Supply and Demand Mismatch Forecasted in Shipping, Danaos is Downgraded

We are downgrading Danaos to Neutral from Outperform, and Seaspan to Underperform from Neutral. – Credit Suisse

Despite both Danaos’ (ticker: DAC) and Seaspan’s (SSW) solid contact coverage in 2012, we are downgrading both names under a backdrop of capacity rationalization by their customers. The liner industry (customers) is trying to figure out how to make money and capacity reductions seem to be doing the job.

Idle ship capacity stands at 5% of the fleet, and we expect more not less as new ships are delivered this year. This should keep charter rates (already around cash costs) at depressed levels into 2013 and drag down asset values along the way.

Rationalization and ton-mile contraction is not good for ship owners. Last year was another tough year for the liner industry with the major liner companies returning to their losing ways. This has driven many shippers to rationalize their services, which has included increased vessel-sharing arrangements (think better-utilized vessels but less of them). Additionally, while we expect strength in regional trades such as Intra-Asia and Far East-Middle East, we expect slower growth on the Far East-Europe trade and the transpacific trade to drive ton-mile contraction. In other words we are not expecting the container trade to be a two times multiple of global growth.

Fleet growth is slowing, but still a lot on the way. We expect containership fleet growth of roughly 9% in both 2012 and 2013 versus our containership demand growth estimates of 5% in 2012 and 7% in 2013 — this still points to a supply demand mismatch. Barring a surge in global container trade, we expect charter rates to remain at depressed levels in 2012 and below midcycle levels in 2013.

– Gregory Lewis and Anthony Sibilia, Barrons Online

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