The financial statements at container ship lines are looking like the 401(k)s of many Americans. After big losses in 2009, they improved in 2010 but have surrendered many of those gains this year.
Midyear reports from ocean carriers are variations on a common theme. Profits have vanished or retreated amid rising costs and falling rates on high-volume east-west trade routes. Carrier executives, meanwhile, are warning of difficult conditions through the rest of 2011.
With capacity rising and demand uncertain in a shaky economy, it’s clear from comments carrier executives gave along with their tepid earnings reports that hopes are dimming for a robust trans-Pacific peak season for holiday imports. Shippers have balked at the planned Aug. 15 imposition of a peak-season surcharge. The surcharge, $400 per 40-foot equivalent unit, has been delayed twice from a scheduled June 15 start.
“The late introduction of peak-season surcharges on the trans-Pacific trade, despite reasonable levels of demand, is an indicator of the difficult trading conditions expected for the remainder of the year,” said C.C. Tung, CEO of Orient Overseas (International), parent of Orient Overseas Container Line.
Hong Kong-based OOCL, with net profit of $175 million in the first half of the year, is one of the few profitable major carriers, along with A.P. Moller-Maersk’s Maersk Line container business (see story on page 6). OOCL’s profit is down 40 percent year-over-year, however, and operating profit fell 41 percent to $183 million. Still, both figures compare favorably with most other lines.
APL, Hapag-Lloyd, Hanjin Shipping, Hyundai Merchant Marine and Japanese carriers NYK Line, MOL and “K” Line reported second quarter losses and offered apprehensive outlooks for the rest of the year.
China Shipping warned of a first half loss and China’s Cosco, which will release its first half financials on Aug. 26, also said it expects weaker results.
The struggles with profitability come despite growth of about 6 to 7 percent in global demand during the first six months of the year, said Neil Dekker, container research director at London-based Drewry Shipping Consultants.
Sailings from Asia to the Mediterranean and east coast of South America have been full or nearly full, he said, and Asia-Middle East traffic was strong in advance of Ramadan. But carriers’ performance on these routes failed to overcome the impact of fuel costs and rising overcapacity on Asia-Europe and trans-Pacific trade lanes.
“Fuel prices of over $650 per ton compared to an average of about $450 per ton in 2010, as well as a distinct overcapacity in the core east-west trades, have served to undermine any attempts by ocean carriers to increase freight rates,” Dekker said.
It’s a sharp reversal from last year, when container lines were on their way recouping much of the more than $15 billion they lost during the recession year of 2009.
Diversified carriers are having difficulty using other operations to offset weak container results. Maersk is an exception with its profitable oil business, but Hapag-Lloyd’s largest shareholder, TUI, reported a loss on its core tourism business, and Japanese, Korean and Chinese carriers are feeling the impact of sluggish bulk shipping markets.
The global fleet of dry bulk carriers will grow 13 percent this year, outpacing a 4 percent increase in traffic, according to Clarkson Research. The Baltic Dry Index, a benchmark for bulk shipping rates, has lost 25 percent year-to-date.
Ocean carriers also are being hit by the weak U.S. dollar. Carriers collect most of their freight rates in dollars and incur a loss when their revenue is converted into their home currencies.
NYK, MOL and “K” Line reported net losses totaling $233 million for their April-June fiscal first quarters, mainly because of weak container markets. Despite continuing recovery from Japan’s March earthquake, they lowered their forecasts for the rest of the year.
MOL expects its liner operations to be profitable for the next three quarters, but it may lower those forecasts if freight rates don’t rise significantly. “K” Line CEO Jiro Asakura said the carrier expects the supply-demand balance to tighten in the peak season, but weak rates and rising fuel prices “will likely result in an adverse business environment.”
Hanjin’s container division had a $159 million operating loss, compared with profit of $136 million a year earlier. Container revenue fell 1.2 percent despite a 13.2 percent rise in volume, primarily because of “delayed recovery in freight rates on the trans-Pacific and Asia-Europe trades.”
Hapag-Lloyd’s second quarter profit tumbled 87 percent to $37 million from $294 million in the second quarter of 2010, despite a 3.3 percent increase in container volume. The German carrier said it expects continued medium- to long-term growth but “short-term results will be influenced by high crude oil prices and pressure on freight rates as a result of tougher competition, particularly in the Asia-related trades.”
APL had a second quarter deficit of core earnings before interest and taxes of $53 million, compared with positive EBIT of $102 million a year earlier. Volume rose 7 percent, but average revenue per 40-foot equivalent unit fell 9 percent to $2,539.
“Conditions are challenging throughout the shipping industry,” said Ron Widdows, CEO of NOL Group, Singapore-based parent of APL. “In this environment, we are working aggressively to bring down costs while keeping our assets well utilized.”
Unlike in 2009, carriers this year have been slow to reduce capacity by laying up ships. Idle ships in July represented only 120,000 20-foot equivalent units of capacity, compared with a peak of 1.5 million TEUs at the end of 2009, research analyst Alphaliner reported.
Drewry’s Dekker said carriers face “a major conundrum” in deciding how to redesign their services during the slack season before new rate negotiations for European trades begin at the end of the year.