The Jones Act carrier saw volumes on its single eastbound transpacific string from China drop 18.1 percent in the first quarter 2016 compared with the same 2015 period.
Matson is primarily a Jones Act container carrier between the United States mainland and Hawaii and Alaska, but its results in the first quarter of 2016 had a lot to do with a single string of ships that carry goods back from China, according to the company’s latest financial statements.
The ocean carrier reported a profit of $18.1 million for the quarter ended March 31, 2016, down 27.6 percent from $25.0 million in the same period last year. Consolidated revenues for first quarter 2016, however, stood at $454.2 million compared with $398.2 million reported for the first quarter 2015.
The company saw container volumes from China drop 18.1 percent year-over-year in the first quarter due to the absence of the exceptionally high demand the service experienced in the first quarter of 2015, when West Coast ports were snarled by labor disruptions. Matson also noted this year has seen continued market softness amid a slower than normal post-lunar new year recovery.
Matt Cox, Matson’s president and chief executive officer, said Matson’s “core businesses performed largely as expected in the first quarter,” but that operating results declined year-over-year in the absence of last year’s extraordinarily strong demand for its China service.
Matson was highly attractive to shippers during the difficult 2014-15 labor negotiations between the International Longshore and Warehouse Union and Pacific Maritime Association because its terminal in Long Beach, where the China service calls, and a nearby off-dock facility, did not suffer the same congestion as other Long Beach terminals.
“Market conditions in the China trade have deteriorated further in 2016 as international ocean carriers have continued to lower rates in an attempt to attract cargo in this heavily over-supplied trade lane,” the company said. “This dynamic has spilled over into the annual contracting cycle with freight rates being offered at historically low levels.”
“Despite this downward pressure on Matson’s freight rates, we expect to continue to earn a substantial rate premium, and given our dual-headhaul route structure, we expect our China service to remain solidly profitable,” it added.
Matson’s China ships carry cargo from the U.S. mainland to Hawaii and Guam on their westbound voyages across the Pacific before calling Xiamen, Ningbo and Shanghai before returning to Long Beach, so they get heavy utilization in both directions, unlike most transpacific carriers who carry many empty containers or lower value commodities to China on their westbound “backhaul” voyages.
“While these challenging dynamics in China will weigh on our 2016 results, we continue to see solid fundamentals and performance in our other core trade lanes, and also SSAT (its terminal joint venture with SSA Marine) and Logistics,” said Cox. “In Hawaii, where we recently deployed an 11th ship, we expect to benefit from continued market growth and a stronger market position.”
Matson acquired the Alaska service of now-defunct Horizon Lines last year, and “integration activities in Alaska are progressing well, and are on-track to be complete by the end of the third quarter,” said Cox.
“Overall, we remain confident that our businesses will continue to generate strong cash flows to fund our fleet renewal program, invest in equipment, and pursue growth investments, while continuing to return capital to shareholders,” he added.
In first quarter 2016, the company’s Hawaii service achieved 8.4 percent container volume growth compared to the first quarter 2015 thanks to “competitive gains and modest market growth.”
Matson said it believes “the Hawaii economy is healthy and expects construction activity to be a primary driver of market growth. For the full year 2016, the company continues to expect its Hawaii container volume to be moderately higher than 2015 with substantially all of the relative increase occurring in the first half of 2016.”
Cox said there has been an upsurge in construction in Hawaii and, “One of the primary places in our network that we were struggling to carry all the cargo that was demanded or presented to us was in the Pacific Northwest. It’s where you’ll recall that Pasha, as they reconfigured their fleet last year, withdrew from that market to focus on California and in particular, Southern California.”
Matson is now operating two ships with capacity of about 2,800 TEU between Seattle and Hawaii, where previously one of the ships had 2,800 TEU and the other had 1,600 TEU capacity. So some cargo was flowing over to barges operated by competitors. The company said by increasing the size of the one ship, the company will be able to accommodate growth and help better meet the cargo management needs of its customers.
“We, long term, continue to believe that the construction segment is going to be the segment that grows the fastest and much of that construction-related cargo comes out of the Pacific Northwest and Canada over Seattle, we felt we were not serving the market the way we wanted to.”
Matson expects to continue to operate 11 ships to Hawaii for the foreseeable future, though it may revert to 10 ships during slack months.
The company has two 3,600 TEU ships under construction at Philly Shipyard in Philadelphia which are scheduled for delivery in the third quarter of 2018 and first quarter of 2019. When the first of those is delivered, “planning now suggests that we’re going to move into a 10 ship fleet,” said Cox.
In the Guam trade, Matson noted APL launched a bi-weekly U.S.-flagged containership service at the beginning of the quarter. APL transships cargo through Japan. For the full year 2016, Matson said it expects to experience continued modest competitive volume losses to this new service.
In Alaska, Matson said “container volume for the first quarter 2016 approximated the level carried by Horizon Lines in the first quarter 2015, primarily due to muted economic activity,” adding that the company expects full-year 2016 Alaska volumes to fall slightly from the total 67,300 containers carried by Horizon and Matson in 2015.
Matson said it expects “2016 operating income to modestly exceed the 2015 level of $8.5 million, driven by volume growth and continued expense control.”
Matson Q1 profits shrink 27.6% on weak demand for Chinese cargo
