The Shanghai Containerised Freight Index (SCFI) decreased by 1.2% w-o-w after gaining for three weeks in a row.

Meanwhile, we see liners actively adjusting their capacity. As per Alphaliner, 10.8% of sailings from Central China to Europe loops offered by the three big shipping alliances were blanked in June and July.

Liners handed over their 1H23 transcripts: During 1H23, the listed container shipping lines reported 72-98% y-o-y declines in EBIT but still largely profitable, barring ZIM and Wan Hai, which incurred losses (Exhibit 3).

While volumes for the liners declined 1-8% y-o-y, freight rates declined steeply by 38-65% y-o-y and 31-53% h-o-h. ZIM had the steepest decline in freight rates, followed by -60% for OOIL.

In terms of volumes, Maersk saw the sharpest decline at -8% y-o-y. This led to 28-68ppts y-o-y declines in EBIT margins for the liners, with Wanhai seeing the steepest erosion, and among our coverage, -52ppts for Evergreen.

Cautious outlook for 2H23e: Commentary from the shipping lines and freight forwarders point to potential sequential improvements in volumes during the rest of the year, helped by restocking, and if the macro outlook improves on receding Fed rate hikes.

Hapag Lloyd indicated that we might be witnessing a mild peak season.

While overcapacity looks imminent, shipping lines were confident of managing capacity with charter retirements, slow steaming, and blank sailings.

For the lines that we cover, we have modelled for 6-16pts h-o-h EBIT margin erosion in 2H23e, driven by up to 5% h-o-h growth in volumes (-1% to +4% y-o-y) and 6-20% h-o-h decline freight rates. Overall, we continue to expect the sector to remain profitable in 2023e.

Further headwinds to dry bulk: The Baltic Dry Index (BDI) fell 18% YTD despite gaining 10% in the past week. With no signs of recovery in China's property sector, HSBC China Materials team thinks that without new policy support, the drag from the property sector will continue to weigh on construction materials demand (see Mainland China July'23 materials output, 15 August 2023).

We think this could weaken the demand for bulk vessels that carry construction-related materials.