Monday, August 15, 2016

POTENTIAL $5BILLION LOSS FOR CONTAINER LINES

Real contraction is needed--not mergers--to better align supply and demand.


Without an uptick in rates, ocean carriers are facing a $5bn annual loss, warns Drewry

SuezCanal-ContainerShip
Container lines are enduring a “severe revenue contraction”, said Drewry, after the first six-month turnover figures reported so far by carriers were down an average of 18% on the same period of 2015.
Sales are contracting faster than carriers can cut costs, and unless there is a significant uptick of freight rates, the consultant predicts industry losses of “at least $5bn” this year and spark a further flurry of M&A activity.
Indeed, if the carrier depression continues apace, full-year revenue will plunge below that of its lowest point in 2009, a year when the industry suffered collective operating losses of $19bn.
However container lines are much more cost-effective now, notes Drewry, which will mitigate losses, but not the problem.
Last week, The Loadstar reported the H1 results of three household names in liner shipping: OOCL, Hapag-Lloyd and market leader Maersk Line.
The carriers reported interim losses of $57m, $158m and $114m respectively, but of particular concern was that all three suggested that a return to profitability was a very long way away.
“Freight rates dropped in the second quarter of 2016 to record low levels; we made a loss as we were unable to reduce costs at the same speed. We are not satisfied with our second-quarter result,” said Maersk Group and Maersk Line CEO Soren Skou.
Mr Skou said he thought container rates had “bottomed out”, given recent jumps, albeit tenuous, in the spot market indexes. However, he admitted that rates would “remain under pressure” for some time due to low demand and chronic overcapacity.
These days, 50% of Maersk Line’s business comes from the volatile spot market – compared with less than 25% a few years ago when the Danish carrier famously referred to the spot market as a “casino”.
So the carrier is unable to budget comfortably on its sales more than a few weeks ahead, meaning it reacts somewhat later to market changes. Moreover, the hitherto base contract rates were reset at much lower levels for the year in both the Asia-Europe and transpacific tradelanes, dragged down by record low spot rates at the time of their negotiation.
Spot rate increases on the transpacific route were “completely wiped out” by the low annual contract rates that had already been agreed, advised Mr Skou, last week.
And the non-reporting carriers, such as Hamburg Sud and MSC, are not immune from the current malaise blighting the industry, a source from the latter told The Loadstar last week.
“MSC does not have a silver bullet”, said the source, admitting “we are suffering like the others”.
More aggressive cost-cutting, including new pressure on terminal costs, consolidation and the development of bigger alliances, are the only tools left in the box for an industry on its knees – and arguably the architect of its own demise.