Japanese carriers enter ONE with global growth, muted Asia-US gains

Japanese carriers enter ONE with global growth, muted Asia-US gains

A ONE ship.

All three carriers in Ocean Network Express (ONE) highlighted the supply-demand balance as having an influence on container industry financials, with freight rates stronger than during the previous year but lower than expected. Photo credit: ONE.

NYK Line, MOL, and “K” Line entered the new Ocean Network Express (ONE) joint venture with revenue and volume heading mostly in the right direction, but their total Asia-US container growth lagged the market in the first quarter.

The first three months of 2018 was the last quarter of the Japanese carriers’ financial year for the container shipping units of NYK Line,  “K” Line, and MOL before they operated as ONE starting April 1 and became the sixth-largest global carrier. The three carriers that make up ONE recorded combined year-over-year growth in Asia import volume of 2.1 percent to 610,115 TEU, slower than the 8.9 percent increase in volume for the trade as a whole. The 8.9 percent expansion in the first quarter of this year is more than double the increase in the same period of 2017.

“K” Line was the only one of the three carriers to record a decline in Asia-US volume in the first quarter, dropping 4.9 percent to 214,392 TEU. Its market share in the Asia-US trade also slipped by 0.8 points to 5.6 percent, with MOL edging down 0.2 points to 5.1 percent, and NYK losing 0.1 points to 5.2 percent share of the market.

It was a similar two-up, one-down scenario in the annual results of the three Japanese carriers that were announced this week. This time it was MOL in the negative numbers, as the one-off restructuring costs related to separating its container unit ahead of the ONE launch came in at $672 million. Excluding those costs, the carrier actually made a $141 million profit.

The other two carriers turned around losses recorded in the last financial year. NYK Group posted a 2017 profit of $190 million, growing its liner trade revenue by 18 percent to $6.3 billion. “K” Line announced a $95 million net profit, with the container shipping segment growing 15 percent compared with 2016 and generating revenue of $5.4 billion.

Supply-demand balance highlighted

All three carriers highlighted the supply-demand balance as having an influence on container industry financials, with freight rates stronger than during the previous year but lower than expected.

“Shipping traffic was brisk along trans-Pacific routes, but an upswing in spot freight rates largely came to a standstill due to the impact of growing shipping capacity, which was caused by the production of new ultra-large container ships,” said NYK.

MOL said in its review of the year that, “The spot freight market on the Asia-North America routes, although slumping in the first quarter, rose over the summer period with cargo volumes for this fiscal year proceeding at a record high pace. Over winter, the increased pressures of vessel supply caused market weakness, but the market once again began rising during the busy period before the Lunar New Year in February.”

Carriers are injecting 8 to 9 percent increase in trans-Pacific capacity, while imports are projected to increase 5 to 6 percent, according to Alphaliner. Spot rates from Shanghai to the US West Coast jumped 21.8 percent this week to $1,403 per FEU, according to the Shanghai Containerized Freight Index spot rates displayed on the JOC Shipping & Logistics Pricing Hub. That level is down $9 from the rate the week after Lunar New Year, when spot rates traditionally fall as factories close. The rate to the East Coast from Shanghai rose 8.1 percent to $2,371.

In terms of annual Asia-US service contracts, contract negotiations between US importers from Asia and ocean carriers are moving slower than in past cycles because many beneficial cargo owners (BCOs) are holding out for lower rates. Early progress reports suggest East Coast rates are under downward pressure because of overcapacity, while most BCOs see the cost of inland transportation increasing.

MOL said the Asia-Europe trade also struggled to keep rates up. “On the Asia-Europe routes, although there was a significant recovery in cargo volume, this rise was picked up by new deployments of large-sized vessels at each liner company, causing the spot freight rates to remain relatively stable over the entire year,” the carrier said.

Ocean carriers largely optimistic regarding 2018

According to IHS Markit data, the global container fleet is projected to expand 4.7 percent this year, just below the projected 4.9 percent increase in global trade. But demand on Asia-Europe in the second quarter is forecast to grow by about 4 percent, less than half the 8.8 percent increase in capacity that is predicted to enter the trade in that period.

However, carriers have a largely positive outlook for the container business. Fresh off the best result in its history, CMA CGM said the volume momentum of 2017 was expected to continue through 2018, and the carrier would continue to benefit from this trend with its coverage of east-west, north-south, and intra-regional trades. The container shipping industry ended six years of straight losses in 2017, with an estimated $7 billion total profit, according to Drewry.

Hapag-Lloyd CEO Rolf Habben Jansen said the carrier expected increasing demand for container shipping services, and year-over-year volume would also grow with the inclusion of United Arab Shipping Co.’s business activities for the whole year. “The market environment remains challenging, but as we see some of the fundamentals improving gradually over the upcoming period, we remain cautiously optimistic,” he said.

Maersk Group CEO Soren Skou also maintained a positive outlook for the container shipping industry in 2018 and beyond, saying the fundamentals continued to be the best they have been in a decade with broad based and strong global economic growth.

“Europe is doing well and the US will continue to do so. The commodity-based countries are also growing again because commodity prices have come up and costs have come down. Oil at $65 a barrel today is good for those economies and that drives container demand,” he said.

Contact Greg Knowler at greg.knowler@ihsmarkit.com and follow him on Twitter: @greg_knowler.