31-10-2016

Japanese shippers kicked when down as strong yen worsens weak outlook

Shipping

Japan’s big three shippers will report earnings on Monday as yen strength threatens to widen annual loss estimates, in a sector shaken by shrinking demand and over capacity that has already sunk a major carrier.

Nippon Yusen KK (NYK), Mitsui OSK Lines Ltd (MOL) and Kawasaki Kisen Kaisha Ltd (K-Line) – whose combined fleet of over 2,000 vessels includes tankers, dry-cargo carriers and container ships – will issue second-quarter results and updated full-year estimates that analysts say are currently too optimistic.

The announcements will come just weeks after NYK said it would write down assets to the tune of 160 billion yen ($1.52 billion) in the July-September period.

The charge is symptomatic of a global container shipping industry that is set to book a collective loss of around $6 billion in 2016, showed estimates by maritime consultant Drewry Financial Services.

“With costs above sales and underlying freight markets showing no sign of recovery, the outlook for 2016 is grim,” Drewry said in a report.

Over capacity and anaemic economic growth globally has left hundreds of ships idle, causing the collapse in August of South Korea’s Hanjin Shipping Co Ltd, then the world’s seventh-largest container shipper. Analysts expect capacity to worsen at least over the next three years.

As of Oct. 25, as much as 1.55 million 20-foot equivalent units (TEU) of container ship capacity was idle, or 7.5 percent of the global fleet, showed estimates by market intelligence firm Alphaliner.

“The poor global economic situation, as well as the depressing outlook for most of the seaborne shipping sector… needs to be countered by a drastic increase in demolition activity,” said chief shipping analyst Peter Sand at ship-owners lobby group BIMCO in Copenhagen.

Container lines are unlikely to return to profitability until at least 2020, he added.

LIQUIDITY ISSUES

For the three Japanese shippers, whose income is mostly earned in U.S. dollars, earnings are being further squeezed by a 7.5 percent fall in the value of the dollar against the yen so far in the current business year that started April 1.

For whole year, NYK three months ago said it expected to break even on an operating level, but the average estimate of 11 analysts surveyed by Thomson Reuters is a 6.9 billion yen loss.

Analysts expect a loss of 9.3 billion yen at MOL rather than the shipper’s own forecast of 5 billion yen, and 22.5 billion yen at K-Line versus the firm’s view of 13 billion yen.

“K-Line has the largest exposure to the container market compared to its peers. We therefore expect the company to post significant losses in coming years,” Deutsche Bank analysts, who recommend selling K-Line stock, said in a research note this week.

Shippers are shrinking fleets to cope with global over capacity – including MOL which is cutting its big bulk carriers by a tenth – but a lengthy downturn will still weaken finances.

“We expect the upcoming Q2 results to again surprise to the downside,” Deutsche Bank said of all three shippers. “We do not rule out the possibility of certain Japanese carriers facing liquidity issues ahead.”

Source: Reuters

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