Jefferies expects Asian container lines’ earnings for the fourth quarter of 2013 overall will be in line with or below Bloomberg consensus estimates, as freight rates in Asia-related trade lanes continued to slide and overcapacity remained. Such depressed rates and continuing overcapacity will lead carriers increasingly to rely on alternative methods to improve profitability, according to Drewry Maritime Research.
Trans-Pacific eastbound freight rates have fallen 10 index points from a reading of 104 in July 2012 to 94 in November 2013, hitting a low of 91 in October 2013, according to Container Trades Statistics. Of nine Asian container lines Jefferies considers — including China Shipping Container Lines, Orient Overseas International, NOL (APL), Cosco, MOL, NYK Line, “K” Line, Yang Ming and Evergreen — “K” Line has the biggest share of its business invested in the trans-Pacific trade lane, with 40 percent of its capacity deployed on the route and 45 percent of its revenue dependent on it, according to Jefferies.
Freight rates in the intra-Asia trade lane may be another drag on fourth quarter earnings, following a “sharp drop,” Jefferies said. CTS data shows that intra-Asia rates, excluding the Indian subcontinent and Oceania, have fallen 16 points from July 2012, when they hit a high of 113, through November 2013. Based on Jefferies predictions, intra-Asia rates fell to a four-year low in the fourth quarter of 2013, as container lines cascaded capacity from Asia-Europe to intra-Asia to make room for new mega-ships, in turn increasing capacity on the intra-Asia trade as well.
Of the nine container lines, CSCL and NOL have the biggest shares of their respective businesses invested in intra-Asia in terms of capacity, each with 30 percent of their fleet deployed on the route. In terms of revenue, CSCL stands to lose the most, with 37 percent of its revenue dependent on intra-Asia trade.
In the Asia-Europe trade, despite 10 attempts to raise rates in the fourth quarter of 2013, average spot rates were still about $450 per FEU below where they stood at in the beginning of the year, according to Drewry. Although carriers overall reported decent industry load factors of around 90 percent throughout the year, in the absence of a significant third quarter peak season, Asia-Europe freight rates in the fourth quarter still fell drastically to well below the break-even levels in June and October, Drewry said.
The immediate successes of GRI attempts at the end December and in the beginning of January, as shown by Shanghai Containerized Freight Index from Shanghai to Northern Europe, have given the Asia-Europe trade “false hope,” according to Drewry. Many container lines’ 2014 contracts have been signed with shippers on the Asia-Europe route at levels of between $300 and $700 per FEU below those signed in 2013.
Of the nine Asian container lines Jefferies discussed in its latest research note, “K” Line stands to lose the most from falling freight rates in the Asia-Europe trade, as 34 percent of its fleet is deployed on the route in the fourth quarter, according to Jefferies. Cosco, with 37 percent of its revenue dependent on Asia-Europe trade, is also expected to be affected.
Jefferies blamed overcapacity as the main factor depressing freight rates. For example, in the trans-Pacific lane, container lines deployed 8 percent more capacity in 2013 than in 2012, according to Alphaliner. Overcapacity in general is expected to continue to over the next few years, as the average container vessel size has already increased 88 percent since 2013, according to Seabury. According to Drewry, 56 ships of at least 10,000 TEUs capacity are lined up for 2014 delivery, and 52 are expected in 2015, with even more orders beyond that on the books.
As profits as a whole are expected to remain low in coming years, container lines around the world will increasingly turn to alternative methods to make money, such as splitting container businesses into core and non-core divisions and forming vessel-sharing and operational alliances, according to Drewry. In the past 15 years, the container shipping industry has averaged a net income margin of 1.7 percent, and never exceeded an 11 percent margin in any year, according to Seabury Group.
“Even with the bigger ships now being deployed, carriers will still find it difficult to make a substantial profit,” Drewry said.
Some carriers also seem to be staging their businesses to be able to sell off “non-core” assets within their container divisions. So far, only five of the Top 20 carriers — Maersk Line, Zim, CMA CGM, PIL, and CSAV — have adopted a multi-brand container line approach, but this type of strategy is “getting back in style,” according to Alphaliner.
For example, A.P. Moller Maersk recently revived its SeaLand brand to launch a niche intra-Americas carrier, which could be a sign that the group is considering spinning off niche entities in its container business. According to Maersk, its regional carriers — MCC Transport in Asia, Seago in Europe, Safmarine in Africa and Mercosul in Brazil — will provide greater flexibility and more focused customer service for local markets. These niche divisions within the group’s container business also offer another advantage: they will be easier sell down the road if they turn out to be less lucrative than major east-west trade lanes.
The financially troubled Zim is also in the midst of restructuring in order to get rid of its $2.8 billion in debt, including selling non-core operations to cut costs.
“The sale of non-core assets is a distinct strategy by many lines to retreat to core businesses and release new cash flow, but this should not detract from the fact that some of their business plans are not working,” Drewry noted.
In addition, earlier this month, seven container lines — APL, Maersk Line, OOCL, CMA CGM, Emirates Shipping Line, Hamburg Süd and Regional Container Lines — announced a new cooperation in the intra-Asia trade lane, in order to eliminate unnecessary service duplications, as rates in this trade lane have been declining. In the face of overcapacity, these types of vessel-sharing agreements, along with operational alliances such as the P3 and G6, will increase out of necessity on all trade routes, Drewry said.
Ultimately, freight rates are now largely determined by carrier behaviors and their responses to supply and demand changes, regardless of market fundamentals, Drewry said. That means the “moderate” demand growth of 6 percent that is expected through 2017, according to Seabury, will be insufficient to offset overcapacity. With elusive profits and plenty of new investments in ever-larger vessels, the container shipping industry could be headed toward a breaking point.
|Carriers' Container Capacity Deployment vs. Container Revenue Breakdown|
|CSCL||OOIL||NOL (APL)||Cosco||MOL||NYK||"K" Line||Yang Ming||Evergreen|
|Container Capacity Deployment (October 2013)|
|Container Revenue Breakdown|
|*Note: Intra-Asia revenue portion is included in the "other" segment for NYK and "K" Line.|