Rough seas for container liners as freight rates ease
By Alison Leung

HONG KONG, Oct 24 (Reuters) - Container liners, which have ridden a three-year wave on surging Chinese trade, are heading for choppier waters as shipping capacity grows faster than demand.

"Long-term investors should continue to look for exits from the container-shipping sector," said SHK Financial analyst Alvin Chong.

Rates for containerised freight between Asia and Europe have dropped 15 percent since last month, while the cost of shipping a twenty-foot-equivalent box from China to the west coast of the United States is 20 percent lower than a year ago.

Earlier this month, Hong Kong-listed container ship operators Orient Overseas (International) Ltd. (OOIL) and China Shipping Container Lines (CSCL) posted weaker-than-expected third-quarter operating figures in a latest sign that the industry's party is over.

Malaysian International Shipping Corp. Bhd , Asia's top valued shipper with a market capitalisation of US$9.4 billion, warned in late August that its current year to end-March would likely be worse than last year due to softer freight rates for petroleum tankers.

Based on current orders for new ships, SHK's Chong expects global container liner capacity to grow 14-16 percent a year from 2005 to 2007, ahead of 8-10 percent annual demand growth.

"It's clear that container freight rates are trending down on a unit basis," added Geoffrey Cheng, a shipping and base metal analyst at Daiwa Institute of Research (Hong Kong).

Container freight is the last category to fall in the shipping world with prices for both oil tanker and bulk cargo freight slumping to more than 2-year lows in August from record highs last December.

The shipping industry had enjoyed a longer-than-expected boom, starting from the second half of 2002, on a shortage of shipping space amid strong international trade largely fuelled by China's hunger for imported raw materials to feed increased demand for its relatively cheap exported goods.

Basic container rates from Hong Kong to Europe have fallen to about $900 per twenty-foot-equivalent unit (TEU) from $1,050 a month ago, not including surcharges for high fuel costs and peak season pricing, according to Sunny Ho, executive director of the Hong Kong Shippers' Council.

"It is because capacity is expected to rise by about 13 percent this year and most of the new ships are delivered in the second half," Ho told Reuters.

WEAK STOCK PRICES

Concerns that the highly cyclical shipping business is finally heading for a downturn have trimmed OOIL and CSCL stocks by more than a third from their April peaks.

Shares in OOIL hit an 8-month low on Monday of HK$25.90 -- less than three times forecast 2005 earnings per share and 3.7 times expected 2006 earnings, and versus an Asian sector average PE of more than 17. The stock closed at HK$25.95.

OOIL, controlled by the family of Hong Kong's former Chief Executive Tung Chee-hwa, said last week its third-quarter traffic volume rose 5.5 percent on the year and average revenue per TEU rose 3.6 percent.

Shares in rival state-owned CSCL hit a 14-month low of HK$2.675 on Monday before recovering to HK$2.725 -- a slightly higher PE of 3.4 times for 2005 and 4.25 times for 2006.

Singapore-listed Neptune Orient Lines shares have slumped by a quarter since mid-August.

CSCL's rates on trans-Pacific trade grew 8 percent on the year in the third quarter but were flat on Asia-Europe routes, Deutsche Bank said in a recent report. Its rates on East Asia, Australia and China domestic trade fell 3-12 percent, it said.

"The container shipping sector should continue to see selling pressure as analysts are likely to revise down their estimates after the third quarter operational data," Chong said.

Morgan Stanley has cut its 2005-07 earnings estimates on CSCL by 21-23 percent after the world's sixth-largest container shipper by volume announced its operational data.

UBS, meanwhile, said it was surprised by rival OOIL's relatively sluggish volume growth. "Rate growth is already slackening during peak season, which comes as a surprise to us, and the market, we believe," it said in a research note, adding freight rates could come under greater pressure than the market expects for the second half of 2005 and 2006.

Daiwa's Cheng said he put OOIL's "outperform" rating under review for a possible downgrade.

Shares in the more diversified state-owned China COSCO Holdings Ltd. , which controls container leasing and port operator COSCO Pacific Ltd. , have dropped 22 percent from their June IPO price of HK$4.25. (US$1=HK$7.8=8.09 yuan).

Asia-Europe trade boosts shipping rates-Goldenport

CHICAGO, Sept 11 (Reuters) - Rising trade in consumer goods between Europe and Asia should boost container shipping rates and offset softer U.S. trade, a top executive at container and dry bulk shipper Goldenport Holdings Inc said on Tuesday.

"We are often asked by analysts whether softness in the U.S. market will weaken container rates," company commercial director John Dragnis, son of founder and Chief Executive Officer Paris Dragnis, said in a telephone interview. "The answer is that demand for containers right now is driven mostly by trade between Asia and Europe."

"This is more than compensating for the softness in the U.S. market," he added.

Rates in the dry bulk sector should remain strong in 2008 and into 2009, driven by continued high demand from China and India for bulk commodities such as coal, iron ore, steel and grain, Dragnis said.

Athens-based Goldenport went public in 2006 with a fleet of 17 container ships -- which haul standardized containers full of consumer goods -- and dry bulk carriers. The fleet now stands at 25 vessels and the company has plans to order six more ships at a cost of $245 million for delivery from 2009 to 2011, subject to shareholder approval. The Dragnis family holds 60 percent of the company's stock.

Earlier Tuesday the company reported interim first-half results, showing net income rising to $32.3 million from $21.7 million, boosted in part by high dry bulk shipping rates.

Those rates have repeatedly reached record levels this year on the back of surging demand for raw materials and congestion at ports in the key export centers of Brazil and Australia.

"We see rates strong through 2008 and relatively good in 2009 as well, as demand for major and minor bulk commodities remains solid," Dragnis said. "China remains particularly strong; but a lot of people forget about India, where demand for coal is high."

Some analysts have expressed concern that the large number of container ships under construction will lead to oversupply and push down shipping rates.

"We are more positive on the container ship market at the moment than the dry bulk market," Dragnis said. "We see demand continuing strong for container shipping

"Also, the order book for new container ships is heavily skewed in favor of the largest ships most ports can't handle, so it won't affect smaller ships like ours so much," he added.

Goldenport closed up 6.25 percent on the London Stock Exchange at 420.75 pence and is up 76 percent from a 52-week low of 239 pence.