Friday, February 12, 2016

2016 IS SHAPING UP BADLY FOR CONTAINER LINES

 Freight Investor Services
LEADING THE WAY IN FREIGHT AND COMMODITY DERIVATIVES

Could the year of the monkey prove to be a banana skin for carriers?
 
With the year of the monkey in full swing there was no SCFI published this week, allowing carriers an opportunity to take stock of what lies ahead this year.

If Maersk Line’s prediction holds true, in that it’s 2016 results will be significantly lower than that of last years, then carriers could be facing an increasingly perilous position this time next year.

Worryingly for Maersk Line it saw its Q4-2015 underlying profit fall by a massive 126% year-on-year to negative $165m, whilst its average rate per FEU declined 25%, reflecting the severe deterioration in rates at the end of last year. For the full year the Danish line reported an underlying profit of $1.3bn versus $2.2bn reported a year earlier.

Looking ahead the key question is: How will 2016 on average perform versus Q4 2015?

Maersk estimated that growth in demand for seaborne container freight increased just 0-1% in 2015, whereas 2016 growth will be in the region of 1-3%. By comparison respected freight forwarder DSV is expecting transport market growth to be in line with the underlying economic growth in the individual regions. With the International Monetary Fund expecting advanced economies to expand by 2.1% this year, it’s in line with Maersk’s expectations.

Importantly however Alphaliner is predicting 2016 supply growth to reach 4.6% thereby further widening the supply, demand imbalance. On the basis of the above then 2016 does indeed look as if it may pose an even greater challenge to carriers than 2015.

Why take the risk?

Maersk Line’s average freight rate per FEU is highly correlated to the SCFI index, as shown in both Fig 1 and Fig 2.
Fig 1.
SCFI vs Maersk Line
Fig 2.
SCFI vs Maersk Line correlation
With poor fundamentals expected for 2016 and a clear recognition of the risk this poses to income, then surely an effective risk management policy would involve limiting this risk where possible? Of course carriers are able to secure a proportion of their income in advance using Container FFAs and therefore limiting this risk.

Elsewhere this week Reuters reported that the EU Commission’s investigation into the possible collusion amongst lines pricing is nearing an end, with a decision expected within the next few weeks. It’s being reported that carriers will instead publish binding rates with a months’ notice, which could in effect act as a cap on rates.

However fundamentally will this change anything?

If carriers still plan to announce rate increases, albeit under a different guise how will this differ from announcing GRI’s, as it could still show their intention to increase rates?

In addition although it’s argued that by publishing binding rates a cap on prices may be formed, in reality it’s likely that very few shippers will pay the full rate increase, just like a traditional GRI.

The EU Commission states that it would like to see the container shipping industry develop pricing tools that are modern, conducive to competition and consumer friendly. Although a step in the right direction it’s hard to see how this latest proposal will truly change the market.


Source: Maersk Investor Relations, Shanghai Shipping Exchange