2016 looks like it will be an even more difficult year for container carriers.
Conditions in the container-shipping industry deteriorated during 2015 and the outlook is far less rosy than it was one year ago.
C.C. Tung, chairman and chief executive officer of Hong Kong’s Orient Overseas (International) Ltd., the parent of OOCL, told shareholders in their annual report that “At the start of 2015, container-shipping companies enjoyed unforeseen conditions that were, almost without exception, positive. For those few months, substantially lower fuel costs and gains in momentum in the U.S. recovery drove industry-wide results that were better than anticipated.
“Unfortunately, the economic context became increasingly complicated as the year progressed. The fall in oil prices led to a reduction in energy-related capital expenditure, and to some producers bordering on default. Trade growth was limited, and the [U.S. Federal Reserve] was signaling (and eventually implemented) a start to the normalization of interest rates. The second half of the year saw retail sales stagnating further, thereby reducing imports from Asia,” he said.
Carrier earnings continued to deteriorate in 2016 as the accompanying table shows.
Tung noted that by the end of 2015, “the worsening imbalance in supply and demand, driven by large amounts of new tonnage being introduced at a time of lackluster volume growth in many trades and even shrinkage in others was having a dramatic effect. Capacity had started to be taken out of the market in response to slower demand growth, and having witnessed a substantial fall in rates, lines were forced to surrender all of [or more than] the benefit of lower fuel prices to their customers.”
In April, Drewry Maritime Equity Research said it “believes container shipping is staring at a terrible 2016 with a structural slowdown in global trade volumes, historical low freight rates and ever-increasing capacity could result in industry losses of $6 billion.”
Drewry is due to publish a revised estimate in July, but in June it said shippers in its “benchmarking club” reported in its contract rate index, based on average transpacific and Asia-Europe contract freight rate data provided confidentially, had now declined by 29 percent from the beginning of the year to May, as shippers secured, first, big cuts in Asia-Europe annual contract rates and, second, considerable reductions in their transpacific rates, effective from May.
In an article in its Container Insight Weekly, Drewry said, “Spot rates in the major container lanes have improved recently, but they still have a long way to go to reach previous levels.”
“The market has crumbled,” said Patrik Berglund of the rate-tracking company Xeneta. “There is too much capacity today and they’re desperate to get the cargo in the boxes.”
In April, the International Monetary Fund lowered its estimate of world economic growth to 3.2 percent from 3.4 percent in January 2016.
Drewry analysts Rahul Kapoor and Nilesh Tiwary are skeptical about a rate recovery in 2016 and 2017, adding “meaningful upside in the short term and sector recovery on the ground remain elusive.”
Even Maersk Line, the world’s largest container-shipping company and perennially one of the strongest performers, has given a gloomy forecast, stating in May when it reported its first quarter results that it expected an underlying result “significantly below” that of last year when it had earnings before interest and taxes (EBIT) of $1.4 billion and net operating profit after tax of $1.3 billion.
It expected global demand for seaborne container transportation to grow 1 to 3 percent in the coming year.
Søren Skou, CEO of Maersk Line, said the first quarter of 2016 saw “a continuation of the global rate war in container shipping, driven by weak demand and significant supply growth.”
Maersk said in its first quarter report that global container-shipping demand growth was about 1 percent and the global container fleet capacity grew by 7 percent, resulting in “very challenging” conditions. Maersk Line’s average freight rate for a 40-foot container has fallen from $2,630 in 2014 to $2,209 in 2015 to $1,857 in the first quarter of 2016.
Skou said Maersk expected the market to pick up towards the third quarter of 2016, adding its network was “operating with very high utilization and our vessels are full in the Asia-Europe trade.”
In the second quarter, the Danish carrier’s chief executive expected “some upward price momentum ahead of the traditional peak in the third quarter.”
“2016 is turning out to be a poor year, although I expect operating losses to be less than $3 billion industry-wide,” said H.J. Tan, executive consultant with Alphaliner. “The weakness is self-inflicted, with carriers chasing freight at loss-making freight rates.”
He noted that “carriers have already started to withdraw capacity on the weaker routes, which will help to stem the losses.”
Lars Jensen, CEO of SeaIntelligence Consulting, thought carriers will do worse in 2016 than in 2015, but said “the global volume development January-April 2016 has not been all that bad.”
