Can the industry return to profitability in 2017?

Can the industry return to profitability in 2017?

As outlined by Drewry, the gradual recovery in freight markets is a much-needed and positive development for the container shipping sector, but it is likely to be partially at the expense of the weaker players, especially companies that are still heavily leveraged and carry heavy debt burdens. It expects the rejuvenation of the business cycle to drive further gains by year-end, though the ride could be bumpy.

One of the key metrics to measure the health of the industry are the head-haul East-West load factors. Average industry utilisations of 87% and 93% in the second and third quarters 2016 denote a decent state of affairs. Although this is not enough to cure the industry’s ills overnight, it is an important first step towards restoring some degree of commercial common sense and financial propriety to the business. 

While the medium-term view remains bullish on the sector, it is likely to continue to look out for negative surprises, the challenge is continued anti-trade sentiment and rhetoric stemming out from the US and a resultant escalation into a full blown trade war. A trade war would be disastrous for the nascent recovery and force the projection to reverse out long-term recommendations and positive sector outlook. 

Drewry Maritime Financial Research (DMFR) has been highlighting the industry’s perilous financial health and rising debt for the last few years. Barring a few companies, most will continue to struggle on elevated debt levels and low cash and liquidity positions.

Asia/Europe rates slip

Asia-Europe spot rates are slipping further off the late December gains as the peak shipping period starts to taper off with the approach of the Chinese New Year and the traditional slump in demand. 

How deep that slump will be remains to be seen, but with just a week before the first day of the Year of the Rooster on Jan. 28, spot rates form Shanghai to North Europe fell $ 34 to $ 1,052 per 20-foot equivalent unit, according to the Shanghai Shipping Exchange’s SCFI. The decline was not a heavy one, keeping the rates above the $ 1,000 per TEU mark for the seventh consecutive week. The weekly spot rates on the major trades are tracked on JOC.com’s Market Data Hub. Rates on the Asia-Mediterranean trade were a little softer, falling $ 24 this week to $ 1,004 per TEU. It is the fourth week the Med rates have been above $ 1,000. 

The Chinese New Year is earlier than usual this time around and the reason behind what has been a frantic rush by shippers to get their cargo out of the China factories before they close for up to three weeks. The supply chain director for a major Asia-Europe shipper said space was a big problem this year. This year was different to last year, because when Chinese New Year is early, the peak shipments all start before Christmas already and it gets quite chaotic, he said. “Space has been tight. It was tough to get all my containers on board and I was fighting with everyone. Unfortunately for me, I happened to be well over my space protection so I had to pay for an additional 300 containers.”

A forwarder with officers in Hong Kong, Shenzhen and Shanghai also reported that it was difficult to secure space on vessels to North Europe. “The Europe market seems to have recovered, or lines are forcing the recovery through blanking sailings, but all I know is that space is very tight all the way up to Chinese New Year,” he told JOC.com.

Ultra large ships to flood

As of early January the total operated 10,000+ TEU fleet stood at 387 units. Another 171 are on order for delivery in 2017 (91 vessels), 2018 (66) and 2019 (14). Considering the present market and its direct perspectives, it may be assumed that operations/owners will try to (further) postpone delivery, as it happened in 2016 when more than 25 ULCS slipped into this year. This explains the unprecedented number of 91 deliveries formally planned for 2017. 

The largest ULCS currently operating are six LNG-ready 19,870 TEU units of UASC. The biggest ULCS to come are five 21,100 TEU monsters being built for OOCL, of which the first one is to hit the water in May. She will be preceded by the first ever delivery of a 20,000+ mastodon when MOL is to take delivery of the 20,150 TEU, also LNG-ready, ‘MOL Triumph’ in April 2017.

Competition issues raised by Global Shippers Forum (GSF)

The GSF in a report published has raised the following competition issues relating to mega-ships and alliances:

• The growth of global strategic alliances has produced barriers to entry for new entrants and made it almost impossible for independent carriers to compete on global trades. Absent independent shipping lines in genuine competition with alliances and consortia, effective competition will be eliminated or seriously compromised through the new market structure dependent on strategic alliances and exchange information between their members.
• The growth of mega-ships has been a major driver for the development of the four main strategic alliances and concentration of the container shipping market. Strategic alliances should therefore be the main area of focus for completion authorities (such as the European Commission) and maritime regulators worldwide.
• There should accordingly be sufficient independent competition to strategic alliances on key trade routes.
• In line with the economic conclusions above, consideration of the treatment of mergers by, for example, the European Commission leads to the question as to whether consolidation through mergers is a preferred market structure to global strategic alliances, because of the impact not only on economies of scale but also of service and geographic scope.
• Consequently, in line with the European Commission’s investigations into liner shipping mergers it may be time for competition authorities and maritime regulators to focus on the merger criteria when assessing alliances in the future.
• In concentrated markets, the sharing of information on a regular and frequent basis reveals commercially sensitive elements of competitors’ strategies in the market, including price, capacity or cost information is more likely to raise competition concerns. GSF therefore, reiterates its call for competition authorities and regulators to remove, where possible, shipping line exemptions for price agreements and other forms of agreement that facilitate exchanges of information on costs and rates, including general rate increase guidelines.
• While GSF favours the repeal of unique shipping industry exemptions, effective oversight and monitoring of consortia and strategic alliances (including direct interventions) may be equally effective in dealing with the competition and efficiency issues detailed in this paper and by international Transport Forum ITF / OECD. The new market structures and trend towards consolidation may require new competition and regulatory approaches.

DP World to increase investment in India

DP World is looking to invest $ 1 billion in India in the coming years, with a focus on developing transport infrastructure in and around existing ports rather than engaging in greenfield projects. Its’ local subsidiary, Hindustan Ports Ltd., is involved in five container terminals, in Chennai, Cochin, Mundra, Nhava Sheva and Visakhapatnam respectively. Chennai has increased the permissible draught for ships berthing along DP World’s Chennai Container Terminal from 13.5 metres to 15.0 metres, the same as PSA’s Chennai International Terminal.

New port in Port Kelang

According to local media, a new port area will be developed at Port Kelang on Carey Island (location), south of the existing port. Besides space for up to 30 million TEU container capacity, it will provide capacity for dry and liquid bulk cargoes and cars, as well as for industrial parks, free trade zones and residential buildings. The massive project to be developed over the course of 20 years is to be launched later this year. The first phase will take approximately six to seven years to complete.

Indian port volumes up by 4%

Fiscal nine-month 2016 April-December TEU handled by the eleven Indian Major (container) Ports rose by 4% year-on-year to 6.3 million TEU. Volumes at Nhava Sheva grew marginally to 3.4 million TEU, whereas Chennai, the main port on the other side of the Sub Continent, lost a substantial 4% at 1.1 million TEU. Some smaller ports posted double-digit growth rates, such as Cochin (+20%), Kolkata (+17%), Mormugao (+21%) and New Mangalore (+24%).

[The writer, a Maritime Economist, is a Chartered Fellow (Logistics Transport), Chartered Shipbroker (UK), Chartered Marketer (UK) and a University of Oxford Business Alumni. He is also a Fellow of NORAD/JICA and Harvard Business School (EEP).]