Ignore Data from U.S. / Asia Container Trade at Your Peril

by: Vincent Fernando, CFA

One of my favorite signals for the world economy - container trade volume - still looks like it will be pretty weak for 2H09. Industry research firm Drewry recently came out with a -10% forecast for 2009, which is a large change from the days of low to mid teens volume growth (~3x World GDP). Anything in the low single digits of growth would be weak historically, but if we start to approach a double digit decline then things are clearly still pretty rough. And Drewry isn't alone in terms of their outlook. Our friends at Transport Trackers recently issued a note whereby they believe that while Drewry may be slightly too pessimistic, we should still expect high single digit declines as the base case for 09E. This indicates further hard times ahead.

Drewry’s Shock and Awe: Drewry, not always known for pessimistic forecasts, recently shocked the market with a ‐10% container growth forecast for 09E… More depressing perhaps is Drewry sides with long‐term growth of 6‐7% (we agree) and not 9‐10% type growth long built in to owner‐operator forecasts, based on historical experience. We can’t get quite as low a 09E ‐10% global estimate yet but agree, of course, with a longer‐term shift down for containerization, even while seeing some early‐10E or mid‐10E rebound post 09E deep bottom…

TT also points out that recent container shipping rates reported by some listed companies have been quite poor. As an aside, we remind readers that in addition to slumping demand, container trade faces a lot of new supply, in terms of new container ships coming online, which is a substantial threat for end-2009 profitability. TT believes shipyard delays may mitigate the supply growth problem to some degree, but it is unlikely to be enough for 2009. Thus they believe current data implies a rough 2H09, a moderating but still challenging 2010, and then perhaps potential for some decent profitability in 2011 should further shipyard cancellations and a global economic rebound coincide nicely.

I think it is also worth pointing out that TT's data continues to show Asia particularly hard hit by the decline in container trade. They estimate Asia outbound 2009 volumes will be down 14%, which is higher than their high-single-digit-decline estimate globally. Thus Asia is expected to show relative weakness for 2H09.

Our Asia Outbound series is looking like a very weak ‐14.2% in 09E, though we have a mild rebound of about +6.7% out of Asia in 10E. Our current Transpacific Eastbound (Asia to US) demand outlook is for about ‐14% TEU volumes

For further reading, you can find Transport Trackers' note here.

All in all, this data feeds quite well into the information highlighted by Citi's Markus Rosgen in terms of weak Asian export data and still-high US inventory-to-sales likely indicating weak 2009 US demand for Asian products. It also lends credence to his warning that analyst estimates for a a fast and sharp Asian rebound in profitability may be a bit premature. And our final thoughts? Ignore container trade at your peril. Remeber that it started showing peculiar weakness well before the floor fell out from under the global economy.. and global markets. I want to see a nice turnaround, before I get giddy on global growth.