Drewry: Most container carriers will make a profit in 2017

The London-based shipping research and consulting firm said that even though freight rates fell seasonally in the first quarter of 2017, they are better than they were in 2016.

   After losing money in 2016, Drewry is forecasting most container carriers will have small profits in 2017.
   The London-based shipping research and consulting firm has estimated that carriers collectively had an operating loss (earnings before interest and taxes) of $3.5 billion in 2016, but will have an operating profit ranging between $1.5 billion and $3.3 billion in 2017, depending on how much freight rates improve.
   Speaking during a webinar this week, Simon Heaney, senior manager, container research at Drewry, noted how there has been great variation in operating profit margins among carriers in recent years, a trend he expects will continue.
   “We think that wide spread of margins is going to be a continuing feature of 2017, the only difference is that you will see more winners than losers,” he said. “The relative success of each carrier will depend on their exposure to the least and most profitable trades as well as their operating expenses.”
   Heaney said while Drewry was optimistic about 2017, a spike in bunker costs or a rate war in one of the key trades “could condemn many of the lines to another year of loss-making.”
   Neil Dekker, director of container research at Drewry, noted that the fourth quarter of 2016 saw an uptick in demand for container transportation, and that for the year as a whole, demand was up 2.2 percent in 2016.
   “For 2017, we’re certainly expecting slightly stronger performance on the demand side,” he said.
   The industry also benefited from limited growth in supply of 1.7 percent in 2016. Dekker said that was a lot less than Drewry anticipated, and resulted from record scrapping – about 659,000 TEUs of capacity – and delay in ship deliveries.
   For this year, Drewry’s fleet growth expectations are about 2.2 percent, he said. Maersk, CMA CGM and Costamare have all delayed delivery of some new ships until 2018.
   Dekker noted that last year, only 250,000 TEUs of new containership capacity was ordered in 2016, a sharp decline from the 2.1 million TEUs of capacity ordered in 2015. In 2017, only “negligible amounts” of container capacity has been ordered, he said. “The order book’s dead,” he said. “The big question really is when will this be reactivated? Well we certainly don’t think any time soon.”
   Dekker said there are no big orders and that an order by the Islamic Republic of Iran Shipping Lines for four 14,000-TEU ships late last year has not been confirmed.
   Since the beginning of this year, freight rates as recorded by the Drewry East-West Freight Rate Index have fallen about 20 percent over the first three months.
   But Heaney cautioned against reading too much into this, noting this downward trend early in the year was similar to the seasonal pattern seen in 2015 and 2016.
   When compared on a year-on-year basis, the rates in the first quarter of 2017 were about 40 percent higher than they were in 2016, and 20 percent lower than they were in the first quarter of 2015.
   “On an annual basis, East-West rates are doing just fine,” he said. Last year’s very low freight rates were an exceptional event he said.
   Drewry expects rates – on both East-West trades and globally – will continue to improve in 2017 and “help carriers remove a lot of the red ink from their income statements.”
   Blending both contract and spot rates (including fuel charges), Drewry is forecasting that on East-West trades, rates will increase 14 percent, while globally, they will rise 11-12 percent. He noted Drewry may increase that estimate in its next forecast.
   “We can say with a high degree of confidence the market has definitely turned and carriers are now once again price givers, not price takers,” he said.
   Looking at the long term trend, since 2013, he said carriers “are fighting against a long term downturn in rates that previous upturns failed to arrest.”
   To reverse that trend, he said a long period of above average spot rates will be required, and “that doesn’t happen all too often.”
   What’s behind the recent increase in rates? Heaney pointed to the “intense efforts” by carriers to suppress supply expansion through scrapping, idling of ships and “void sailings” where a carrier may periodically eliminate a weekly voyage. He said the bankruptcy of Hanjin, merger and acquisition activity, and improved demand have also been contributors.