Jensen said it’s best to analyze supply and demand by looking at global TEU-miles, that is, volumes times distance, “as the distance over which a container is transported has a direct impact on the amount of vessel capacity to perform the transportation.
“We see that January-April, the global demand grew 2.9 percent year-on-year. If we only look at March-April, the growth was a very healthy 5.3 percent,” he said.
However, he added, “The problem is that over the past five years demand measured as global TEU-miles has grown 16 percent, whereas capacity has grown 40 percent.
“When this is combined, we find that effective global fleet utilization has declined 16 percent over the past five years, and this is the fundamental driver of the abysmal situation related to the freight rates—and it is a situation with no simple short-term solution, and even though we have seen good demand growth recently, it cannot resolve the structural imbalance,” Jensen explained.
“We do not presently see major idling of vessels on a global scale; however, we have seen a significant reduction of capacity in the Asia-east coast South America trade which has resulted in much higher, sustained, freight rates,” he said.
Writing in early June, Jensen said the positive growth in TEU-miles in March and April this year “is clearly good news for the industry, but it is a long climb up from the bottom of the market. But as the saying goes: ‘The night is darkest just before the dawn,’ and the market data does currently indicate that end 2015, early 2016 was the bottom of the structural imbalance and we now face the long climb back up.”
Tadaaki Naito, president of NYK, agreed that although shipping traffic is projected to increase, the oversupply of tonnage is forecast to persist due to the entry of newly built ultra-large containerships and spot freight rates are expected to remain stagnant.
“The freight rates level of annual contracts concluded for this fiscal year has been declining due to the effects of the current sluggish market. Maintaining certain services will be very tough if the low rates under annual contracts will put pressure on the bottom line. Therefore, we need to fill available shipping capacity by spot contracts. By increasing the ratio of such contracts, it should be possible to raise the overall freight rate level above the rates in annual contracts,” NYK said in June.
“Nevertheless, considering that the low levels of freight rate indices during FY2015 4Q will continue to some extent, we assume that rate levels in this fiscal year will decrease around 10 percent year-on-year for Asia-transpacific routes, and between 6-7 percent for Asia-Europe routes,” the carrier added.
In a June stock prospectus where it discussed the outlook for the container-shipping industry, Seaspan, which owns 86 ships, manages another 17 and charters them to liner companies such as COSCO China Shipping, MOL, Yang Ming, Hapag-Lloyd, Hanjin and others, said “As of May 1, 2016, newbuilding containerships with an aggregate capacity of 3.5 million TEUs, representing approximately 17.8 percent of the total worldwide containership fleet capacity as of that date, were under construction. The size of the orderbook will result in the increase in the size of the world containership fleet over the next few years. An over-supply of containership capacity, combined with stability or any decline in the demand for containerships, may result in a reduction of charter hire rates, which is currently the case.”
Alphaliner projected at the beginning of the year that capacity would grow 4.5 percent this year, 5.6 percent in 2017, and 3.9 percent in 2018, compared with the 8.5 percent growth the container liner industry saw in 2015. It added most of that capacity will be on very large ships—this year it forecasted 61 ships with over 10,000 TEUs of capacity will account for about 63 percent of the capacity added, and another 33 ships with 7,500-to-9,999 TEUs of capacity will account for 23 percent of the added capacity.
Despite the huge amount of capacity being added, even financially troubled companies may get into the big-ship game.
The Korea Development Bank said in June that once Hyundai Merchant Marine’s business is normalized it would invite “outside experts to consult on restructuring the fleet by ordering new mega and high efficiency ships to boost HMM’s mid-term competitiveness.”
The industry may benefit from the consolidation the industry has seen in the last two years. Hapag-Lloyd acquired the container business of CSAV in December 2014 and at the time this article was prepared was engaged in talks with United Arab Shipping Co. about a possible combination; COSCO and China Shipping merged earlier this year; and CMA CGM last month moved forward with its plan to acquire Neptune Orient Line, the parent of APL and had acquired a majority of its stock. There has also been widespread speculation that Hanjin and Hyundai might be merged.
In addition, carriers are realigning themselves, reducing the number of global alliances from four to three large groups that will begin operation next spring.
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