Meetings with several container lines last week in Europe yielded an unexpected takeaway. I had expected the carriers to be universally morose following the more than $1 billion in collective first quarter losses they reported and the precarious position of this year’s rate increases in the bellwether Asia-Europe trade.
Indeed, none is bullish on 2012, and they all admit the market could easily turn sour. But there is an emerging shared view that even when taking into consideration the near-recessionary state of the European economy, the second half of 2012 will improve.
In an important point beneficial cargo owners should take notice of, carriers believe the two- to three-year outlook is beginning to swing encouragingly in their direction. If this year’s outlook hangs on possibly wishful thinking — the prospect of good behavior by the largest carriers that are increasingly emphasizing the need for profitability in their public statements — the longer-term outlook is rooted in what for the carriers is a brightening view of the fundamentals based on a drying up of vessel order-ing and the financing behind it.
In the container sector, the odds will always be with those who bet against the ability of carriers to hold the line on rates in the face of overcapacity; such is the pattern over many years. But the losses have been so severe this year that many in the industry believe the major carriers have given up on increasing market share, as well as on the notion that ships must sail at 80 to 90 percent utilization to be profitable.
Maersk is spreading the gospel of “Back to Black” far beyond Copenhagen, and other carriers may be getting the message. As Macquarie transport analyst and TPM 2012 speaker Janet Lewis told JOC Hong Kong correspondent Mike King last week: “We believe most carriers are likely to see significantly better profitability in the second half of the year, even with some softening of rates into the fourth quarter.”
But factors other than pure sup-ply and demand will be in play this year, she said. “Hope lies in carrier behavior; with a significant volume of new capacity coming on, especially for ultra-large container ships, and sluggish volume growth in the Asia-Europe and trans-Pacific likely to persist, carrier discipline is critical to maintaining the recent rate hikes,” Lewis said.
Most interesting from my carrier meetings last week was the degree to which the carriers see a brightening picture — for themselves, not necessarily for their customers who may be forced to pay higher rates — taking shape in the next two years.
The idea is this: Ship ordering is drying up because of the withdrawal or sidelining of traditional sources of container ship financing such as the German KG funds and large European banks. No clear replacement sources such as Chinese banks or private equity have emerged on a scale to replace the fi nancing capac-ity that’s been removed.
“It is hard to see where a significant level of new orders could come from given the (lack of) profitability in the sector and overall tight lending conditions,” Lewis said.
As tracked by Alphaliner, the container ship order book as a percentage of the existing fleet peaked at 64 percent in 2007. It dropped to 30 percent last year and now sits at 24 percent, Alphaliner analyst Hua Joo Tan said.
Business Week speculated in an article last week that shipowners might turn to private equity to help plug an estimated $250 billion funding gap for all shipping sectors created by the withdrawal from ship financing of European banks such as Germany’s HSH Nordbank and Commerzbank, both of which are cutting their shipping portfolios.
The problem is private equity typically seeks returns far exceeding container ship profitability and is opportunistic rather than long term in its orientation. The article reported on a KPMG survey that indicated U.S. private equity has expressed interest in container shipping investments in Germany, but the prospect of “this alternative financing for German shipping companies may prove diffi -cult to realize given the requirement for yields of up to 15 percent.”
This makes abundant sense: European banks and German KGs are relatively stable, institutionalized sources of container ship financing, while prospective new investors will seek a short-term killing and then move onto the next opportunity. The result could be less overall financing capacity and the possibility of a narrower pipeline of new ship construction extending out for a number of years. Two CEOs of top-tier container lines have mentioned this development in conversations over the past two months.
It would make sense for this to be on the radar screen of customers as well.