Asian shipping shares slumped Tuesday as a key index for marine freight rates fell to a two-month low, reflecting waning global demand for commodities and an industry trapped with excess capacity because of a harsh cyclical downturn.
With the global economy still in the midst of a slowdown and inventory levels for resources rising, the marine transportation may still be awaiting the worst, say analysts.
Nomura analysts Andrew Lee and Cecilia Chan wrote in a report Tuesday that the worst was yet to come for the bulk shipping industry.
"We expect industry fundamentals to deteriorate further as demand continues to remain weak and the large order book begins to be delivered," they said. "We expect dry bulk freight rates to remain under pressure due to a combination of weak demand, high China iron ore inventory, high China steel inventory and expected delivery of new capacity."
Shares of Mitsui O.S.K. Lines (MSLOF) dropped 2.4% and in Tokyo trading Tuesday, restricting gains for a broad market that was wavering between gains and losses. Shares of China Cosco Holdings Co. dropped 4.2% and Pacific Basin Shipping sank 6.4% in Hong Kong, while STX Pan Ocean fell 0.9% in Seoul.
The drop in shipping stocks came after the Baltic Dry Index, which measures shipping freight rates and is often considered a barometer of world trade, tumbled 1.3% to 1,486 points Monday. That's the benchmark's lowest level since Feb. 4, according to Bloomberg.
At Monday's close, the index is just a shadow of the record high of 11,440 that it hit in May 2008. Since then, the index has been steadily declining, dragging along shipping stocks. Several Asian shipping shares have lost at least 60% in the past 12 months.
Nomura's analysts said they expect the Baltic Dry Index to average 1,666 this year, down about 74% from average prices of last year, and fall a further 15% in 2010, before recovering in 2011.
"We expect dry bulk freight rates to remain under pressure due to a combination of weak demand, high China iron ore inventory, high China steel inventory and expected delivery of new capacity," they wrote.
Meanwhile, the outlook for base metals was also weakening amid rising inventories, with Credit Suisse analysts noting that "aggregate base metal inventories are at record high levels and continue to rise amid weak demand."
Mining giant Rio Tinto said earlier Tuesday that it was slowing the construction of a planned alumina refinery and slash production of bauxite in response to weak demand and prices for alumina and aluminum. "At current prices around 70% of the industry is currently operating at a financial loss," said Rio's Alcan bauxite and alumina President Steve Hodgson. Rio shares tumbled more than 9% in Sydney on the announcement.
Less bearish on container ships
Analysts see the weak global economy impacting the earnings for companies across various segments of shipping, but have been most bearish on the bulk shipping segment. However, some expect companies with a fleet of tankers to perform better.
"We perceive [bulk shippers] as being in the early innings of a multi-year downturn, unless all vessels aged [more than] 20 years are scrapped and at least half of the global dry bulk order-book disappears due to cancellations, lack of funding etc.," Goldman Sachs noted in a recent report.
"Tankers face a tough year ahead, but that could encourage more scrapping of single-hull vessels, which could alleviate the oversupply situation from 2010 onwards," the brokerage added.
Among container shipping stocks, shares of China Shipping Container Lines Co. skidded 7.9% and Orient Overseas (International) lost 1.2% in Hong Kong trading.
In wider-market action, Japan's Nikkei 225 Average fell 0.2% to 8,841.73 after moving in a range around the break-even level and China's Shanghai Composite rose 0.5% as trading resumed after Monday's holiday. Hong Kong's Hang Seng Index fell 1.1%, Taiwan's Taiex fell 0.5%, Australia's S&P/ASX 200 gave up 0.8% and South Korea's Kospi was little changed.
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