Shipping

Plain sailing

Cosco’s results show the container shipping industry is booming again

Cosco-w

Its stock price has quadrupled since last September

Many of the world’s e-commerce firms have been big commercial beneficiaries of the Covid-19 pandemic. There is another sector that is not far behind in profiting from the pandemic, although it hasn’t been recognised by investors until relatively recently. It’s container shipping.

Road and rail is quieter than normal in most countries but shipping lanes have been busier than ever. They’re also running into their own forms of traffic congestion. In March one of the world’s largest container ships, the Ever Given, got stuck in the Suez Canal for six days, generating huge queues at both ends of the crucial waterway. Likewise many of the world’s busiest ports are reporting major delays.

Average waiting times for container ships at West Coast ports in the United States are about a week, for instance, because of capacity constraints. In Singapore, where container volumes hit a record high in March, there are long delays to unload too.

“In a normal situation, the average waiting time for Singapore Port was around five to six hours, but now ships have to wait for two to three days due to severe congestion at the port,” a source told S&P Global this week.

Container lines expect congestion for at least another three to four months, citing a surge in shipments. The primary cause is a major increase in consumer spending. Working from home during the pandemic means that people haven’t been spending on commuting, socialising and holidays. Unable to splash their spare cash, they are going shopping (often online) to cheer themselves up. Retailers are also starting to restock more aggressively, anticipating a further boom in spending as the worst of the pandemic subsides and vaccinations rise.

The impact started to show in shipping companies’ profits from the fourth quarter of last year. For example, Hong Kong-listed Cosco Shipping Holdings reported net profits of Rmb6.1 billion ($930 million) in the period. That was its highest quarterly return in a decade and almost two-thirds of its entire profit for 2020.

Financial analysts scrambled to adjust their forecasts for this year, with brokerage CICC initially upping its profit predictions for Cosco Shipping by almost a third to Rmb23.6 billion. The stock price had already quadrupled from around HK$3.50 in late September to a peak of HK$13.66 in early April, and last week Cosco pre-announced first quarter net profits of Rmb15.44 billion, beating expectations yet again. CICC responded by topping up its full-year forecast a second time to Rmb40.5 billion in profit.

Can the bonanza last? Shipping consultancy Drewry has hedged its bets, saying the industry is in “unchartered waters” and adding “Using history as a guide, the smart bet would be to think that the market will cool down fairly quickly but these are not normal times”.

Routes between China and the rest of the world are seeing the biggest moves in pricing. Container traffic out of China has been buoyed by its vast manufacturing economy, which produces many of the goods being demanded by consumers in other markets. But containers heading back to China have been billed at a premium as well, due to demand to get them back to a region where trade is moving intensely.

Spring is typically a time when container lines lock in forward rates with their major clients and Cosco says that its new rates are “significantly higher” on a year-on-year basis. Increases in rates have been widely accepted by customers and some container companies are reducing minimum quantity commitments in their contracts so they can squeeze in a greater proportion of higher-paying spot business.

The shipping lines are also starting to deploy their newfound profits on orders for more vessels, something that has acted as a warning signal in the past of a bull market that is close to topping out.

News headlines about enormous orders at shipyards have been coming thick and fast over the past month. Taiwan’s Evergreen Marine Corp has put in the largest so far – a $2.5 billion contract with Samsung Heavy for 20 ships, equivalent to 5.5% of its existing fleet in capacity terms.

Not far behind is the world’s second largest container line Mediterranean Shipping Co (MSC). It is reputedly the customer for the largest-ever order received by China State Shipbuilding Corp (CSSC) – a Rmb10 billion contract for 13 ships that will be built by two subsidiaries: Dalian Shipbuilding and Guangzhou Shipbuilding.

South Korea is ahead of China in terms of new orders, according to the former’s national news agency, Yonhap. South Korean shipbuilders booked 5.32 million compensated gross tonnes (CGT) during the first quarter. That was just over half the global total – in the best quarter since the last shipbuilding boom between 2006 to 2008.

Yards in China came second with 4.26 million CGT. State giant CSSC is well positioned to win more deals, given that it is once again the country’s dominant shipbuilder. Back at the turn of the century, the central government split its shipbuilding giant in two. CSSC was given the dockyards and markets of eastern and southern China, while a new company called China Shipbuilding Industry Corp (CSIC) was assigned the north and inland.

In 2019 the government decided to merge the two shipbuilders once more. This was partly driven by commercial necessity, given the then deplorable state of the industry, but was also the result of a corruption probe. Hu Wenming, who had run both CSSC and CISC during his career, was placed under investigation last year and formally arrested this January.

CSSC is listed on the Shanghai Stock Exchange. However, its shares have not enjoyed the meteoric performance of clients like Cosco Shipping. In fact its share price had been falling since last summer, hitting a low of Rmb14 in early February. In recent weeks it has shown more signs of life, closing yesterday at Rmb16.30.

The Chinese shipyards are getting more orders but they don’t win the higher-priced contracts at the top end of the market where the South Koreans operate, the Global Times explains. Korean and Japanese yards are also preferred for construction contracts for the mega vessels (like the Ever Given) that many of the leading container lines now favour.

Korean yards have been consolidating, increasing their competitive threat (Korea Shipbuilding and Daewoo Shipbuilding are in the process of merging). But the main challenge for the Chinese yards in achieving greater profits are cost-related, the Global Times says, especially in terms of raw materials.

“In normal circumstances, we could factor the rise of raw material prices into contracts with clients. But the current wave of steel price hikes is simply too fast and too significant,” a Wuhan-based shipping executive told the newspaper. “The prices for steel products have on average risen Rmb2,000 per tonne in the past month, which is similar to a year’s hike in normal times.”

The situation may yet play out to the shipbuilders’ advantage. Shipping industry news sites report that order books are filling up fast, which is likely to trigger further price rises. But the trend worries sector specialists like Drewry, which notes the comparisons to peaks in the market on the eve of the global financial crisis of 2007/8.

“Ships are being ordered as if they are for today, not what the market will look like when they are ready for delivery,” the consultancy concludes. “Customers risk paying top dollar for assets that will potentially end the up-cycle.”

If the 2007 peak is anything to go by, share prices still have plenty of upside, however. In October 2007, shares in Cosco Shipping hit a peak price just above HK$39, triple where they are now. Shares in Chinese shipbuilder CSSC topped out at just under Rmb140 a few months later, nearly nine times higher than where they are today.


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