Bernstein: 'Strike averted, removing important source of upside for freight rates'

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Here’s a ‘quick take’ from Bernstein out today to equity investors following the latest news on ILA-USMX negotiations:

“A potential strike at ports on the US East and Gulf coasts has been averted. The International Longshoremen’s Association (ILA) and US Maritime Alliance (USMX) reached agreement overnight, preventing a work stoppage that would have been due on January 15.

“In a statement, the ILA commented ‘This agreement protects current ILA jobs and establishes a framework for implementing technologies that will create more jobs while modernizing East and Gulf coast ports.’

“In other words, they appear to have agreed to some automation, on the condition that jobs are not eliminated as a consequence of it. However, the details of the contract have not been made public.

“The potential strike was one of the most important forces that would have seen freight rates rise in the early part of this year, as it would have meant an effective supply reduction of container capacity, with ships waiting, unproductive, for a berth. There remains a possibility of a demand pull-forward ahead of new tariffs on US imports, which can yet support rates near-term — but is only a time-shifting of volumes, and if this transpires, we would expect a volume soft patch later on, as seen in 2018-19.

“Structurally, we expect ongoing pressure on freight rates, as supply looks set to continue outgrowing demand. We are already lapping the impassibility of the Red Sea and diversion of vessels around the Cape of Good Hope; if and when this is resolved, we would expect a very rapid drop in pricing.

“Earnings of container shipping lines, including Maersk (Underperform), are highly geared to freight rates. Freight forwarders would likely have been somewhat supported by a strike, as they would have been needed to help clients navigate the ensuing chaos — but the effect is much smaller.”