Orient Overseas International troubled by port congestion

But is it deeply worried?.

The management of Orient Overseas International, which is principally engaged in container transport and logistics, said it believes the industry is still suffering from overcapacity.

According to a research note from Nomura, it also believes the problem should be even serious in 2015, as additional larger vessels are expected to come in that year.

As such, despite rebounding volumes, freight rates are not moving up and will likely continue to be under pressure in 2015, as per management’s expectation.

Further, to survive in this overcapacity-industry, management believes that higher efficiency and a better-managed company would stand out to enjoy lower costs compared with peers.

Here's more from Nomura:

Management is proud of OOIL’s IT techniques and management quality which should allow the company to enjoy lower operating costs and hence better margins than peers.

Global supply/demand forecasts for 2014-2015F. As per management, demand growth rate will likely rebound to 5.3% in 2014F and 5.9% in 2015F from 4.1% in 2013.

Net capacity growth will also likely increase to 5.6% in 2014F and 6.8% in 2015F from 5.4% in 2013. So the gap will widen further in 2015F amid more larger vessels coming online.

Demand is expected to bottom out in 2013. Management expects global container demand should have already bottomed out in 2013 and may see a CAGR of 5.1% in 2013-2017F. Transpacific volumes have continued to register m-m and y-y increases during Feb14 to Sep14, and management expects volumes will likely continue to rise in Oct14 before coming down due to the off season.

This is in contrast to a lack of peak seasons in 2013 and 2012 when volumes started to decline in Sept. Management believes that continued demand increase may indicate that the peak season is still ongoing.

Similarly, Asia-Europe volumes also recorded a strong rebound y-y into Aug14 and management expects such a trend would continue into Sep14 driven by restocking in Europe. Management notes that such a rebound in Asia-Europe has surprised many investors, especially when the European economy is not improving much. Forward-booking on both the transpacific and Asia-Europe routes has been good at 91% and 100%, respectively. Nevertheless, freight rates remain stable despite strong demand rebound as the oversupply issue still persists.

Freight rates will continue to be under pressure in 2015F due to oversupply. With more new vessels coming online in 2015F, at an estimated (by Alphaliner ) 1.82mn TEUs vs. 1.59mn TEUs in 2014F and 1.38mn TEUs in 2013, management expects freight rates may continue to be under pressure in 2015F.

Apart from shipping companies expanding their capacities, management notes that some other nonshipping companies (including Oaktree, Capital Ship Management, Seaspan) also enter the container industry to build and lease out vessels in order to enjoy the higher leasing rates, this would also increase the industry’s supply going forward.

Port congestion another concern.

Management notes that port congestion problem is especially severe in developed regions such as the US, HK, Europe. Congestion may be caused by large vessels, port hardware, port infrastructure, intermodal infrastructure, alliance operating model and weather, seasonal/strike risk bunching.

Port congestion would continue to increase shipping companies’ operating costs and place more challenges on operations and service quality.

Fittest to survive in the market. Improving operational efficiency via better IT solutions and management skills would be a direction for the company to work for and to stand out from peers, as per management.