El contenido del presente documento va destinado a inversores profesionales en el sentido de la Directiva MIF.
by Aravindan Jegannathan, CFA, Senior Equity Analyst & Fabrice Jacob, CEO, JK Capital Management Ltd., a La Française group-member company
In March 2021, we wrote about how global supply chains were in a state of disarray and how the growing shortage of containers exacerbated the issues faced by the global shipping industry, pushing freight rates to new heights. In that write up, we mentioned how global container demand had been surging as a result of China getting out of the Covid lockdown crisis earlier than any other country while millions of people in the West were still in lockdown, purchasing tablets, computers and all kinds of equipment to work from home and find new distractions.
We thought at that time that the surge for Chinese goods would taper as soon as Europe gets out of lockdowns and back to some kind of normality, with shipping rates and container leasing prices going back to their normal level. We were completely wrong: It got far worse.
To give a recap, global shipping freight rates started to rise since mid-2020 and have been on a constant uptrend ever since, with no end in sight. This is the result of a confluence of factors.
China’s zero Covid policy was undoubtedly an initial success that boosted Chinese exports, taking the country’s trade surplus to new heights. But today this policy is backfiring on the Chinese economy as entire cities are regularly put under lockdown as soon as a handful of Covid cases appear. This is directly impacting logistic centres and container ports. In August, after identifying one single Covid case at the Zhoushan terminal of the third largest container port in the world, Ningbo, Chinese authorities shut down all operations for two weeks, ordering all workers to be quarantined. It had a ripple effect on the ports of Shanghai, Xiamen and Hong Kong where traffic was diverted. Shipping analysts have described the impact on global trade of this single event as having been worse than the Suez Canal blockage by a container ship last March, an incident that lasted for six days. The Ningbo port shutdown in August was only two months after a similar situation happened in another busy Chinese port, the Shenzhen - Yantian container port.
The zero Covid policy of China also means that quarantine measures applied to crew members delay the turnaround of ships, as they also need to go through quarantine, with different rules being applied to them depending on their vaccination status and their own nationality. The standard procedure for ships docking in a port anywhere around the world is to go through two days of testing for the crew and for the cargo, as well as two days of testing before a ship goes to dry dock. A typical round trip from Shanghai to Los Angeles that took five weeks pre-pandemic has now gotten stretched to eight weeks given the Covid restrictions and safety precautions carried out in ports.
Container ports around the world are facing major bottlenecks as a result, leading to much longer turnaround times and skyrocketing prices. Container shortage is more acute than vessel shortage due to a lack of port handling capacity. As a result, the ships leave their containers stranded in ports and start their next voyage as soon as possible as the cost of keeping a ship idle in the port waiting to get empty containers reloaded back proves to be cost ineffective in the current circumstances, with freight rates being stratospheric. This automatically curtailed the industry capacity by 60% creating significant pressure on the freight rates.
In normal circumstances, a typical snapshot of container flows shows that roughly 40 percent of all moving containers are returning to East Asia (often empty) while around 20 percent are heading to North America and 20 percent are heading to Europe (always full). However, during the first half of 2021, 45 percent of the containers were heading to North America, 40 percent were heading to Europe and only 15 percent were returning to East Asia, the reason being that a large proportion of empty containers are left in parking lots in Europe and the United States.
Maersk which reported strong 2Q21 results last month estimated that global container shipping demand was up only 2.7% in 2Q21 compared to 2Q19 (using pre-pandemic as the base year) while their average freight rate for forty-foot equivalent unit increased by 63% from US$1,868 per FEU in 2Q19 vs US$3,308 per FEU in 2Q21. The Drewry World Container Index of spot rates rose to $9,987 per FEU as on 2nd September 2021 which was nearly 7x higher than what it was two years ago. https://www.drewry.co.uk/supply-chain-advisors/supply-chain-expertise/world-container-index-assessed-by-drewry
Source: Bloomberg, JKC – September 2021
According to Singamas Container Holdings Ltd., one of the largest container manufacturers in the world, a standard twenty-foot Corten steel dry container had an average selling price of USD3,175 in the first half of 2021. The same container had a selling price of USD1,830 in the first half of 2020, representing an increase of 73% year-on-year. The price of Corten steel itself went up from USD535/ton to USD764/ton over the same timeframe, a 43% increase. And prices keep on going up.
To make matter worse, Christmas is coming. Typically, supply orders for Chinese goods are placed in August/September for delivery in early December. Given the uncertainty of delays in shipments, western retailers are said to be ordering significantly more than what they would typically order, in different batches, to make sure their shelves won’t be empty for the Christmas season. We heard of some retailers ordering as much as twice what they would normally order under normal circumstances in order to minimise their risk. This will necessarily have an impact on Chinese exporters next year as the inflated order books they are seeing now will likely be followed by a post-Christmas adjustment due to some heavy de-stocking by the same retailers.
