they will be negative as well. So far we have seen some smaller players withdraw capacity on the Trans Pacific trade lane. On the route Asia Europe the main solution to dealing with the falling freight rates has been the ordering of more and bigger vessels. Let’s hope that the current negative results will lead to investor actions. The step taken by Mr. Yildrim, an investor in CMA CGM, has stopped the management from ordering more vessels. A step that should be applauded in the current economic climate

What do you think of the state of the industry? We’d love you share your thoughts on ShippingPodcasts.com or facebook.com/coracleonline

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