Fitch Ratings said CMA CGM's first-quarter results are evidence that the world's largest container shipping companies are beginning to reap the benefit of a more rational approach to pricing.
But Fitch said the French carrier’s first-quarter loss of $248 million also illustrates how far the industry has to go before a full return to health, which it thinks is unlikely before 2014.
The cyclicality of the industry, combined with its high capital requirements as well as high operating leverage and sensitivity to volatile bunker prices, means companies in the shipping sector tend to be rated in the sub-investment grade ('BB' and 'B' or lower) rating categories.
Larger companies (or conglomerates with significant shipping activities) with the benefit of diversity of shipping lines, stable profitability and strong market positions can be investment grade, but they are rarely rated above the 'BBB' rating category.
Fitch called carriers’ performance through the downturn “weak and erratic.” It said that wildly fluctuating freight rates have meant that the major carriers have regularly reported negative operating profits since the crisis hit the industry in the second half of 2008.
The container shipping industry is still struggling to recover from a frenzy of new ship orders in 2008, with a large number of new vessels expected to enter the world fleets in 2012-13. Attempts by some of the major players to address this oversupply — by retiring older vessels, delaying orders, or reducing capacity on key routes — have had limited impact.
“We don't expect overcapacity to begin to reverse until 2014 at the earliest,” Fitch said.
The efforts by the three largest carriers, Maersk Line, Mediterranean Shipping Co. and CMA CGM, to gain or maintain market share, often at the expense of rates, has worsened the situation, Fitch said.
“We believe this has run its course and that companies are shifting their focus more towards profitability,” the ratings agency said. “The size of freight-rate increases in March-May 2012 is evidence of this and should contribute to an improvement on Q1 2012's negative EBITDA for the larger players.”