Friday, May 6, 2016

MORE BAD NEWS ON CONTAINER LINE RATES

Freight Investor Services
LEADING THE WAY IN FREIGHT AND COMMODITY DERIVATIVES

Maersk Line beats expectations but is on the slide


Rates on the key Asia-Europe trade have fallen 13.1% or $96 to $636 teu after last week’s increase, which was attributed to the planned May 1st GRI.

Several lines have announced further plans to increase rates mid-May with CMA CGM and MSC looking to implement increases of $200 and $250 respectively. If successful the latest attempts will likely reverse the declines seen this week and next helping to somewhat stabilise the monthly average.

Elsewhere this week Alphaliner highlighted the wild discrepancy between the three big Japanese carrier’s forecasts for the year as well as their historically poor forecasting ability. K-Line, MOL and NYK, have all reported results that were hugely different from forecasts and resulted in various revisions along the way. For their financial year the three lines reported ordinary income that was between $183-289m lower than their April 2015 predictions.

Looking ahead to the current financial year K-Line is expecting Asia-Europe rates to increase by a massive 23% year-on-year, which seems somewhat unrealistic given rate developments year to date. This latest estimate could result in yet another missed forecast.

In fact the Xeneta platform is indicating that long term contracts of 3 months or greater on the key Asia-Europe trade have fallen significantly. Currently the average market rate on the trade is 46% lower than the same time last year, whilst those that can achieve rates towards the lower end of the market have seen their costs fall by 64%. Even with longer dated contracts expected to increase in Q3 by around 10%, they will remain roughly 30% lower than those in 2015.


(Click to enlarge image)
Xeneta
Source: Xeneta
Meanwhile year-to-date on the SCFI the spot market has averaged at $420 whilst over the same period last year it was recorded at $768, representing a fall of 45%.
 
SCFI
Source: Shanghai Shipping Exchange
The trend of falling freight rates is one that was expressed by Maersk Line in their latest results, which reported that its average rate has declined 3.4% per annum since 2004.

Despite this the Danish line was able to pull a rabbit out of the hat for Q1-2016 beating analysts’ forecasts for a loss of around $103m when it reported a profit of $32m. However this still represented a huge year-on-year decline of 95%, indicating how far the market has eroded over 12 months.

Hope is that other carriers less resilient to the market and performing less well will have to change their course, enabling the Danish line to reach its long term goal of “above 10% ROIC (return on invested capital) over the cycle”. In the first three months of the year ROIC fell to just 0.7% for Maersk Line, someway off its target.

Given Hanjin and HMM’s creditor led restructuring programs, whereby the largest creditor is state run Korea Development Bank, it’s unclear as to whether such distressed carriers can cling on, but if they can it may be a long slog before the market is able to deliver its desired returns.