Barclays PLC (LON:BARC) (NYSE:BCS) has released an overview of changing tides in global trade and the expected effects on container shipping, dry bulk shipping, airlines, railroads, highways, and the shipbuilding industry. In this post, container shipping and rails are discussed briefly.
The analysis reports a consistent increase in the manufactured goods trade over the entire history of world trade. At each phase in history, the manufactured goods have benefited from an increase in commodity prices. As the global trade is dispersing into new regions, the relative consumption of products has also varied. On the other hand, the production centers of the world are more or less still concentrated in the same regions as they have been in the last 20 years. The major change in the global trade trends has come from slowdown at the European end, and an absolute decline in trade is expected in 2012.
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The report also discusses how emergence of Chinese economy has changed the world picture of trading, but at the same time contests that the Chinese impact is overstated. The analysis expects more dispersion in manufacturing and production industry but does not expect many changes to originate from China, the leading exporter of the world. The reduction in exports could come from declines in lower value goods. Concentration of export of items like, shoes, apparel, auto parts, and toys have declined over the past 12 months. The report is using US imports as an example to illustrate the degree of impact, as the US is the bigger importer of Chinese products.
As consumption patterns are changing and production is also expected to diversify, the demand thresholds will change as well. The analysis reports that although demand has increased over the past 30 years, the average profit margins have not progressed cooperatively. The focal point of the report is how the container shipping business will change as the result of changing trends in global manufactured trade. The profit margins have been low for the container shipment industry, return on assets has been 4 percent in the past twenty years.
Chinese exports picked up in the month of September, with a 9.9 percent y-o-y increase, compared to 2.7 percent y-o-y in August. Barclays is bearish on growth in the container shipping business. Europe remains the key concern where European cargo has made up 30 percent of the exposure. Negative growth will turn focus to other areas, which will lead to reduced freight rates across industry.
Asia ex-Japan Engineering & Construction
Barclays is bullish on the three largest infrastructure construction companies of China, namely, China Railway Construction Corp Limited (HKG:1186), China Resources Land Limited (HKG:1109), and China Communications Construction Co Lt (HKG:1800). CRCC is at top which is trading at P/E 7x 2013E, and more growth in earnings is expected to come from investment in rails. Both CRG and CRCC have good exposure in rails, and the industry is positioned favorably, as compared to roads, where unfavorable policies are a major headwind. Risks to the rail industry include lower than expected growth, inflation in raw materials and tight liquidity.