The first-half results of major container lines reflect an industry beginning to reap the benefits of the rapid consolidation over the last four years, with carriers generally earning more per container shipped and signaling continued capacity restraint. But amid those signs of newfound and relative stability, the industry faces two imminent challenges in slowing container growth further threatened by the United States-China trade war, and uncertainty in carriers’ ability to pass on higher operating costs tied to the low-sulfur mandate to cargo owners and forwarders.
Both will prove to be major tests of carriers’ discipline and the tailwinds from consolidation that have helped drive a greater degree of stability in their earnings and overall rates. As global volume growth slows — set to rise only 2.5 percent this year, a downgrade from Alphaliner’s January forecast of 3.5 percent — carriers can at least take confidence from results.
Seven of the 10 carriers that reported second quarter were in the black, with Zim Integrated Shipping Services reporting its first profit in six quarters and Ocean Network Express (ONE) swinging to a profit of $5 million in its first fiscal quarter, after ending 2019 with a $586 million loss. CMA CGM and Pacific International Lines (PIL) have yet to report second quarter results, and Mediterranean Shipping Co. doesn’t share its financials.
Looking beyond its own profitable first half, the parent company of OOCL said the industry “has been quicker in responding to ever-changing demands in its response to the underlying condition of our ever-changing markets and more complicated global economic and trade situations.” While noting that the orderbook as a percentage of the total fleet is the lowest in more than a decade and the International Maritime Organization’s (IMO's) low-sulfur rule could accelerate steady ship scrappings this year, OOCL warned the industry will need to “react quicker to meet the changing demand.”
Slowing container demand
A further deceleration of global container growth will test carriers’ focus on yield management, rather than more volume. Maersk CEO Søren Skou on Aug 15 warned US and China tariffs could cut demand up to 1 percent.
More broadly, though, the supply-demand outlook is improving. Global container demand will end the year 3.3 percent higher than in 2018, but demand momentum will dip to 2.56 percent, according to IHS Markit. Capacity growth this year and next will rise 3.4 and 3.3 percent, respectively, after increasing some 5.8 percent between 2017 and 2018.
“On the supply side, we believe that, barring few exceptions such as Evergreen and Hapag-Lloyd which placed orders for ultra-large vessels, in general the industry’s appetite for big new ships is waning,” Nilesh Tiwary, lead analyst of container shipping at Drewry, told JOC.com. Compared with IHS Markit, Drewry expects a more moderate expansion of demand this year, forecasting a 3 percent bump and then a 4.5 percent gain next year — with the key caveat being as long as tariffs and other protectionist acts don’t deepen.
With the top nine major global carriers involved in three alliances, or highly integrated vessel-sharing agreements, most of them have focused on yield management rather than chasing volume, giving them “a level of resilience towards this increased uncertainty” they operate in, said Alan Murphy, CEO and co-founder of Sea-Intelligence Maritime Consulting. In fact, global container rates have reached an unprecedented level of stability through consolidation over the last decade, as measured by the global trade index Container Trade Statistics, according to Sea-Intelligence.
The low-sulfur fuel unknown
That stability portends well for carriers’ ability to resist chasing container demand in the coming year even if growth dramatically slows from the world falling into stagnation or even a recession. The discipline carriers will have to exert in the coming six months, into the lead-up of the Jan. 1 low-sulfur rule and into the new year, is of a different kind. Additionally, the industry’s track record of recouping higher operating costs is mixed at best. Carriers can either hold customers to higher bunker adjustment factors (BAFs), fail to recoup higher costs and cut capacity, or eat some of the industry-wide fuel bill of up to $15 billion, as estimated by Drewry. The last option would threaten their bottom lines and raise the risk of a carrier collapse, à la Hanjin Shipping in 2016.
One of the first tests of carrier discipline will come on the trans-Pacific trade, starting Oct 1. Carriers are beginning to levy low-sulfur BAFs ahead of burning low-sulfur fuel in November and December before the IMO rule takes effect Jan.1. In terms of the rule, the trans-Pacific has been a bright spot for carriers since cargo owners generally agreed to low-sulfur mechanisms within annual service contracts signed in the spring. If carriers can’t make it work on the trans-Pacific, the outlook for them recouping higher fuel costs on other trades, particularly those with shorter-term contracts, darkens significantly.