Staying profitable may be tough for container shippers, says Fitch Ratings

Sustaining last year’s improved profitability in 2018 may prove challenging for container shipping companies, Fitch Ratings says. 

The fact that some companies are likely to have remained loss-making in 2017 highlights the ongoing weakness in sector fundamentals due to persistent overcapacity, which may undermine a longer-lasting recovery.

Financial reports or preliminary results released so far indicate that container shipping companies had stronger performance in 2017 than 2016. Fitch expects most carriers to have boosted profitability, although performance varies company by company. Maersk Line generated EBIT of $634 million in 2017 compared to a loss of $421 million in 2016, while Hapag-Lloyd and COSCO Shipping also materially improved their financial results. But while Hyundai Merchant Marine’s (HMM) operating loss in its container division halved last year, it remained large at $280 million. 

Container transport volume growth ranged from 3% for Maersk Line to 30% for HMM, and economic and trade growth should support further increases in 2018. We forecast container transport volumes to increase by more than 4.5% this year, consistent with the IMF’s global trade growth forecast of 4%. Higher freight rates supported better financial outturns even as operating costs increased due to higher fuel prices. However, it is not clear that higher freight rates will be maintained. The Shanghai Containerised Freight Index was on average 27% higher in 2017 than in 2016. But its average reading in 4Q17 was lower than in 4Q16. It has increased marginally in early 2018, but remains lower on average than in the same period last year. 

Sustainable recovery of freight rates depends on continuous and consistent capacity discipline in the industry. Freight rates are volatile and many previous increases reversed when the supply and demand imbalance returned.

Supply growth is expected to have been about 4% in 2017 with a further acceleration to over 5.5% in 2018, again exceeding demand growth. This may put pressure on rates and make it challenging to sustain the profitability achieved in 2017. 

New orders were low in 2016-2Q17 but surged in 2H17, including mega ships, as market sentiment improved with a focus on scale and vessel size. In 4Q17 Maersk Line exercised an option for two new vessels, each with a 15,200 TEU capacity to be delivered in 2019. CMA CGM ordered nine 22,000 TEU mega vessels in September 2017. HMM also announced an ambitious growth strategy, targeting a 5% market share and using ultra-large container vessels. 

Deployment of mega vessels on Europe-Asia trading lanes will continue to contribute to overcapacity on this route, and to “cascading down” elsewhere. Fitch also expects lower scrapping and fleet idling in 2018 due to improved market conditions, further reducing the gap between net and gross capacity growth. 

In the medium term, continued consolidation in the sector should lead to more prudent capacity management and support freight rates. The market share of the top five container shipping companies was 45% in 2016 and is forecast to rise to 57% in 2018. 

However, no single company is dominant - sector leader Maersk Line’s share is expected to remain below 20% after its merger with Hamburg Sued. Fitch believes most container shipping companies will continue to regard their market position along with the operation of mega ships as key to their success, which may prompt further M&A and new vessel orders as the top three companies try to sustain their market leadership and smaller companies seek to increase scale.