Thursday, 9 January 2014

Shipping and Deflation - Only the strong survive

"When you ask people, 'What's the opposite of fragile?,' they tend to say robust, resilient, adaptable, solid, strong. That's not it. The opposite of fragile is something that gains from disorder." - Nassim Nicholas Taleb

Back in April 2012 in our conversation "Shipping is a leading credit indicator", we indicated that the deterioration of the provision of credit would accelerate the demise of some shipping companies due to many banking institutions paring back drastically funding or pulling-off completely from structured finance operations such as shipping.

Also in our specific post written in August 2012, specifically dealing with the "link between consumer spending, housing, credit and shipping", we argued the following:
"Given the container shipping industry market is already dominated by the top 10 carriers, A.P. Moeller-Maersk A/S appears to us as the strongest contender in winning this deflationary contest" - Macronomics - 15th of August 2012

We did also argue in March 2012 that "Shipping is leading deflationary indicator". Shipping for us is an important credit and growth indicator, but most importantly a clear deflationary indicator.

We did indicate at the time that consolidation, defaults and restructuring were going to happen, no matter what in the shipping industry. We discussed back then, the restructuring process involving one of the biggest container shipping companies of the world CMA CGM. In a deflationary environment, only the strong survive hence our title, but to quote Taleb, in A.P. Moeller-Maersk A/S has been indeed the opposite of fragile and has gained from disorder.

In the case of shipping, excess capacity and falling rates, is leading to "creative destruction" à la Schumpeter, meaning that a company like Maersk with its newest class of triple-E ships introduced in July 2013 has indeed been benefiting from the "scrapping disorder" - graph source Bloomberg:
"Excess capacity and depressed charter rates have increased the number of container ships sent to be scrapped by 607% since June 2005. This is creating a more efficient fleet as older ships are replaced by newer models. For instance, Maersk began introducing triple-E ships in July that consume about 35% less fuel per container and are able to carry 16% more boxes. In May, the total number of scrapped container vessels surpassed tankers." - source Bloomberg.

"Only the strong survive" - Shipping has always been our favorite deflationary indicator, so we give you the latest reading of the Drewry-Hong-Los Angeles container rate benchmark. The container rate increased by $400 USD on the 15th of November on all US destinations with no impact so far for the "recovery" desired by Private Equity busy investing in the shipping space as discussed back in our December conversation - graph source Bloomberg:
"Containership lines have announced 12 rate increases, totaling $5,250, on Asia-U.S. routes since the beginning of 2012. The increases have largely failed to hold because of excess capacity and a sluggish global economy. As such, benchmark Hong Kong-Los Angeles rates have only risen 31% since the end of 2011 and are down 15% yoy. In a Bear Case scenario, operators will continue to struggle to sustain rate increases." - source Bloomberg.

In a Bear Case scenario, only the strong survive such as Maersk. The world's largest container shipping line with 15% of the world's market share, did report an 11% increase back in November in third-quarter profit after cutting costs by 13% in the quarter helped as well by its new line of triple-E ships being introduced which has been countering the deflationary trend in freight rates.

When it comes to making recommendations we did confess in January last year in our conversation "If at first you don't succeed..." the following:
"The greatest trick Macronomics ever pulled on its readers was to convince them there is no "market tricks" displayed in their posts." - Macronomics

When it comes to A.P. Maersk-Moller's performance and for the attentive readers, no doubt our previous "identification" of the fittest survivor in this deflationary environment has rewarded them handsomely - graph source Bloomberg:

Yes, sometimes, we do slightly break our Magician's Oath:
"As a magician I promise never to reveal the secret of any illusion to a non-magician, unless that one swears to uphold the Magician's Oath in turn. I promise never to perform any illusion for any non-magician without first practicing the effect until I can perform it well enough to maintain the illusion of magic."

When it comes to A.P. Moller-Maersk A/S, the record pace of divestments in order to grow their cash pile with the latest being the sale of their retail business for $3.1 billion dollars, will make them even stronger to counter the deflationary effects of falling container prices as indicated by Christian Wienberg in Bloomberg on the 8th of January in his article "Maersk Enriches Bondholders as Cash Mound Swells":
"As A.P. Moeller-Maersk A/S sells off business units at a record pace, the company’s growing cash pile is driving its bond spreads to the narrowest ever.
Yields on Maersk bonds fell to their lowest in more than a month yesterday after the owner of the world’s biggest shipping line said it will sell most of its retail business, raising proceeds of about 17 billion kroner ($3.1 billion). Two days earlier, the Copenhagen-based company, which owns more than 1,000 subsidiaries, agreed to sell 15 crude tankers for $980 million.
This will make Maersk’s financial position even stronger, at least in the short to medium term,” Brian Boersting, a credit analyst at Danske Markets in Copenhagen, said in a phone interview.
Since taking over in 2007, Chief Executive Officer Nils Smedegaard Andersen, Maersk has been selling divisions to focus on container shipping, port operations, oil exploration and drilling. From January 2007 to September 2013, Maersk raised about $11 billion in cash from divestments that included a rubber producer, a shipyard and a stake in a ferry operator.
With the sale of its crude tankers and retail business, this year’s cash flow from divestments has already topped a record $3.3 billion reached in 2012."- source Bloomberg.

Cash is king and only the strong survive...

"Learning is not compulsory... neither is survival." - W. Edwards Deming, American scientist

Stay tuned!

1 comment:

  1. One can follow the publicly traded Shipping Companies with the use of this Finviz Screener

    Jesus Christ, through dispensation, that is the administration of all things economic and political, produced peak liberalism on January 13, 2013, via currency carry trade investing and debt trade investing.

    This being seen in the ongoing six month Yahoo Finance chart of Shipping SEA, Global Financials, IXG, Nation Investment, EFA, World Stocks, VT, Greece, GREK, The Eurozone, EZU, and Denmark. EDEN

    The terminal phase of Liberalism, beginning with Ben Bernanke's QE1, was a paradigm and age that featured the economic action of inflationism where economic life centered around the investor and investment choice.

    Now since Jesus Christ opened the first seal of the Scroll of end time events, on October 23, 2013, the Rider on the White Horse, Revelation 6:1-2, has pivoted the world into authoritarianism, where economic action is one of destructionism, and economic life is centered around the debt serf and debt servitude.


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