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Wednesday, February 17, 2010

More on the Container Shipping Market: Tight Capacity in Asia on Reduced Supply

The Journal of Commerce posted an interesting article the other day regarding trends and expectations for the container shipping market. We're tracking the sector given our ownership in Seaspan (SSW, $10.12) and another container shipping company, Global Ship Lease (GSL, $1.59). We've not shared details on the latter company, but concur with the GSL summary thesis included in this December SeekingAlpha post. We categorize GSL as a special situation that, like Seaspan should benefit from gradually improving market conditions (please see our sector outlook in our prior Seaspan post). Admittedly, macroeconomic conditions are a key risk factor and current overhang for both companies.

Anyway, back to the article. For those interested, we recommend giving a read for current market commentary and various graphs. Here are a few highlights:
  • Dean Tracy, director of international logistics at Lowe’s, had a devilish time getting his spring and summer merchandise on vessels leaving Asian ports in late January. The busiest time of the year for home improvement retailers was approaching rapidly, but space on vessels was unusually tight.
  • The capacity crunch in Asia likely will end with this week’s Chinese New Year celebration or shortly after. Carriers removed a large chunk of vessel capacity from the trans-Pacific for the winter months, as they do every year, but cargo volume leaving Asia before factories close for the two-week celebration were larger than anticipated.
  • Evidence of that strategy emerged in late January, when the strong demand in the run-up to the Chinese New Year spurred carriers to return nearly 50 idled container ships to service. The week leading up to Feb. 1 represented the first significant decline in idled container ships since November 2008, according to Paris-based consultant and analyst AXS-Alphaliner.
  • Although economists are divided as to how rapidly consumer spending will return, advance bookings in Asia-to-U.S. trans-Pacific lanes are strong into June, so retailers believe the recovery will be relatively robust. In fact, some factories in China say they will reduce the traditional two-week Lunar New Year vacation period to seven to 10 days because orders are so strong.
  • Therefore, after the customary dip in eastbound freight following the New Year celebration in Asia — a dip that could be far less pronounced this year, considering cargo backlogs — volume could pick up rapidly. That will happen just as importers meet with carriers to negotiate freight rates for their May 1-April 30, 2011, service contracts.
As noted in our "Which Way from Here" post, the best time to buy businesses is when no one wants them. While we prefer cash rich, asset light, high ROIC businesses such as eBay (EBAY, $22.68) and j2 Global Communications (JCOM, $20.83), we're not afraid to invest in downtrodden areas where we see long-term value. Also, recall that the Market can be manic and totally unpredictable.

As mentioned in our Seaspan post, shipping remains of the few areas still very much out of favor despite some signs that conditions are improving. For example, banks/financials and REITs have largely recovered, even with plenty of bad loans and surplus commercial real estate that will press fundamentals for some time to come (e.g. for a negative view on Wells Fargo/WFC, please this 12/10/09 Forbes article, Hooked on Tarp -- now somewhat dated, but risks still relevant). Of course, some investors may intelligently posit that that banks/financials and REITs are now poised to stumble following a short covering, hope-driven rally last year. We'll see.

So long as long-term lease charters remain in force for Seaspan and Global Ship Lease -- as we expect -- we're less worried about excess ship capacity plaguing the sector and are betting that the Market will award higher multiples as fundamentals gradually improve.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long SSW, GSL, EBAY, JCOM.

© 2010 Jeffrey Walkenhorst
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