Container ship lines will struggle to achieve profitability while attempting to manage capacity that’s expected to rise faster than cargo volume, and the result may be more rate volatility and service challenges for shippers.
That was the takeaway from a panel discussion on the container shipping outlook at the opening day of The Journal of Commerce’s 12th Annual Trans-Pacific Maritime Conference in Long Beach, Calif.
“The outlook for freight rates is entirely dependent on capacity and how capacity is managed by carriers,” said Martin Dixon, research manager at Drewry Maritime Consultants’ Container Freight Rate Insight. Most carriers are showing negative operating cash flow and declining equity ratios.
Janet Lewis, analyst at Macquarie Capital Securities in Hong Kong, said it’s unlikely carriers will achieve profitability this year but that the red ink isn’t expected to produce a rash of consolidation, mergers and acquisitions, at least immediately.
She said an acquiring company would have to take on the acquired company’s liabilities but that carriers have little incentive to acquire vessels, which are in oversupply, or customers that can easily defect to a rival.
But she said carrier losses, which Drewry Shipping Consultants estimated at more than $5 billion last year, are cause for concern. “The industry is not yet in critical condition, but most carriers have seen significant deterioration in their financial health,” she said. “What we have is too many vessels chasing too little cargo, and rates have collapsed.”
Carriers are still taking delivery of ships ordered in the boom years of 2007-2008. Most of the new ships have capacities of more than 10,000 20-foot-equivalent units, and are bumping mid-sized vessels to north-south and feeder trade lanes.
Shippers are enjoying low container rates — Lewis said per-unit costs of shipping women’s jeans from Hong Kong to Columbus, Ohio, are 18 cents a pair, and that that a 30-inch LCD television can be shipped from Yantian, China, to Torrance, Calif., for $3.22.
Brian Conrad, executive administrator of the Transpacific Stabilization Agreement, said rates are below most carriers’ operating costs, especially with bunker fuel prices above $740 a ton, and don’t begin to cover capital investments.
It costs more than $2,500 to move a container from Hong Kong to Los Angeles “and you know how rates are now,” he said.
The TSA, a discussion agreement whose members can discuss and set voluntary guidelines on rates, has had “generally positive” response to a $400-per-FEU general rate increases last month. TSA members plan to seek additional increases of $300 per FEU on March 15 and $500 per FEU to the West Coast and $700 to the East Coast in May.
Asked whether carriers’ persistent struggles with rates and profitability will eventually cause financiers to shy away from shipping investments, Conrad replied, “I think it’s something people need to think about.”
Dixon said this spring’s trans-Pacific contract rate negotiations are likely to be affected by spot rates, which have been weak. He predicted rate volatility will continue, and suggested that carriers and cargo interests consider indexed contracts to smooth out the peaks and valleys. He also said carriers must find a way to manage capacity.
Drewry projects that a 6 percent increase in layups by year-end would yield a 10 percent increase in Asia-Europe rates this year and a decline next year. A 10 percent increase in layups would yield a 31 percent rate increase this year and stable rates next year. On the trans-Pacific, a 6 percent increase in layups would produce a 2 percent increase this year, followed by a decline next year. A 10 percent increase in layups would boost rates 13 percent this year and allow rate stability next year.
Carrier overcapacity comes amid a gradually improving economy. Mario Moreno, economist for The Journal of Commerce and its sister company PIERS, forecast trans-Pacific imports will rise 2.4 percent this year while exports will increase 4.2 percent to a record total of nearly 7 million TEUs.