CMA CGM – Margins to strengthen on higher in the SCFI vs LSFO Bunker costs differential

All,

We estimate that Q2 20 should see another quarter of strong margins for CMA CGM. Our monitor of the SCFI (Shanghai Containerized Freight Index) vs LSFO Bunker differential shows a significant strengthening between January and July, by as much as +80%.  The variation vs March is also significant at +10%, which would leave the Q2 20 average around +24% higher than Q1 20.

 This differential is a basic but important measure of margins net of fuel costs. As we have argued in the past, rates on their own are insufficient to understand margin dynamics, as during normal times they retain a very strong relationship with the underlying fuel costs required to fulfill the delivery. 

 Shipping volumes are seeing a decent recovery, with China, Europe, Japan, South Korea and key Southeast Asian economies more than 2 months into the reopening phase as the coronavirus was brought under control. At the same time, the oil products segment has seen a much weaker recovery thanks to the significant accumulation of inventories across all parts of the value chain, from crude to refined products.

 This normalization of prices in oil products will not happen before the production cuts from OPEC and other key producers bring crude inventories back to normal levels. This is currently expected to take place around mid-2021, as we discussed in our recent initiation note on the seismic data provider CGG (here).

 Overall, this supports our view that both the remainder of the 2021 bonds and the 2022 bonds are likely to be repaid in full as the container shipping sector continues to maintain discipline in a relatively low bunker cost environment well into 2021. Please find our previous note on CMA CGM here.

 As always, feel free to reach out if you want to exchange ideas on these situations.

Juliano