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2010 and that risk has grown in each of the past three years, says a new study by industry consultancy AlixPartners.
“Carrier debt has been growing at a constant and significant rate, at the same time as their cash flow is not growing at the same pace,” said Esben Christensen, Director of Global Maritime Practice at AlixPartners. “Over time, there is less and less cash to pay the interest on the growing debt, which is unsustainable in the longer run.”
Carriers’ growing debt burden is exacerbated by the mounting overcapacity of vessel space and lacklustre global demand, which have led to falling freight rates and thus less cash flow. “We do not seem to get out of the downturn in the rate environment that’s happened since 2008, with the exception of 2010, when they laid up enough ships to get dramatic increases in rates”. Christensen said in an interview with the JOC.
Deteriorating financial indicators
In its’ study of the industry’s 15 publicly listed ocean carriers, AlixPartners says the carriers’ financial indicators continue to deteriorate. “It is clear that the market as a whole has suffered over the past year, falling deeper in to the risk of sever distress ranges.”
While carriers’ financial health actually improved in 2013, when the number reporting negative EBITDA (earnings Before Interest, Taxes, Depreciation and Amortisation) fell as compared to 2012, the cash flow available to pay interest on their debt fell to 4.9%, less than half the rate it was in 2011 and less than a third of what it was in 2010.
Among the carriers that have reported full year earnings for 2013, some carriers like Maersk Line earned a good profit, but many carriers look set to do poorly. Christensen said: “Nevertheless, I think the industry as a whole will probably turn a profit but I would not expect it to be a significant one, right around the break-even mark”. But he said any marginal profitability tends to hide balance sheet issues. “When your balance sheet is growing the way it is for some of these carriers, you have to generate more profits to balance your debt obligations”.
Can bankruptcies be beneficial?
Declaring bankruptcy does not mean that shipping lines will have to go out of business. Bankruptcy could help some carriers address the root cause of some of their issues, including balance sheets that are growing out of phase with earnings. It would also force them to sell some assets, like older ships or container terminals. “If the process is managed properly, it could be very beneficial because it could get come capacity rationalisation and weed out some of the weaker players,” Christensen said.
“At the end of the day, if the mismatch between supply and demand is not corrected, some of the carriers will have to make tough choices about whether they want to compete with the big carriers head on, or if they want to restructure by refocusing on some of the niches or regional areas that the big carriers are less focused on”.
The possibility of some carriers declaring bankruptcy does not raise the prospect of further mergers, at least not among the largest carriers. “I would be surprised if we had another wave of consolidations,” Christensen said. “There will be some consolidation among mid-tier carriers, but not among the mega-carriers.”
Good news, freight rates may improve
The latest Shipping Confidence Survey from international accountant and shipping adviser Moore Stephens shows that overall confidence levels in the shipping industry rose to their highest level in the three-month period to March 2014, since the global economic crisis of 2008.
The survey reported that the mood of improving confidence evident in many of the responses to the survey was tempered by an awareness of the difficulties which the industry still faces. One respondent said: “There are signs that we have passed the deepest point of the recession. The only question now is how long it will take for the markets to improve to the point where we have sustainable rates again. It may be that some ship owners will still not make it because time – or cash and the patience of the banks – will run out.” Elsewhere it was noted that “2014 will see us bounce along, with small upward flurries followed by a return to barely profitable rates for all but debt-free vessels”.
One respondent said: “The markets have been in the low-end band for the past five years, affected by both supply-side and demand-side crises, but the supply side is now showing some stability and the demand forecasts are positive in the light of various recovery measures under way in certain major economies.”
The report showed a higher level of optimism with regard to rate increases in the container shipping sector. The numbers expecting rates to increase in the container shipping market were up 4% to 34%. Expectations of improved container shipping rates were up by 2% in Asia to 38%, up 4% in Europe to 31%, but dropped in North America from 44% to 27%.
India’s container volume drops
The volume of export and import containers handled at major ports in India declined by 3% year-over-year in fiscal year 2013-14, from April 2013 to March 2014. Cumulative container throughput reached 7.46% million 20 foot equivalent units, down from 7.7 million TEUs in fiscal year 2012-2013.
Jawaharlal Nehru Port, also known as Nhava Sheva, moved 4.16 million TEUs. Nhava Sheva accounts for nearly 60% of India’s total containerised ocean traffic. Container volume at Chennai Port, the country’s second largest container gateway, was estimated at 1.47 million TEUs, down 5% from 1.54 million TEUs. Kolkata Port handled 563,000 TEUs down from 600,000 TEUs. Traffic at Mumbai Port, which has been steadily losing container market share, over the past several years, totalled 41,000 TEUs, compared with 48,000 TEUs.
Major ports registering marginal levels of container throughput growth included Tuticorin, now renamed V.O. Chidambaranar and Vallapadam Trans-shipment Terminal, a DP World facility at Cochin, where volume rose to 508,000 TEUs, from 476,000 TEUs and to 351,000 TEUs, from 335,000 TEUs, respectively.
Shipping line halts new buildings
CMA CGM says it has no plans now to place further vessel orders over the next three years as it receives the ships it already has on order and waits to see the market reaction to the P3 Network. Following confirmation from the French shipping line this week that it would upgrade six vessels it has on order to 17,700 TEU, CMA CGM Group Senior Vice President, Asia-Europe Trades Nicolas Sartini mentioned that the company plans to spend the next three years digesting the vessels it has on order.
As well as the ultra large container ships it is due to receive, from May it will begin to take delivery of its series of 9,000 TEU new buildings. Sartini regards the 9,000 TEU class of ships as the new workhorse for the deep sea container trades, because of its flexibility and suitability for the South American and other North-South trades, where the vessels will be deployed. Earlier this week, CMA CGM which is a member of the P3 Network, along with Maersk Line and Mediterranean Shipping Co., confirmed it would charter 23 new buildings of 9,000 TEU from Chinese companies.
Chinese container lines continue to lose
Although China Cosco Holdings swung to a profit in 2013 with the help of asset sales, removing the risk of being delisted, its core shipping operations performed poorly, The Wall Street Journal reported. The world’s fifth largest container line, according to Alphaliner, said its annual net income was Y235.5 million (about $ 38.3 million), compared with net losses of Y 20 billion in 2011 and 2012. Revenue was Y66.1 billion, down 3.1% from Y68.27 billion, primarily due to lower freight rates.
China Cosco’s results followed the 2013 earnings report from China Shipping Container Lines, which posted a net loss of Y2.65 billion, versus a net income of Y522.7 million in 2012, The Wall Street Journal reported. Its’ revenue rose 2.7% year-over-year to Y34.34 billion, from Y33.42 billion. The world’s 09th largest container shipping line, according to Alphaliner, said it expects to carry up to 8.55 million TEUs in 2014, up 4.4% from a year earlier, The Wall Street Journal said. China Cosco and China Shipping recently signed an agreement to establish a strategic partnership, as both companies continue to struggle with losses. (Source Lloyds Lits/JOC)
Meanwhile, China’s exports and imports contracting sharply in March raises the question as to whether the world’s second largest economy is slowing down. The country’s exports fell by 6.6% in March and imports dropped by 11.3% in the same month as against the same period last year. This is the second straight month of falling exports for China, where in February the decline was 18.1%.
[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).]