The current chaos should normally be a short-term phenomenon as these bottlenecks will eventually ease. Some additional shipping and container capacity will get added in the coming year while demand growth should taper. Unfortunately, the ruthless zero-covid policy of China is not helping, and there is no sign that such policy will soften. Indeed, we expect more lockdowns of port infrastructures and more disruptions in the coming weeks, especially as the Delta variant is spreading rapidly across the world. Currently the industry consensus is for the bottleneck to last at least until the end of 2022, or even beyond as there are no signs of any improvement on the horizon.
We remain mindful that the shipping freight rates, and container prices could quickly pull back from their current ultra-high levels, with an impact on the stocks that have benefitted from this trend.
A new stock exchange in China: The Beijing Stock Exchange is born
By Sabrina Ren, Equity Portfolio Manager & Fabrice Jacob, CEO, JK Capital Management Ltd., a La Française group-member company
While addressing the 2021 China International Fair for Trade in Services on 2nd September, President Xi Jinping focused on innovations for small and medium-sized enterprises (SMEs). He touched on reforms to be undertaken at the National Equities Exchange and Quotations (NEEQ), the over-the-counter (OTC) market of China that covers companies that are not listed on the main exchanges of Shanghai and Shenzhen, and he announced the creation of the Beijing Stock Exchange. The Beijing Stock Exchange will be the third official exchange of mainland China, three decades after the setting up of the Shanghai Stock Exchange and of the Shenzhen Stock Exchange.
There are today 4,467 companies listed on the Shanghai Stock Exchange and Shenzhen Stock Exchange, with a total market capitalisation of Rmb86.7 trillion (USD13.5 trillion). The mainland Chinese stock market is the second largest in the world, behind the United States (USD52 trillion) and ahead of Japan (USD7.2 trillion).
The Beijing Stock Exchange will be different from its two larger siblings. Its purpose will be to foster the growth of SMEs while adapting to their characteristics. There will be a supervision of investor suitability as investors will need to be qualified to invest in innovative SMEs, with all the risks it encompasses. The Beijing Stock Exchange will be a springboard towards the more developed stock markets of China while offering a financing platform that will complement the traditional banking sector which, as we know, has always been wary of lending money to privately-owned SMEs. The idea is to nurture a group of high-tech small and medium-sized enterprises with high growth potential, advanced technology, and strong market competitive edges (also called in China "little giant" companies).
The establishment of the Beijing Stock Exchange marks a new stage of reform for the NEEQ, this OTC market that foreign equity investors are typically not very familiar with. The NEEQ is an alternative way to obtain financing through the listing of equities that do not qualify for listing on the Shanghai or Shenzhen stock exchanges. It is essentially a pre-listing or startup exchange that has less stringent and lower capital threshold requirements for listing. The NEEQ was established in January 2013.
Over the years, the NEEQ market has developed into a three-tier structure: the Basic tier, the Innovative tier and the Select tier, with respectively 5,988, 1,250 and 66 companies currently listed under each tier. The total market capitalisation of the NEEQ market is RMB2.4 trillion (USD370bn), which is approximately the size of the stock market of Finland. According to the arrangements devised by the securities regulator, the CSRC, the Beijing Stock Exchange will be built largely around the listing rules that currently apply to the existing NEEQ Select tier, while companies to be listed on the Beijing Stock Exchange are expected to mainly come from the NEEQ Innovation tier. Going forward, the NEEQ market will maintain a structure composed of the NEEQ Basic tier, the NEEQ Innovation tier and the Beijing Stock Exchange (which will replace the Select tier). The listing mechanism will be registration-based as opposed to approval-based, which should simplify and accelerate the listing process.
To summarise, China will soon have three main exchanges, and one OTC market: 1) the Shenzhen Stock Exchange, which itself consists in the Shenzhen main board + the ChiNext market (a NASDAQ-type of market), 2) the Shanghai Stock Exchange, which consists in the Shanghai main board + the Shanghai Stock Exchange Science and Technology Innovation Board (also known as the “STAR” board), and 3) the Beijing Stock Exchange discussed above. The NEEQ will remain as the OTC market and will be largely used as an incubation platform for the Beijing Stock Exchange.
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Informative Document for professional investors as defined by MIFID II. The information contained herein is issued by JK Capital Management Limited. It is provided for informational and educational purposes only and is not intended to serve as a forecast, research product or investment advice and should not be construed as such. The information and material provided herein do not in any case represent advice, an offer, a solicitation or a recommendation to invest in specific investments. To the best of its knowledge and belief, JK Capital Management Limited considers the information contained herein is accurate as at the date of publication. However, no warranty is given on the accuracy, adequacy or completeness of the information. Neither JK Capital Management Limited, nor its affiliates, directors and employees assumes any liabilities (including any third party liability) in respect of any errors or omissions on this report. The opinions expressed by the author are based on current market conditions and are subject to change without notice. These opinions may differ from those of other investment professionals. Under no circumstances should this information or any part of it be copied, reproduced or redistributed. Published by JK Capital Management Ltd. - a limited company - Rm 1101 Chinachem Tower, 34-37 Connaught Road Central - Hong Kong – company number AEP547 - regulated by the Securities and Futures Commission of Hong Kong.