AlixPartners says carriers need to address the dual challenges of rising costs and oversupply.
The outlook for global container carriers this year is “decidedly mixed,” according to a report released Tuesday by AlixPartners.
“Although the industry enjoyed modest improvement in 2017, it still needs to address the dual challenges of rising costs and oversupply – driven mostly by fleet expansion – to keep the momentum going,” the consulting firm said.
“In 2018, we will begin to see the impacts that might result from the industry’s reconfiguration into two tiers: the five large global players and about two dozen much smaller players, many of which compete either as specialists or exclusively in niche markets,” the consulting firm added. “The traditional second tier of midsize carriers has been absorbed by the giants.
“As controlling power within the industry stabilizes, it becomes more important than ever for carriers to step up their efforts to improve their performance, discipline their investments, and sharpen their strategies for succeeding through scale or specialization.”
The report noted the container liner industry’s financials “showed some improvement in 2017, though they remain at relatively low levels.”
It pointed to the industry’s average “Altman Z-score,” a credit strength metric, which it explains is a “formula for predicting the likelihood of bankruptcy based on a number of metrics from a company’s public statements.”
While that improved from 1.10 in 2016 to 1.44 in the last 12 months, “the number still shows cause for concern because it still puts the industry squarely in the danger zone – and certainly nowhere near the safe zone of higher than 2.99, which we’ve not seen since 2007,” AlixPartners said, adding that an Altman Z-score of less than 1.81 suggests financial distress.
“Freight rates were stronger in the first half of 2017, but they remained low in a wider historical context,” the report said. “Generally, they’ve settled back to where they were before the Hanjin Shipping Co. bankruptcy in late 2016.
“Demand is growing slowly but steadily, and after a brief lull, fleet capacity is once again on the rise. Estimates of growth in fleet capacity for 2018 range anywhere from 4 percent to more than 5 percent compared with 3.3 percent in 2017,” it said.
For 2018, 30 percent of the 1.3 million TEUs of new containership capacity scheduled for delivery is on mega-ships with a capacity ranging from 18,000 TEUs to 25,000 TEUs.
AlixPartners said, “Rates will continue to be squeezed as long as supply continues to outpace demand for containerized services. Consequently, total demand – at the very least – will have to meet expectations of a 4 percent to 5 percent increase to provide any real opportunity for margin growth.”
At the same time, operating expenses for shipping companies are increasing due to higher bunker prices that have more than doubled from the end of January 2016.
The ability of companies to recover those higher costs has been limited, it said.
“Larger customers have been rejecting surcharges such as the low-sulfur-fuel surcharge and frequently demanding contract rates with bunker adjustment factor included, thereby eliminating carriers’ ability to pass on fuel price fluctuations. Consequently, carriers will have to step up other efforts to manage expenses and lower the cost base,” it said.
AlixPartners also said container shipping is “susceptible to black-swan events ranging from the impacts of shifting geopolitics to cyberattacks. After a year of harsh rhetoric and rancorous negotiations, it remains unclear what impacts Brexit, America First policies, and volatilefinancial markets might have on specific demand and routes.”
AlixPartners outlined three areas where carriers can significantly improve performance through effective management in areas within their control:
• Mergers and acquisitions in the industry means it is now dominated by larger companies, creating a unique opportunity for the industry to demonstrate a level of price discipline that has been lacking for years;
• As fleets have merged, fleet operators can “make dramatic cuts in redundant expenses and to modernize operations;”
• And that it’s “imperative that carriers curb their voracious appetites for new ships.”
“New orders slowed, and deliveries were deferred during much of 2017, but in September, the buying spree resumed in earnest, thereby ensuring the continuation of the current margin-crushing balance of supply and demand unless scrappage activity accelerates dramatically,” AlixPartners explained.
Also on Tuesday, Hyundai Merchant Marine, South Korea’s largest ocean carrier, announced it was ordering 20 new ships, which will boost its capacity by 352,000 TEUs.
Looking ahead, AlixPartners suggested shippers should expect tougher contract negotiations going into the transpacific contracting season. Many transpacific contracts have renewal dates between April and June.
“Shippers will have to be knowledgeable about their regional trades so they can know how each market is doing; rate volatility won’t happen on a global level but, rather, on a trade-by-trade basis,” the firm said.
It also suggested that because of rate volatility, shippers should consider allocating a portion of their business to the spot market and not moving all of their cargo under long-term contracts.
For freight forwarders, volatility in the market “should create opportunities for forwarders to capture profits,” AlixPartners said. “With industry consolidation, stable alliances, and learnings from the recent Hanjin bankruptcy, forwarders would be well served to have a strong relationship with a least one carrier in each alliance – and with independent carriers – so they can become able to provide their customers with consistent service and business continuity.”
Ports and terminals will continue to face challenges, with secondary ports even feeling pressure to provide terminals with adequate water depth, air draft and berths of sufficient length for larger ships, the firm said.
Container shipping outlook ‘decidedly mixed’
