Brighter side of shipping sector
29 August 2005

RISING oil prices, increasing vessel capacity and generally lower shipping rates have made most analysts view the shipping industry as being not too promising.
 
“There are still a few bright spots in the industry. We see exceptions in companies like Malaysia International Shipping Corp Bhd (MISC) and Malaysian Bulk Carriers Bhd (Maybulk),” said OSK Research senior analyst Chris Eng.
 
He expects the sector to start picking up after shipping rates begin their upward climb again.
 
An analyst from a bank-backed research house concurs.
 
“After the super bull run in freight rates last year, the shipping cycle is generally going south with most sub-segments not doing so well,” he said.
 
Mayban Research, however, holds a different view. It expects the outlook for the shipping industry to remain robust, driven by the buoyant regional trade and growth in Asian exports.
 
“We have a neutral stance on the sector as we anticipate shipping rates to moderate further and unlikely to revisit the levels seen in 2004,” it said in a research note.
 
According to the research house, the dry bulk segment experienced the greatest decline in rates.
 
“Dry bulk rates are expected to moderate further as vessel supply and capacity increase due to (the introduction of) new ships. Demand for commodities such as iron ore and coal is also expected to slow down,” it said.
 
The research house attributed the plunge in dry bulk rates, which had more than halved that recorded in the peak month of December 2004, to falling steel prices as China slowed its iron ore imports.
 
The slowdown was in line with the Chinese Government’s recent decision to restrict iron ore import licences to only 118 companies, down from an estimated 500 that were previously engaged in iron ore imports.
 
Mayban said the situation was further exacerbated by the influx of new capacity, where the dry bulk fleet was estimated to have expanded by 3% over the past six months, while old vessel scrapping remained negligible.
 
“However, the end is not near for dry bulk shipping as demand for it remains strong,” it added.
 
An analyst from a local stockbroking firm expects a rebound of the Baltic Dry Index (the index that measures the costs of shipping iron ore, coal and other dry-bulk commodities) in the second half of the year, as China replenishes its inventory of iron ore, coal and various commodities in the fourth quarter, its busiest quarter.
 
Mayban expects tanker rates, though moderately lower in the second quarter of the year, to remain firm on the back of rising crude oil shipments driven by high oil prices. However, rising tanker capacity will cap its upside potential.
 
“Nevertheless, with leading yards worldwide at full capacity until 2008, vessel capacity may not expand as quickly.
 
“In addition, the rise in vessel capacity may also be constrained by the scrapping of old vessels and the phasing out of single-hulled vessels. Therefore, we do not expect the downward correction on shipping rates to be severe,” it said.
 
Due to the meteoric rise in rates last year, prices of vessels, both for newly built and second-hand, shot up considerably.
 
“Halim Mazmin Bhd and Maybulk were quick to capitalise on this development,” Mayban said, adding that Halim Mazmin gained RM33.2mil from the disposal of four vessels.
 
Maybulk recently sold a handymax vessel for a net gain of RM48.5mil, with an agreement to buy back the ship at the end of seven years.
 
“We like Maybulk for its ability to realise gains from vessel sales to counter declining shipping rates going forward,” it said.
 
The group recognised a gain of RM413.5mil from the disposal of its four panamax tankers and three dry bulk carriers.
 
Mayban also prefers smaller niche intra-Asian shipping companies, like Hubline Bhd, which will be relatively buffered from any capacity increase due to supply constraints in the smaller segment (less than 2,000 TEUs or 20-ft equivalent units), as most of the new vessels will be within 3,000 to 6,000 TEU sizes.           

 BACK TO NEWS PAGE