Malaysia Shipping Report Q2 2012

BMI View: Moderate Growth, Downside Risks Inching Up We are still expecting moderate growth in the Malaysian ports and shipping sector in 2012, with no change to our tonnage and boxes-handled projections relative to our last quarterly report. Yet downside risks are beginning to increase. We have reduced our GDP projection by a percentage point (pp) to 3.2%, on the back of global headwinds caused by the eurozone crisis and sluggish growth in China. Another sign of the less benign environment is that we have reduced our projection for real trade growth this year to 3.4%, barely above GDP growth. Political risk must also be taken into account: national elections are expected during the course of the year, and by 2013 at the latest. Across our five-year forecast period to 2016, GDP will expand by an annual average of 4.1%, a little lower than in the preceding five-year period.

Headline Industry Data

The real value of Malaysia's total trade will rise by a predicted 3.4% in 2012, a slowdown on the estimated 4.2% expansion experienced in 2011.

Total cargo volume handled at Port Klang will rise by 7.7% to 197.70mn tonnes in 2012, while volume at the Port of Tanjung Pelepas will rise by a slightly higher 8.2% to 130.09mn tonnes.

Box traffic at Port Klang is projected to rise 8.3% to 10.34mn twenty-foot equivalent units (TEUs), while at the Port of Tanjung Pelepas a gain of 6.1% to 7.33mn TEUs is expected.

Key Industry Trends Tanjung Pelepas Outperforms In 2011 The Port of Tanjung Pelepas had a bumper year in 2011, recording a 15% year-on-year increase in container handling volumes to 7.5mn TEUs. According to PTP Deputy CEO Azlan Shahrim, improved connectivity and frequency helped the port to provide shippers with better access to the global market. Shahrim added that the port currently handles 26 shipping lines and box operators.

MISC Decides To Quit Container Shipping MISC Berhad, Malaysia's largest shipping line, said it would cease all container shipping operations in mid-2012. Its decision is considered a reaction to the heavy losses it has made in the sector over the last three years, as well as continuing problems of global box-ship overcapacity. MISC's exit, planned for the end of June 2012, is not a sudden move on the company's part; the carrier's liner unit has suffered a total financial loss of US$789mn over the last three years. Unlike other carriers, it has been quick to react to the difficult operating environment in the box shipping sector. In 2010 the company exited the Asia- Europe trade route, which was plagued by overcapacity, instead turning its focus to intra-Asia trade.

Local Shippers Struggle With Tough Dry Bulk Market Difficulties in the dry bulk sector have also affected Malaysian shipping lines. Malaysian Bulk Carriers (Maybulk) was hit hard by the 51% decline in the Baltic Dry Index's average for the first nine months of 2011. Maybulk's net profit was down 56% to MYR74.9mn during the period, compared with MYR170.67mn a year earlier.

Key Risks To Outlook We see two important downside risks to keep in mind. Of the two, the most probable is for global growth to be lower than we expect, impacting on Malaysian GDP and reducing shipping demand. Our core forecast already incorporates the effect of slowdown; the risk here is that it could be more intense than expected, perhaps through a deeper eurozone crisis or a sharper Chinese slowdown. The second risk is of a sharp increase in Malaysian political risk. We are already contemplating that the domestic political temperature will increase in the wake of the acquittal of opposition leader Anwar Ibrahim. On the whole, however, we believe this will be a relatively benign process, with both the government and the opposition offering reforms and 'better governance' as they compete for future votes. The risk here is that the process could take a sectarian and violent turn. Political violence would scare off investors and lead to a sharper economic slowdown.