Valuation of the maritime industry

Weekly Corporate Growth Report, Dec 8, 1997

According to Value Line, the risks outweigh the potential rewards for most investors in the maritime industry. This is due to the fact that the industry is currently facing some very tough times. The containment segment of this industry is in a state of upheaval as new capacity floods the market, and severe rate pressure is now the norm on close to every major trading route.

The transpacific market has been especially hard hit, a situation not helped out by labor unrest and equipment shortages. And in an attempt to regain satisfactory investment returns, the world containership fleet is going through a major restructuring. The icing on the cake is that this is happening at a time when Congress is turning away attempts at regulatory reform legislation.

All Hands on Deck The world fleet is facing a very harmful overcapacity situation. Shipping lines have spent the last two years adding scores of new vessels to the world fleet, and owners continue to take delivery on larger and faster ships in an effort to lower their cost per unit. The problem is that these giant vessels are contributing to worldwide capacity while the older and smaller ships are sent on to niche or feeder markets.

Owners are now competing for volume instead of profit. Much of this has occurred on the Pacific, where some cargoes have seen their rates at 30% or below late-1995 rates. The market will probably not reverse itself before 1999.

Mutiny on the Bounty The problems on the Pacific have been intensified by various powerful labor unions that have initiated work stoppages or slowdowns over the last year. The Pacific Maritime Association has released statistics that show a decline in cargo handling productivity at West Coast ports in 1996. This will probably be the same case for 1997. Additionally, a shortage of railcars at these same ports delayed the movement of holiday-season imports.

The squeeze on profit margins has forced companies to drive down costs. The latest trend in this effort is outright mergers. There have been at least five major acquisitions announced or completed this past year. Among them, CP Ships has announced plans to purchase Contship Container Lines and Neptune Orient Lines has offered a good price for APL.

All is not doom and gloom, however, as Winter 1998 is looking to feature the best tanker market since the Persian Gulf War. Significant new tonnage should enter the market in late 1998 and 1999, yet rates should hold reasonably firm as demand for crude oil and its derivatives steadily increases and older tonnage is retired. (Source: Value Line)