The likelihood of the container shipping industry hitting two straight years of total profitability is fading fast, with rising tit-for-tat tariffs, bunker prices up by half from a year ago, and challenges being faced by carriers in raising spot and contract rates to a degree expected through recent consolidation.
Hapag-Lloyd’s declaration on July 2 that it was lowering its full-year financial outlook — even after being one of the few carriers to report an operating profit for the first quarter — was the latest reminder of the difficulties facing container shipping in its search for sustained profitability.
After industry-wide profitability in 2017, only three container lines managed to stay in the black during the first quarter of 2018, led by Hapag-Lloyd, which posted operating profits of $66 million on revenue of $3,217 million for a margin of 2.1 percent.
CMA CGM and Wan Hai also managed to turn in positive operating margins of 1.6 percent and 1 percent, respectively. Alphaliner noted that the remaining eight carriers all reported negative margins, with HMM remaining at the bottom of the list for the eighth consecutive quarter with a margin of -15.6 percent.
The global container fleet is forecast to increase 5.4 percent this year as container volume rises 5.3 percent, according to IHS Markit’s Container Ships Forecast.
But this balance between supply and demand will be undermined by rising bunker prices, declining volume between China and the United States, and growing uncertainty over the impact of widespread US trade tariffs and the retaliatory measures being taken by its trading partners.
The average price per metric ton through June for bunkers across the ports of Shanghai, Rotterdam, and New York-New Jersey is 53 percent higher than it was in June 2017. Alphaliner said fuel costs, which only accounted for about 8 percent of carriers’ operating costs in 1998, now account for 15 percent.
This is hurting carriers, despite the most recent Asia-US West Coast spot rate increase of 29.4 percent compared with the week before. That puts the rate up by 12 percent year-over-year, according to the latest reading of Shanghai Containerized Freight Index (SCFI), as displayed on the JOC Shipping & Logistics Pricing Hub. The SCFI has remained in positive territory year-over-year for the last several weeks, but if growing trade tensions begin to eat into volume, those gains could be undermined in the coming months.
Bunker fuel costs weigh on business models
Ratings agency Moody’s said bunker costs had been on the rise since the beginning of the year in tandem with the increase in oil prices, while the vessel chartering market has rebounded, aided by less new supply coming into the under-10,000 TEU segment of the market, where most of the charterers operate.
“At the same time, the recovery of freight rates has been slow, with a prolonged weakness following the Chinese New Year. In combination, these factors put pressure on (Hapag-Lloyd’s) earnings,” Moody’s said in a note to investors.
Lars Jensen, CEO and partner at SeaIntelligence Consulting, said he expected the negative view on 2018 profitability to be symptomatic of the challenge facing most of the main carriers. “The toxic combination of increasing fuel and charter prices and continued weakness in rates inevitably leads to such a situation,” he wrote in a LinkedIn blog.
Several carriers began to levy emergency bunker surcharges from June 1 on global trades and from July 1 on routes to and from the US. The surcharges are intended as a short term measure to address sharp and unexpected increases in the fuel price, but CMA CGM on June 30 announced that it would be extending its emergency bunker surcharge of $55 per TEU through July and evaluating it monthly.
“A significant increase in bunker prices has been observed since the beginning of the year. Unfortunately, prices have continued to rise even more sharply recently,” the Marseille-based carrier said in a statement to the market justifying the continued surcharge.
Adding to carrier concerns, in the first five months of 2018, US imports from Asia grew just 2.8 percent to 6.3 million TEU compared with the 6.5 percent growth reported in the first five months of 2017, while the 4.3 million TEU imported from China saw growth shrink to 2.7 percent from 7.1 percent in the same period of 2017, according to data from PIERS, a sister product of JOC.com.
US exports to Asia fell 6.2 percent through April to 2 million TEU, compared with a 5.9 percent increase in volume in the same period of 2017. US exports to China fell 18.7 percent to 799,555 TEU, compared with a 7.8 percent increase in the same period of 2017.
Asia-Europe volume growth also slowed, rising 1.5 percent through April to 5.2 million TEU, down from the 3.1 percent increase recorded in the same period of 2017, data from Container Trades Statistics show. Backhaul Europe-Asia volume fell 6.6 percent through April to 2.5 million TEU, compared with a 10.3 percent increase in the same period of 2017.
However, the leading cause of global uncertainty is the trade tariffs the US is imposing and the retaliatory tariffs that will be placed on US goods by its trading partners. From July 6, US Customs will begin collecting tariffs of 25 percent on the first list of 818 Chinese products, mainly machinery and electronics goods on the trans-Pacific eastbound trade, worth approximately $34 billion. The second list of products, worth $16 billion, is being reviewed.
The tit-for-tat tariffs China and the United States will levy on each other affect 6.2 percent, or 830,095 TEU, of the total China-US container trade of 13.5 million TEU, based on 2017 figures, and the tariffs will hit US exporters harder than importers, according to PIERS data. The additional $16 billion in commodities that both sides are still reviewing and adjusting would bring the total affected trade to 8.1 percent, or 1.1 million TEU
“The trade war adds painful uncertainty for the shipping industry, as it distorts the free flow of goods, changes trade lanes, and makes it difficult for ship operators and owners to position ships efficiently in the market,” said Peter Sand, BIMCO’s chief shipping analyst.
In its Container Forecaster report, Drewry said the trade disputes were taking the gloss off the strong demand growth seen in the early months of 2018, driven by an improving world economy. “Perhaps the biggest risk is the unpredictability of it all and the potential confidence knock it will give to the world economy, just when it seems to be finding its feet,” Drewry noted.
The analyst said that although the risk to container demand was currently relatively low, even when factoring in tit-for-tat measures and disputes with other trading partners, there was clearly the potential for matters to get much darker if additional tariffs were forthcoming.