Demand threatened by weak macro environment, but high backlog levels will ensure income in the short-term

Supply-chains: The global manufacturing industry – including the transport-equipment sector - has been struggling for about two years with considerable bottlenecks in the supply chains for parts and semiconductors, as well as the increase in the cost of raw-material prices (metals). While these bottlenecks have been notably dissolving in the last months of 2022, there are still some difficulties in the supply of certain pieces. To cope with these disruptions, companies have been forced to maintain inventory buffers to ensure continued production. However, due to the weakened economic environment, demand for 2023 is likely to be weaker so we expect a further easing in supply chains, benefiting manufacturers since they will be able to speed up deliveries (of orders placed in 2021-22) and therefore increase their income and liquidity in 2023-24.

Contracts: The manufacture of transport equipment is a costly and time-consuming business as it can take about two-to-four years to build a ship or airplane. Because of the long duration of the projects, there are many risks in the process since a lot can go wrong. Due to this, contracts for the purchase of transport equipment often go hand-in-hand with insurance bonds (from bid bonds for the tender offer to performance bonds and advance-payment bonds for assuring the completion and delivery of, and payment for, the projects). In many cases, operating/transportation companies place orders for several units, which increases the size of the contract considerably. This is why it is common to see purchasing contracts guaranteed by an export credit agency (ECA). As the aviation sector is still in the recovery phase, and it continues to be a leveraged and financially weak sector, we believe that for airlines to modernize their fleet, they will continue to need the backing of ECAs or states. Otherwise, the financing of new aircraft could be affected.

Inflation: As is the case for many other sectors, we expect transport-equipment manufacturers to suffer wage-inflation pressures in the coming quarters, though material costs should decline from the peaks observed in 2022 for many metals. Although companies generally have good levels of liquidity today, this will decline as production costs cremain elevated and the cost of debt (interest payments) increases because of hawkish central banks.

Backlog: Shipping companies in particular have had two years of record profits (2021-2022), given the significant increase of ocean-freight rates. Thanks to this extra cash generation, the vast majority of companies have enlarged their capex for fleet modernisation. As a result, the backlog for shipbuilders is at very high levels. Airlines have done the same, though to a lesser extent because the recovery of the air sector is still underway and some airlines still struggle to reach breakeven.

New orders: In 2022, the prices of brand-new tankers, bulkers and container vessels increased by +14.5%, +17.6%, and +34.4% y/y, respectively, given the significant increase in demand for new ships. We believe that new orders are going to slow down a bit in 2023, in line with the weaker global economy and lower expected cash flows in the maritime sector. Nevertheless, it should be noted that demand for LNG tankers is still high and shipbuilders with expertise in this field will continue to receive new orders as these are among the most difficult ships to build, taking up to 30 months for delivery. This ensures production and income in the short term.