Container Shippers Booming as Dry Bulk Wanes: Freight Markets

Container shipping companies are cashing in on the global economic recovery.

Rising demand for manufactured goods is swelling profits for container shippers, boosting the shares of companies such as A.P. Moller-Maersk A/S (MAERSKB) and Orient Overseas International Ltd (316), and encouraging others to sell stock. Adding to the allure is a decline in the fortunes of dry-bulk and tanker operators, which carry grains and oil, as China’s appetite for commodities wanes and a glut of new ships hurts charter rates.

“The container sector has shown a remarkable rebound after a difficult 2009 due to the discipline of carriers on the supply side and the revival of trade growth in 2010,” said Maria Bertzeletou, an analyst at shipbroker Golden Destiny SA in Greece, home to the world’s biggest shipping fleet by capacity. “The bulk and tanker sectors are in the doldrums, with freight rates under pressure given too many available ships and not enough demand to match supply.”

The container shipping industry, which transports more than $4 trillion of goods each year, or about 60 percent of the value of seaborne trade, will grow more than 8 percent in 2011, according to Maersk, the world’s largest container line. Maersk shares have gained 80 percent in two years.

Greek dry-bulk operator Paragon Shipping Inc. (PRGN), which carries cargoes from the Americas to the Middle East and Asia, diversified into container shipping in June when it bought two vessels.

Share Sales

“We like the container sector,” said Chief Executive Officer Michael Bodouroglou in an e-mailed response to questions. “As consumers become active again in the developed economies but also in the emerging economies, this sector has significant upside potential in the years to come. If we were to invest in shipping today as a group, we would be investing in the container-ship sector.”

Germany’s TUI AG (TUI1) is planning to sell shares in subsidiary Hapag-Lloyd AG, the world’s fifth-largest box carrier, this year. Some closely-held container shipping companies are also preparing for IPOs in the U.S., said Socrates Leptos-Bourgi, Global Shipping and Ports Leader at PricewaterhouseCoopers SA in Athens, who is prohibited from naming the companies by Securities and Exchange Commission regulations and customer confidentiality.

In the U.S., “dry-bulk IPOs have lagged container shipping-related ones substantially and will need to be substantially discounted to get to market,” said Josef Schuster, the Chicago-based founder of IPOX Capital Management LLC, which manages $3 billion. “Container shipping IPOs may be more fully priced.”

Shipping Fleet

London-based Global Ship Lease Inc. (GSL), which operates a fleet of 17 container vessels, said Feb. 7 it will sell shares or debt securities to raise as much as $500 million. CMA CGM SA, the world’s third-largest shipping line, has a stake of around 45 percent in the New York Stock Exchange-listed company.

“The container industry is more favorable for initial public offers than other shipping sectors given a stronger earnings outlook,” said Doug Garber, maritime analyst at the Energy & Natural Resources division of Arlington, Virginia-headquartered FBR Capital Markets & Co.

Bulk vessels and tankers are suffering partly as China, the world’s biggest buyer of energy, industrial metals and soybeans, tries to prevent its economy from growing too fast. It raised interest rates last month for the third time since October, crimping demand for raw materials.

Prices for iron ore delivered to China are in the longest losing streak since September as buyers turn to stockpiles of the steelmaking ingredient, eroding demand for new supplies, Deutsche Bank AG said on Feb 24. More iron ore is hauled at sea than any other dry-bulk commodity.

Freight Rates

Rates for vessels carrying these goods reached a two-year low on Feb. 4, while rates for supertankers that can carry up to 2 million barrels of oil have slumped 75 percent in the past 12 months. At the same time, the cost of transporting goods in boxes more than doubled last year, an index from the Hamburg Shipbrokers’ Association shows.

“China is targeting some policies on the property side to cool that market,” said Daphne Roth, head of Asian equity research at ABN Amro Private Banking, which oversees about $14 billion in the region. That means “demand for some of the construction material, like steel, will not be as much as last year. We are more positive on the container” ships.

Dry-bulk companies also ordered too many vessels in 2007 and 2008 before the world economy collapsed, causing an 89 percent plunge in the Baltic Dry Index (BDIY) of freight rates from its 2008 peak.

Maritime Outlook

New orders for container ships, measured in terms of overall capacity, fell 21 percent over the past 12 months, according to Peter Sand, shipping analyst at the Copenhagen-based Baltic and International Maritime Council.

By contrast, growth of the dry-bulk fleet will be 13 percent this year, a level “difficult to absorb even under the most optimistic demand outlooks,” Jonathan B. Chappell, an analyst with JPMorgan Chase & Co. in New York, said in a report on Feb. 3.

Seoul-based dry-bulk ship operator Korea Line Corp. (005880) filed for bankruptcy protection last month after posting losses in six of the past seven quarters. It hired vessels on long-term contracts before the glut of new ships and slowing demand in China caused rates to tumble.

Container shippers, including Hanjin Shipping Co., South Korea’s largest shipping line, and Neptune Orient Lines Ltd., plan to raise rates further as the global economy recovers.

U.S. Recovery

Spending by consumers in the U.S., the world’s largest economy, rose the most in more than four years in the fourth quarter, helping Asian manufacturers to sell more goods. Rising incomes and a payroll tax cut may help sustain higher U.S. consumer spending in 2011, the World Bank said on Jan 12.

Sales at Orient Overseas, Hong Kong’s largest container line, rose 42 percent in the fourth quarter after cargo on intra-Asian and Asia-Europe routes surged. The company’s share price has soared 281 percent in the past two years.

Shares sold by Greece’s Costamare Inc. (CMRE) in a November share offering have since risen 40 percent. The company, which owns 44 ships, raised $160 million and has used the funds to partly finance its purchase of five new vessels.

By contrast, shares in Monaco-based Scorpio Tankers Inc. (STNG), which sold stock in New York last March, have declined 22 percent. Greece-based Crude Carriers Corp and dry-bulk operator Baltic Trading Ltd (BALT) of New York, which also completed IPOs last March, have fallen 18 percent and 34 percent respectively.

The container time-charter market “is moving up strong and fast and we expect this trend to continue for some time,” said Costamare Chief Financial Officer Gregory Zikos. “We are optimistic for 2011.”

To contact the reporter on this story: Paul Tugwell in Athens at ptugwell1@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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