Will Tailwinds Blow Again for Shipping Stocks?

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[Asia Economy Reporter Minji Lee] As the shipping freight index reaches an all-time high, attention is focused on whether shipping stocks, which had been shrinking due to concerns about peak-out, can show an upward trend again.

According to the financial investment industry on the 28th, the Baltic Dry Index (BDI) recorded 4,644 points as of the 24th, rising about 12.4% this month. This month, the BDI touched the 4,650 level, marking the highest level since November 2009. The Shanghai Containerized Freight Index (SCFI) rose by 21.28 points from the previous week to 4,643.79, recording an increase for 20 consecutive weeks.

The sustained rise in the BDI is attributed to the trade dispute between China and Australia. As China increases imports of Brazilian iron ore instead of Australian ore, affecting the market conditions, it is analyzed that factors such as China's stockpiling demand and irregular short-term spot freight rate increases due to regional vessel supply imbalances have influenced the trend. The SCFI index was largely affected by container congestion and increased demand, with current cargo volume about 5% higher compared to pre-COVID-19 levels in 2019.

Choi Go-woon, a researcher at Korea Investment & Securities, said, "The demand for container ships was not expected to be this strong, but as cargo volume increases, the supply advantage seems to be strengthening." He added, "The Baltic Dry Index has hit a record high due to suppressed coal demand and severe port congestion in China caused by typhoon damage, and the shortage of shipping supply is expected to last longer." The news of new ship orders starting this year also supports the strong market conditions. Considering shipbuilding periods and major shipping companies' dock schedules, the ships currently ordered are expected to be delivered mainly in 2023-2024, with about 41% of the total order backlog to be delivered in 2023 and about 31% in 2024.

Looking at the recent three-month stock price trends of domestic shipping companies, they have continued to decline. Pan Ocean, which focuses on the dry bulk sector as its core business, fell 9.6% from 8,560 won to 7,740 won, and HMM, the largest container shipping company in Korea, dropped about 13% from 44,300 won to 38,400 won. Concerns that second-half earnings may shrink are suppressing stock prices. However, as the market conditions are expected to remain strong, the earnings of these two companies are forecasted to exceed market expectations for the time being.

Profit estimates for the second half are being revised upward one after another. HMM is predicted to record an operating profit of 1.8278 trillion won in the third quarter, a 76% increase from three months ago (1.0353 trillion won). Pan Ocean is also expected to post an operating profit of 145.7 billion won, about 78% higher than three months ago (81.4 billion won).

Looking at the highest target prices suggested by the securities industry, HMM’s target price is 60,000 won, 58% higher than the current price, and Pan Ocean’s is 11,000 won, a 42% increase. Yang Ji-hwan, a researcher at Daishin Securities who suggested these target prices, explained, "In the case of Pan Ocean, due to the strong market conditions, it will announce earnings exceeding market expectations until the fourth quarter," and added, "Container freight rates linked to HMM’s stock price will continue to be strong until there is a decrease in U.S. consumption and cargo volume."

However, some voices caution that investment should be careful despite solid earnings. Kang Sung-jin, a researcher at KB Securities, explained, "As congestion in the global shipping logistics network gradually eases, bulk ship freight rates may decline from next year," and added, "The rise in freight indices also affects charter rates, which could negatively impact profit margins."

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