2016, Container carrier revenues shrink by $ 29 billion

2016, Container carrier revenues shrink by $ 29 billion

A severe revenue contraction within the container shipping industry caused by lowered freight rates is forecast to results in container line losses of at least $ 5 billion this year, placing carriers under enormous pressure to find cost savings and increasing the likelihood of more consolidation, according to industry analyst Drewry. First half revenue from the sample lines including Maersk, Hapag-Lloyd, MOL, NYK, OOCL and K Line, was down by 18% on average, according to Drewry’s Container Insight Weekly report. 

If that pattern was extended for the industry across the full year, this would mean carrier income shrinking by around $ 29 billion against 2015, taking industry revenues below the level seen during the industry’s nadir of 2009, Drewry noted. That led to a collective operating loss in the region of $ 19 billion in 2009 and although shipping lines are now more cost-effective, the industry will still probably lose at least $ 5 billion this year; according to proprietary forecasts from Drewry’s Container Forecaster; with carriers waving goodbye to likely more than $ 50 billion of sales in two years since 2014. 

In 2009 the sales reduction was about $ 66 billion in just one year, it should be no surprise that most of the big players are losing money and that some are close to the financial abyss, or that a number of lines are merging in order to better prepare for such hard times, the analyst said. After years of merger and acquisition (M & A) inactivity, the container market has seen a flurry of M & A deals recently, involving the Chinese state carriers Cosco and China Shipping, French carrier CMA CGM buying Nol/APL and Germany’s Hapag-Lloyd merging with UASC, Drewry noted. On top of all that, carriers have developed bigger alliances to pool their resources and try and find more cost savings. All of these moves are defensive strategies forced upon carriers by the weak state of the market. Drewry said the latest results indicate that the second quarter was harder on carriers than had been expected, with operating margins falling to the lowest point since the first quarter 2012.

Global container growth weakest this century

Growth of 2.8% on key global container trades is on track to be significantly better than last year but would still be the third lowest rate this century if the first half average is maintained over the full year. In the shipping analyst’s Container Insight Weekly report, it said two-way bi-lateral container traffic grew by just 2.6% on average in the first half of the year on the 14 trades covered regularly in its weekly reports, which represent an estimated 40% of the world total. The spread was fairly wide, ranging from a high growth rate of 9% for Asia-Oceania down to a low of -16% for Asia-East Coast South America.

10 of the 14 trades posted higher first half volumes, providing a net addition of around 988,000 TEU, nearly half of which came from the Asia-West Coast North America trade. Modest as the latest growth rate may seem, it does actually represent an improvement of sorts, Drewry noted. Were the first half average to maintain over the full year, it would surpass the measly 0.8% rate for loaded traffic in 2015. However, it would still be the third lowest rate this century behind 2009 and 2015, confirmation if it were needed that the days of double digit growth are long gone. 

It said carriers were adapting to this low growth environment. Despite the heavy influx of big new ships, they have found ways to improve ship utilisation on most trades through selective use of missed/void sailings in weak demand months and more intensive scrapping of smaller ships to free up space for cascading of ships to new lanes, Drewry noted. Preliminary research indicates that front haul load factors on the main East-West trades was around 90% in the second quarter, up from 86% in the same period last year. 

Drewry said its next Container Forecaster report would provide more comprehensive analysis of the global picture, with information on both head haul and back haul load factors. When load factors are at 90% or above, we would normally expect carriers to have more success in raising freight rates. While rates are trending upwards, their slow pace indicates that supply and demand alone is not dictating pricing and that shippersand forwarders are still the beneficiaries of predatory commercial strategies on the part of carriers.

Asia-Europe despite August rise rates slide

Despite reports of improved utilisation levels, relatively weak peak season demand has contributed to double digit weekly declines on Asia-Europe ocean freight spot rates over the last two weeks, with carriers failing to hold rates above the $ 1,000 per TEU level initially achieved through 1 August general rate increases. According to the latest Shanghai Containerised Freight Index (SCFI) figures, average spot rates on the Asia-North Europe trade fell 10.5% to $ 771 per TEU last week and on Asia-Mediterranean trades dropped 19.2% to $ 699 per TEU, while rates to the US East Coast from Asia fell 6.2% to $ 1,768 per FEU and to the US West Coast by 4.1% to $ 1,225 for each loaded 40ft container. 

Last week, Alphaliner noted how average head haul capacity utilisation in the third quarter of the year had been hovering in the mid 90% range, with only Asia-Mediterranean routes at below 90%, but said the relatively high capacity utilisation levels were due to supply side adjustments rather than stronger cargo demand. 

Shipping lines leave some  crews unpaid

As reported in The Shipping Tribune, unpaid, underfed and thousands of miles from home on a rusting tanker, Captain Munir Hasan says he is a victim of a ship owner who has slashed costs in the face of an eight-year shipping down turn. Marooned on the medium sized tanker Amba Bhakti that is moored close to Shanghai and is in urgent need of repair, Hasan claims he and his crew of four from India and Bangladesh have not received their wages from the owner, Varun Shipping, since February and are now owed tens of thousands of dollars. 

Hasan said the crew has had to rely on handouts of basic food, such as rice and noodles, from V. Ships, a company that had operated the ship under contract for the owner before resigning in July. In the last 29 years of my sea career, I have never faced such a situation said Hasan a 50year old sea captain from Bangladesh. Reuters couldn’t independently confirm certain aspect of Hasan’s account. Varun has not responded to repeated queries from Reuters via email and it declined to comment when reached by phone. 

When a Reuters reporter went to its office in Mumbai, India, company officials declined to comment of the matter, saying that management was busy. Scott Moffitt, a V. Ships representative based in Singapore, told Reuters via email that it terminated three ship management contracts with Varun, including the one for the Amba Bhakti, due to unpaid fees, including crew wages. Moffitt said that V. Ships became increasingly worried about their (the crew’s) plight and that legal arrangements are under way to secure the back wages.

Shippers exposed to unfair charges

As reported by Lloyds Loading List, shippers are being exposed to unfair charges by supply chain partners in the wake of the new verified gross mass (VGM) international container weighing rules introduced on 1 July, according to the European Shippers’ Council (ESC). It said that although the new SOLAs rules had entered into force in Europe without a big bang in terms of supply chain disruption, it had received multiple queries from members about surcharges and longer lead times linked to VGM and imposed by ocean carriers, freight forwarders and terminal operators.

When our members ask for explanations, the feedback they receive (from counterparties) is sometimes not logical and ESC tends not to accept these surcharges and fees, said an ESC note. Regardless of being compliant before 1 July or being non-compliant, shippers are all treated the same way, which is not fair. Complying shippers, regardless of the submission method, should not be charged any fees or surcharges. ESC said it had concluded that the fees and surcharges were not about increasing safety or security at sea, but a means of generating earnings. 

SOLAS was created to reduce the risks for liner operators, said the note. Normally if you reduce risk, costs go down and should not go up. Secondly, the SOLAS regulation was already known for two years so it is very surprising that these costs and longer lead times are arising only now and not during the past few months. It was perfectly possible to anticipate that fact that the new procedure would include costs. ESC said the new VGM rules were clearly signposted and would remain in place long term; surcharges of specific fees should be included in freight rates.

(The writer a Maritime Economist is a Chartered Fellow (Logistics Transport), Chartered Shipbroker (UK), Chartered Marketer (UK) and a University of Oxford Business Alumni. He is also a Fellow of NORAD/JICA and Harvard Business School (EEP).)