Wednesday, June 6, 2012

Container Shipping Market Still Struggles as Freight Rate Increases Stagger

CMA CGM First Quarter Figures Sum Up the Market
Shipping News Feature

FRANCE – WORLDWIDE - CMA CGM today released their first quarter figures for 2012 showing a 13.4% volume jump to 2.6 million TEU’s but the container shipping giant only recorded a rise of 2.6% in consolidated revenue to $3.6 billion whilst freight rates plummeted and oil prices rose strangling profits and leaving the group with a net loss of $248 million for the three months.

What is probably of most concern is the report today from Bloomberg that parties within the fifteen container lines which jointly announced freight and surcharge rises earlier this year have been undercutting the tariffs agreed. All the major box lines have cut overheads wherever possible with slow steaming often the norm and deals like the ones struck between CMA CGM and MSC to share routes helping.

CMA CGM says the first quarter was particularly difficult for the maritime container shipping industry. In a market shaped by persistent overcapacity, freight rates fell to new lows during the period, while oil prices climbed sharply until mid-March, with Rotterdam bunker prices rising to nearly $720 per ton and that it is still implementing a cost reduction plan, which delivered $96.5 million in savings over the quarter, above initial target.

The French shipping line makes much of the fact that on the Asia/North Europe trade, for example, the benchmark Shanghai Containerized Freight Index (SCFI) stood at $1,666/TEU as of 1st June, a 3 to 4-fold increase from $490/TEU in December 2011, with similar gains on other routes. Bloomberg meanwhile points out that the same index has fallen 7.6% since the 4th May following its 58% rise in the first four months of 2012.

The basic problem for the container carriers is whilst they are keen to see freight rates rise to a level where they can show a profit individually each company needs to fill more space on its vessels. Hence we have Nils Smedegaard Andersen, A.P. Moeller-Maersk CEO, saying three weeks ago that rates need to continue to increase if his box operation is to break even this year whilst in an interview just a few months ago when pressed he agreed he could never rule out the possibility of granting rate discounts if the need arose.

The continued uncertainty is largely a product of the enormous consequences of litigation within the freight sector over the past few years and the ending of Conference agreements which we dealt with in an earlier article. The anti trust suits successfully undertaken by US, EU and other authorities have resulted in billions of dollars in fines and even prison sentences for colluding companies and their executives leaving it impossible for any sector to declare firm multilateral increases for fear of cartel accusations. The price of a free market is the survival of the fittest and one wonders just how long the situation can go on unless the box lines start to insist on a mutually agreed sensible rate structure that all are happy with.

Meanwhile CMA CGM, whose woes we have documented previously on numerous occasions, says that its performance has improved sharply since the beginning of the second quarter. In particular, the Group reached breakeven in terms of operating profit in April and will pursue its cost reduction plan, which will result in $400 million in savings by year-end. The Group also expects to return to the black in 2012. For all our sakes let us hope that they make it.