Tuesday, July 27, 2010

Cost of Freight Shipping Rises, Hurting Retailers - NYTimes.com

Here's another example of what might appear to be good news is actually something else.

Yesterday I posted a note which talked about how corporations seem to be prospering in a time of economic weakness. Top line growth is muted yet margins and the bottom line keep rising as corporations ruthlessly cut costs, especially in headcount. This unfortunate trend does no show any signs of reversing.

Then there are the sectors that seem to be showing signs of strong economic growth, like the transportation sector. If you are a follower of the Dow Theory, transports are an important sector to watch, since a rise in the transports stock prices should foreshadow a rise in the general markets.

And yet some of the apparent strength in transport earnings and pricing power seems to be more the result of a lack of shipping availability than a strong resurgence in underlying demand.

This article in this morning's New York Times is a good example. Here's an excerpt:

Fighting for freight, retailers are outbidding each other to score scarce cargo space on ships, paying two to three times last year’s freight rates — in some cases, the highest rates in five years. And still, many are getting merchandise weeks late.

The problems stem from 2009, when stores slashed inventory. With little demand for shipping, ocean carriers took ships out of service: more than 11 percent of the global shipping fleet was idle in spring 2009, according to AXS-Alphaliner, an industry consultant.

Carriers also moved to “slow steaming,” traveling at slower and more fuel-efficient speeds, while the companies producing containers, the typically 20- or 40-foot boxes in which most consumer companies ship goods, essentially stopped making them.

And yet, as the same article goes on to note, the price of shipping related to commodities continues to drop:

(While container shipping has recovered from last year’s lower spot prices, commodity shipping, where companies ship raw goods like iron ore or petroleum, remains in a depression. This month, the Baltic Dry Index, which measures commodity shipping costs, fell for the longest number of consecutive days in almost nine years because of low demand for materials like steel.)

Mind you, as someone who is buying transport stocks for client portfolios, I don't have any problem with rail and other shipping companies doing well, as the stocks continue to show nice gains. At the same time, from a macro economic perspective, I am cautious to conclude that the hikes in shipping rates are a meaningful economic indicator.

Cost of Freight Shipping Rises, Hurting Retailers - NYTimes.com