- Ocean shipping in favor in 2021, shipbuilding in 2022; top pick is Pan Ocean.
- Shipbuilding and ocean shipping stocks have been following a similar pattern as in the market upturn of 2017.
- The economic recovery in 2021 will be driven by fiscal policies and stimulus measures implemented by developed countries.
A recent news article published in Business Korea reveals that Ocean shipping in favor in 2021.
Economic recovery in 2021
The economic recovery in 2021 will be driven by fiscal policies and stimulus measures implemented by developed countries.
Shipping companies will see freight rate hikes and shipbuilders to enjoy continued growth in order placements.
We retain our OVERWEIGHT view on shipbuilding and ocean shipping sectors.
Freight rates
Ocean shipping is in our favor this year given freight rate hikes and shipbuilding in 2022 after building up order backlogs.
Valuations of shipping stocks are determined by freight rates and shipbuilding stocks by newbuilding prices.
Newbuilding prices tend to rise during an upturn in order backlog following freight rate hikes and the subsequent increase in order placements.
Pan Ocean is top pick
The top pick is Pan Ocean (028670KS). Share price gains are expected in 2021 on an uptrend in the Baltic Dry Index (BDI) driven by the recovery of emerging economies.
The LNG shipping business should expand based on stable financials.
The share price will likely pick up after the Lunar New Year’s holiday.
Freight rates and orders to grow on economic stimulus and fiscal policies.
Forecast newbuilding prices
Forecast newbuilding prices at 128p (+1.9% YoY) for 2021 and 138p (+7.9% YoY) for 2022. The price increase will be limited this year. G
order placements should visibly recover 48.2% YoY to 80mn DWT, but will likely be outnumbered by deliveries of 90mn DWT (+2.6% YoY).
The backlog-to-delivery ratio (0.84 correlation coefficient with newbuilding price) should improve slightly to 1.6 years (+0.3% YoY) from 3Q21.
Increases in the USD/KRW rate and heavy plate prices will undermine profitability of newbuild contracts.
Tough regulations
The International Maritime Organization’s Energy Efficiency Design Index (EEDI) phase 3requirements will be applicable from April 2022.
The Energy Efficiency Existing Ship Index (EEXI) requirements, set to be introduced in 2023, will limit engine power of existing vessels as well as newbuilds.
Tougher regulations should lead to a drop in vessel speed, reduction in effective vessel tonnage, freight rate hikes, and market share gains of Korean shipbuilders.
To meet new requirements, shipping companies will likely opt for LNG-fueled ships in which Korean shipbuilders currently hold a 65.4%market share.
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Source: Business Korea
