IB Interview Guide, Module 3: Market Discussion Example - Containerships (Shipping/Maritime Industry)

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IB Interview Guide, Module 3: Market Discussion Example –

Containerships (Shipping/Maritime Industry)
You can use this outline and executed example for market discussions.
Sources of Information:
http://www.ics-shipping.org/shipping-facts/shipping-and-world-trade/world-seaborne-trade
https://www.ft.com/content/823371fc-743e-11e6-b60a-de4532d5ea35
https://www.bimco.org/news/market_analysis/2017/20170103-the-shipping-market-in-2016-
and-looking-forward
https://www.ihs.com/Info/1115/maritime-voyage-touchpoint.html
http://www.marineinsight.com/know-more/10-largest-container-shipping-companies-in-the-
world/
https://en.wikipedia.org/wiki/List_of_container_shipping_companies_by_ship_fleets_and_cont
ainers
http://www.latimes.com/business/la-fi-hanjin-shipping-industry-crisis-20160913-snap-
story.html
Outline:
1) Approximate Market Size and Growth Rate – ~$380 billion worldwide market, ~5% of
global trade, and total volume of ~50,000 billion tonne-miles. Market divided into
tanker (energy), dry bulk (commodities), and container (consumer goods) segments.
Containerships have grown at 2-3x global GDP growth, but 1x more recently.
2) Trends and Drivers – Highly cyclical; volume up ~4x over 40 years, but lots of highs and
lows. Suffered from recent overcapacity and economic slowdown in China.
Demographics in India will increase consumer demand, but companies have aging
workforces and may find it tough to keep up.
3) Fragmentation / Key Players – Few companies own between 5% and 15% of the
market. Consolidation unlikely to create new opportunities since ships remain in use.
1 of 3 http://breakingintowallstreet.com
4) Your View / Recommendation – Interesting in the long term because of demographic

trends and trade growth, but avoid in the short term due to overcapacity,
protectionism, and slowdown in China.
Executed Market Discussion:
“Sure. One industry I’ve followed is the shipping/maritime market, and specifically the
containership segment. Worldwide, shipping/maritime is a $380 billion market, which is about
5% of total global trade. Total shipping volume is ~50,000 billion tonne-miles, and it has
increased about 4x over the past 40 years.
The market is divided into liquid vs. dry transportation; “liquid” means oil and gas and the
tankers that transport them, while the other segment is split into “dry bulk” – mostly
commodities – and containers – mostly packaged consumer goods. In past decades,
containerships grew at 2-3x global GDP growth, but that has slowed to 1x more recently.
The market is highly cyclical, and charter rates have fallen recently because of overcapacity and
an economic slowdown in China. Many operators made the mistake of investing at the peak of
the last cycle to beat the competition and now operate unprofitable routes as a result.
In the long term, demographics in India and younger emerging markets will increase consumer
demand, boosting the prospects for containerships. But traditional companies may find it tough
to keep up due to their aging workforces and inability to attract younger talent.
The market is moderately fragmented, with a few companies, such as Maersk, Mediterranean
Shipping, CMA CGM, China COSCO, and Evergreen Marine each owning between 5% and 15%.
Several companies, such as Hanjin, have gone bankrupt or been acquired recently, but charter
rates haven’t changed much.
The containership market is interesting in the long term because of demographic trends and an
eventual pickup in global trade, but in the short term, I would avoid it because the overcapacity
will not clear anytime soon. Protectionism in the U.S. and EU and the continued slowdown in
China will also hurt the market.”
Possible Follow-Up Questions:
You’re less likely to receive follow-up questions on a market discussion, but you never know:
Question #1: Are the other segments of the shipping/maritime market more attractive than
containerships?
The tanker segment is probably the most attractive one right now because lower oil and gas
prices have increased demand and also increased the profitability of ships due to low fuel
prices. But even there, too many ships may come online in the next year or two, resulting in
overcapacity.
Question #2: At what point would you consider the containerships market attractive enough
for an investment?
The global containership fleet would have to drop significantly, to the point where almost no
ships remain idle for over two weeks. At this point, charter rates would “bottom out” and start
to rise significantly, and the market would become more attractive.
Question #3: Which specific company in this market will perform best?
Deflect this question by saying that you haven’t done enough research to give a definitive
answer, but you would focus on the companies’ Balance Sheets and lease terms.
Companies with the lowest leverage and the shortest-term leases would perform best in this
environment; companies with longer-term leases made at higher rates would not do as well.
Question #4: What are the key drivers for the different segments in the shipping/maritime
market?
Commodity demand drives bulkers, oil/gas demand drives tankers, and consumer retail
demand drives containerships. In some markets, higher underlying prices make the overall
market worse because demand decreases and operating costs increase (e.g., tankers), while the
opposite happens in other segments.
Question #5: You mentioned that a major company in the market filed for bankruptcy
recently. Why wouldn’t that reduce overcapacity and push up charter rates?
The problem is that a company’s ships don’t just “disappear” when it files for bankruptcy or
when it is liquidated. Instead, the company sells its ships to other companies, and those ships
continue to operate in the market. Only the demolition of ships would reduce total supply, but
that usually only happens for much older vessels.

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IB Interview Guide, Module 3: Market Discussion Example –

4) Your View / Recommendation – Interesting in the long term because of demographic

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