Shipping Recovery Mounting

Shipping overcapacity appears to be reduced due to weaker-than-expected growth of shipping tonnage and stronger shipping demand. In the container shipping market, rates are rapidly rebounding on the back of increasing trade volume.

It is around the midpoint of the year when the demand weakens due to seasonality but actual shipping capacity accelerates that we particularly need to check the container shipping market. This year, container shipping stocks have shown better performance than bulk shipping stocks thanks to expectations for a further increase in container shipping rates.

Even though the Baltic Dry Index has turned strong in March, bulk shipping stocks have remained weaker than container shipping stocks due to the BDI moving up and down below 3,000p. The BDI surpassed the 3,000p mark again on March 4, yet the index moved around 2,700p in February, sharply down compared with the monthly average of over 3,000 during November 2009 to January 2010. The main culprit seemed to be negative sentiment caused by China’s monetary tightening moves and price negotiations for iron ore while shipping capacity growth remained still strong.

I think the biggest reason for stronger rates is the efforts to reduce the shipping capacity by increasing the volume of idle ships and slowing down the pace of transportations. In addition, demand has also turned stronger. I continue to expect the shipping companies will continue to keep the upturn in profitability, even without a sudden change in the demand side, given that they are likely to continue to control shipping capacity growth. There will be negotiations for a General Rate Increase for American routes. The Transpacific Stabilization Agreement recommended a $800/FEU increase for US west coast and a $1,000 increase for US east coast for 2010. That should have significant impact on earnings of shipping companies, and that deserve close attention.

Yet if the demand in China weakens, shipping rates will be affected. Whether commodity demand remains strong in China, it will remain to be a key factor to consider.