The Container Shipping Market

By Charles de Trenck, Citigroup Smith Barney

Past Its Peak and Preparing for Volatile Downside Moves

Despite trading calls to the upside, most recently this past summer, we believe the cycle is now moving past its prime and downside risks will begin to crowd out upside opportunity. Many people have noted our view as among the most bearish. But the issue is bearish at what price point – our view is not bearish at all price points but is rather more about trading opportunities around certain valuations.

We are looking for a post Chinese New Year seasonal correction from lofty highs in the dry bulk market and a 2H05 capacity-led down turn in container shipping (higher risk 2006 but depends on demand growth in 2H05 against sizeable acceleration of deliveries in 2H05). In theory and from physical markets perspective, these two markets are not strongly related, given that these sub-industries exhibit different specific dynamics. However, in the big picture and in practice, the two sub-sectors can be quite strongly related given a high degree of correlation between the BDI (Baltic Dry Index) and shipping shares (and even deep cyclicals) in general.

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