Jinhui Too Optimistic

Implications: Jinhui Shipping & Transportation (Oslo:JIN.OL) reported record profits and simultaneously warned of weaker medium term prospects.  The company rightly cited macroeconomic concerns on the demand side, but is overly optimistic related to the supply side.

Analysis: Jinhui is mostly in the supramax market.  The conditions that the company cited related to the demand side of shipping are likely to have a greater impact on the Cape and Panamax sectors.  The shear range of products carried on Handy and Handymax vessels generally ensures that demand is more stable.

It is on the supply side that Jinhui is much too optimistic.  Discounting the extreme order book with the standard forecast of credit-related cancelations, delayed deliveries from new shipyards, and a creative forecast of substandard tonnage from new yards, Jinhui believes that some level of balance will be maintained.

The orderbook for Handymax vessels stands at nearly 63% of the current fleet, with the bulk of orders in the Supramax category.  Greater than 40% of those orders are due for delivery by the end of 2009.  While Jinhui is correct that the age profile will certainly lead to scrappings that will mitigate growth, the handymax fleet profile is substantially less than that of Handies.

Signalling the impending end of record earnings announcements is a prudent move by Jinhui.  Hopefully, their strategy for dealing with the rate environment in 2010 is better than their press release indicates.