The author is an analyst of NH Investment & Securities. He can be reached at [email protected]. — Ed.
SCFI has upped 14% YTD. The pace of increase in freight rates for US routes has been gaining steam in 3Q20 in line with: 1) fleet supply control; and 2) a recovery in trade volume. Given the strong uptrend in freight rates, we expect container shipping players to continue displaying brisk earnings growth in 2H20.
Attribute higher freight rates to supply control and better-than-expected demand recovery
As of Aug 14, the Shanghai Containerized Freight Index (SCFI) stood at 1,168p (+14% YTD), its highest level since 2015. An ongoing rise in container shipping rates continues to center upon US routes. We mainly attribute the uptrend in freight rates to: 1) fleet supply control efforts; and 2) a faster-than-expected demand recovery thanks to both normalizing industrial production in Southeast Asia and China and increasing consumption in the US.
In 2Q20, AP Moller Maersk (the global number-one container shipping player)’s freight rates climbed 4.5% y-y despite a 16% y-y decline in its freight volume. Moreover, Maersk’s operating expenses lessened 16% y-y on decreased charter fees, port usage fees, and fuel costs. Standing out, freight rates for East-West routes (including US routes) rose 8.2% y-y in 2Q20, following a 7.5% y-y in 1Q20. Accordingly, Maersk raised its annual guidance after disclosing its 2Q20 results.
With freight rates uptrend gaining further steam in 3Q20, expect favorable sector earnings in 2H20
Led by US routes, freight rates are on a sharp rise in 3Q20, upping 22% m-m over mid-July~mid-August for America West routes and 17% m-m for America East routes. Moreover, even freight volume turned upward in July. Shipments from China, Vietnam, and Singapore have all been on the rise as of late.
While concerns still exist over a potential drop in trade volume due to Covid-19, we believe that container shipping companies are capable of protecting their freight rates via fleet supply control. Therefore, despite likely fleet deployments in the US, the uptrend in freight rates should sustain in 2H20.
As of end-2Q20, HMM has introduced six 24,000TEU-sized vessels and will add six more vessels of the same size in 3Q20. The scale of its operating fleet is expected to expand by 46% from 580,000TEU in 2Q20 to 850,000TEU this quarter. Given both the expansion of its operating fleet and its robust freight rates, HMM appears well situated to enjoy earnings improvement in 2H20. The ongoing increase in freight rates should also contribute to the earnings improvement at container fleet operator Pan Ocean.
