Record 2017 volume leads Zim back to profitability

Record 2017 volume leads Zim back to profitability

ZIM is active on most of the world's major trades.
Photo credit: Zim Integrated Shipping Services

A loss-making fourth quarter was not enough to offset a profitable 2017 for Zim Integrated Shipping Services as record volume and rising average freight rates led the independent niche carrier to a $50 million net profit.

The carrier’s financial markers were all well in the black. Revenue increased by 17 percent year over year to $2.97 billion, earnings before interest and taxes was $162 million compared with a negative $54 million in 2016, and at $231 million, operating cash flow was almost $200 million above that of 2016.

Container volume increased to a record 2.62 million TEU, up 8 percent on the boxes carried in 2016. This was accompanied by one of the most important profitability-determining metrics, the average freight rate, that at $995 per TEU was up 10 percent over that of 2016.

But even as Zim continues to outperform most of its peers, the carrier’s president and CEO Eli Glickman expressed concern at some of the industry fundamentals creating uncertainty in the market.

“The long-term overcapacity in the market and rising bunker rates continue to burden the industry as a whole,” he said in an earnings statement. Zim said despite a positive trend toward increasing freight rates since the third quarter of 2016, overcapacity and volatile market conditions had led to rates decreasing toward the end of 2017.

When combined with rising bunker costs, weaker falling freight rates can quickly ruin a carrier’s profitability, and this can be seen in Zim’s fourth-quarter results. Despite container volume rising by 12 percent in the fourth quarter — or 72,000 TEU more than in the last quarter of 2016 — and despite average freight rates actually rising 5 percent, ZIM recorded a $10 million loss (adjusted to $1 million loss).

Spot market rates tumbled on the Asia-US and Asia-Europe trades in the fourth quarter, hitting record lows on routes from China to North Europe. The weekly movements of the Shanghai Shipping Exchange’s Shanghai Containerized Freight Index are recorded at the JOC Shipping & Logistics Pricing Hub.

According to data from SeaIntel Maritime Analysis, the capacity scheduled to be deployed on Asia-North Europe in the second quarter will grow by 8.8 percent year over year, while Asia-Mediterranean capacity will rise by 6.5 percent. IHS Markit analysts have forecast that demand for containerized volume on the Asia-Europe trade will grow by not much more than 4 percent for the year, actually declining slightly compared with 2017, before growing again through 2019 and 2020.

Advantages of a global, independent, niche carrier

The return to profitability for Zim highlights the advantages of a global, independent niche carrier in a rapidly consolidating industry dominated by a trio of powerful carrier alliances. ZIM does not belong to 2M, the Ocean Alliance, or THE Alliance but has service agreements with some of the carriers within those vessel groupings.

Even with the unfavorable market fundamentals, the positive 2017 financial result confirms that Zim’s painful restructuring is putting the carrier on the right path.

“I’m proud to say that Zim’s financial results position us at the very top of the shipping industry,” said Glickman. “Zim is undergoing a profound process of change and improvement in all aspects of its activity, as is evident from its 2017 results. We lead the introduction of innovative digital solutions that will enable us to cater for changing market needs swiftly and efficiently. Zim continues with its relentless efforts to improve customer service and to cost reductions, in order to achieve profitability.”

But Glickman’s concerns at the industry overcapacity were shared by Tung Chee Chen, chairman of Orient Overseas Container Line parent Orient Overseas (International) Limited. When announcing OOCL’s $138 million 2017 profit in February, Tung warned that growth in the supply side would limit the recovery.

“The combination of better economic growth and continuing, if moderated, growth in supply, along with higher bunker prices, means that for OOIL and our peers, the environment remains merely one of gradual recovery, not the boom that some analysts expected when improved economic data first started to appear,” he said.

OOCL took delivery of five 21,413-TEU newbuilding vessels in 2017 and received the sixth in January 2018.

“Once the large new vessels scheduled to be delivered in 2018 have been brought into service, with a comparatively low order book for 2019 and 2020, and taking into account the improved economic data, we are hopeful that the industry may start to enjoy greater stability than it has done for many years,” Tung said. “In the meantime, we maintain a positive, if somewhat cautious, stance.”

OOCL was acquired by Cosco Shipping for $6.3 billion and will be operated by China’s state-owned carrier once all regulatory hurdles are cleared. In December, the European Commission gave the green light after tacit approval by US regulators in October when they allowed the objection period to pass. Approval was also secured by Cosco shareholders in October and the acquisition has also been cleared by China’s State-owned Assets Supervision and Administration Commission of the State Council.

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