Shipping Container Market Analysis Says Big is Beautiful for Future of Box Freight
The latest report from Scope says only box shippers with the biggest fleets and most efficient vessels are likely to turn a profit this year and meet longer-term challenges. Anyone in the trade understands that every possible cost cutting measure has been taken, slow steaming and cooperation with other lines to reduce capacity on routes to ensure larger payloads being the favourites.
Shipping consultants Drewry recently upgraded its container demand forecast by two percentage points to 6.5% from 4.5% for 2018 and Scope itself had forecast a favourable demand outlook in January. The agency felt this would translate into visibly higher shipping rates at the time but less ships being scrapped this year as their value fell has meant a better supply of capacity keeping tariffs low. Denis Kuhn, analyst at Scope and author of the report, says this is likely to change, commenting:
“Strong demand is creating a better-than-expected supply-demand balance but another headwind is the industry’s excess capacity, which weighs on freight rates. Scrapping should accelerate in H2 and 2019, easing the capacity glut.”
Kuhn says there are factors which support this hypothesis, new environmental regulations, capping sulphur emissions from 2020 and toughening up requirements for treating ballast water are powerful incentives for owners to invest in new ships and scrap older ones while keeping up pressure for more sector consolidation. He feels the larger companies are better situated to face an uncertain future.
With the largest player, Maersk, spending circa $1 billion annually on newbuilds even it has no real direct control over rates and industry returns depend on asset optimisation, ensuring those ships are always at sea and fully loaded. So what exactly constitutes uncertainty?
Top of the list are the dreaded ‘trade wars’ which are getting so much publicity of late. Restrictive practices by the world’s largest economies may have the potential to severely impact a market which depends on fine margins and is already running as economically as it finds possible. Kuhn however puts a positive point saying the net effect of further deterioration between the biggest trading blocs could be less dramatic than it first looks.
Meanwhile increased crude oil and bunker prices and flat shipping rates will continue to put severe pressure on the operating profitability of older, less efficient vessels and, for this reason he says, fleet efficiency and quality will become even more important over the next few quarters for container companies to be able to generate operating profits and maintain their credit-risk profiles. Shrinking operating results will drive up leverage (typically measured by Net Debt/EBITDA) and may result in increased borrowing costs for shipping companies. Meanwhile credit spreads on many shipping bonds have widened recently amid weaker-than-expected freight rates but could tighten again if liners can mitigate the effect of higher bunker costs via rates increases as well as improved efficiency.
The report points out the obvious in that shipping volumes are determined by consumer demand and suppliers’ strategies for meeting it. However if consumers substitute imports from countries with increased tariffs for cheaper ones from other countries (supplies must be obtained somewhere), the impact on overall trade volumes might well be modest, but Scope believes will favour operators of large, diverse fleets able to adjust routes quickly to changing trade patterns. Being part of a strong alliance like 2M, THE Alliance, ONE or OCEAN is essential, in Scope’s view, to meet shifting customer demands in a flexible and reliable way.
To read the original report in full click HERE.
Photo: The Maersk Triple E series started a new race to ever larger box carriers.
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