The Panama Canal draught restrictions translated into carriers’ General Rate Increases (GRIs) succeeding briefly, supporting container shipping shares at the start of 3Q23. Nonetheless, the Drewry Container Equity Index fell 4.2% in 3Q23 (vs 2Q23: -24.1%). In YTD 2023 (ending 12 October 2023), stock prices of A.P. Moller Maersk (APMM), Evergreen, Marine Corp (EMC) and Overseas (International) Ltd (OOIL) declined by 20.8%, 38.3%, 20.8%, respectively partly due to their dividend payments. The loss-making carriers- Wan Hai, Yang Ming and ZIM -marked sharper declines between 37.6% and 45.9%. Cumulatively, the broader index declined 21.6% YTD. Unlike container shipping equities, the S&P 500 posted a 13.3% growth in YTD 2023.
While container stocks had started stabilising by the end of 3Q23, they tumbled after the EU announced (on 10 October) that the anti-trust block exemption (CBER) for liners will not be renewed after its expiration on 25 April 2024. Between 9 October and 11 October, the shares of APMM, Hapag-Lloyd and OOIL declined by 1.6%, 3.8% and 7.7%, respectively, and the Taiwanese stocks under our coverage also fell between 3.5% and 6.6%. However, container shipping stocks have recovered after this fall. While alliances and Vessel Sharing Agreements (VSAs) have not been prohibited, they shall be subject to greater scrutiny. Thus, we believe the fall in share prices was due to an increased regulatory burden.
Mainly driven by weak earnings prospects, the Drewry Container Equity Index trades at a P/B of 0.5x, a 45.2% discount to its pre-pandemic average (2013-19). We expect freight rates to fall 44.2% in 2H23 (versus 1H23), translating into lower earnings in 2H23 despite higher volumes. Thus, we expect the multiple to remain suppressed.
Meanwhile, on the environmental front, carriers are gearing up to comply with upcoming EU ETS regulations. Major carriers have already started declaring their ETS surcharges. However, these charges are spread over a broad range, and there has been little transparency on how they are determined. For instance, on the Asia to North Europe route, APMM, CMA CGM and HLAG have declared upcoming ETS surcharges of EUR 35 per teu, EUR 25 per teu and EUR 12 per teu, respectively. While APMM’s surcharges are on the higher end, they align with APMM’s cost policy of charging more via fuel and other surcharges than other carriers – presumably to reduce the risk that its cost will exceed the revenue raised by the surcharge. Contrarily, on Asia to Mediterranean route, CMA CGM has the highest surcharge of EUR 20 per teu compared to EUR 7 per teu for HLAG and EUR 5.5 per teu for APMM. We expect other carriers to declare their charges soon.
Orient Overseas Container Line (OOCL) declared its 3Q23 operational update. In 3Q23, the 6.7% YoY increase in volumes was offset by a 67.3% YoY fall in freight rates; thus, revenue slumped 65.1% YoY to USD 1.8bn. The quantum of decline in the topline increased from the previous quarters (2Q23: -62.6% and 1Q23: -57.8% YoY), suggesting a massive fall in freight rates. Based on our broader forecast, we expect this trend to continue in 4Q23, and the revenue will continue to decline.
On the liquidity front, dividends paid to shareholders led to lower cash reserves. As operating cash flows are likely to reduce in the coming quarters, carriers will increasingly dwell in their cash chests, increasing the industry’s leverage.
