Taiwan Shipping Report Q1 2013

BMI has again reduced its Taiwan GDP growth estimate and forecast, respectively, for 2012 and 2013. Wecontinue to see the local economy picking up pace as we move into 2013, but the recovery will be lessvigorous than we originally hoped, for a variety of reasons. They include external factors, such as arebalancing economy in mainland China and a slow recovery in the eurozone. The internal picture alsogives us cause for concern. We are worried that investment interest in Taiwan has cooled. And while thetech industry is leading the recovery, we believe local companies are no longer as innovative as they oncewere, and Taiwan is beginning to fall 'behind the curve' in this respect. Add to this, a banking system inneed of deregulation and reform and a political scene that doesn't seem to support further economic reforms,and the conclusion is that the island's long-term growth trend may be coming down. In fact, we have nowcut back our longer-term growth projections, to an annual GDP average of 3.9% in the 2014-2011 period,compared with 4.7% previously.

The less optimistic economic outlook will have a significant impact on port and shipping activity. We stillexpect an upturn in 2013 port activity levels, but this will be in the low single percentage digits. Broadlyspeaking, Kaohsiung, Taiwan's largest port, remains the most resilient. Keelung, the country's secondlargest port, will recover weakly from a difficult 2012, when we estimate it experienced percentage falls ofaround 8-9% in both bulk tonnage and box traffic.

On the plus side, the policy of cross-straits integration is expected to continue. Further liberalisation ofrelations between Taiwan and mainland China remains on the cards. In this context Taiwan's ports andshipping lines continue to position themselves to work through a series of alliances and partnerships withmainland companies over the next few years.

Headline Industry Data

2013 Port of Kaohsiung tonnage throughput forecast to grow by 1.5% to 124.947mn tonnes, over themid-term we project an annual average increase of 1.6%.

Port of Kaohsiung container throughput forecast to grow 2.7% to 10.127mn twenty-foot equivalent units(TEUs) in 2013, over the mid-term we project an annual average 3.5% increase.

Port of Keelung will see tonnage recovering by 1.0% in 2013 to 70.1mn tonnes, with container traffic upby 1.3% to 1.621mn TEUs.

2013 total trade growth forecast to recover by a strong 10.0% in real terms, compared to a drop of 1.3%in 2012.

Key Industry Trends

Big Is Still Beautiful For Yang Ming

With shipping line Yang Ming reported to be back in profit in Q312, the company has got approval from itsboard to order five 14,000TEU container vessels, with the option for five more. The plan is for the firstnewbuild to be delivered in Q115. The order signals Yang Ming's determination to retain its exposure to theAsia-Europe trade route, despite the tough operating environment on this route in the past few years. It alsoposes the risk of further overcapacity being added to the already saturated Asia-Europe trade route. BMIhas previously highlighted that despite the projected pickup in demand as the eurozone starts its recoveryfrom its double-dip recession in 2013 the massive influx of mega vessels due online in 2013 and 2014 willlead to ongoing issues of overcapacity, which will take time to iron out.

Kaohsiung On The Up

Taiwan International Ports Corporation said that Kaohsiung Port registered a 7.9% month-on-month rise inbox throughput to 875,000TEUs in October 2012. A total of 8.2mn TEUs of containers had beentransported from the port in the first 10 months of 2012, up 2.5% year-on-year. Meanwhile, constructionwork on the phase 2 projects at the port's 6th Container Terminal is moving ahead. Phase 2, which is likelyto be concluded by June 2014, includes two new container wharves (110 and 111), the CY-3 container yard,and various support buildings and infrastructures.

Evergreen Eases Back On Fleet Growth

While still enthusiastic for large ships, Taiwan shipping group, Evergreen Line, is beginning to ease backon its expansion plans. Ever Lawful, the latest 20 L-type containership built for Evergreen Line, has beenlaunched at the shipyard of South Korean shipbuilder, Samsung Heavy Industries. The 8,452TEU vesselwill be deployed on Evergreen's Far East-Europe services. Evergreen has ordered 30 such vessels since2010, 10 of which will be built by Taiwan Shipbuilding. Earlier, there were signs that Evergreen was easingback on its fleet expansion programme. In October 2012, the company said it would undertake no moreshipbuilding in the immediate future. Evergreen Line Executive Vice-Group Chairman, Bronson Hsieh, hadpreviously said that the company would instead adjust capacity in order to meet demand. Evergreen Line'sfleet currently comprises approximately 60 vessels.

Risks to Outlook

Rebalancing in mainland China remains an important downside risk for Taiwan's shipping sector. As themainland switches away from an export-led growth model to one which focuses more on internal demand,BMI believes its long-term growth trend will begin to come down. While there will still be opportunities forTaiwan to benefit from mainland demand, they will be less dynamic. Importantly, given low levels ofmainland investment in Taiwan, and a fall in FDI from other sources, there is a possibility that some ofthese opportunities may be missed.

As in our last quarterly report, we believe politics is also a downside risk factor for the ports and shippingsector. While Taiwan remains a stable, market-friendly country, the troubles of the Ma Ying-jeou KMTadministration have increased. In the early stages of his second term as president, Ma has been doing badlyin the opinion polls, amid internal disputes, allegations of corruption and some significant policy setbacks.

A period of policy drift could undermine business confidence and ultimately delay important investmentand business decisions, delaying the hoped-for economic recovery.