Ocean container shipping carriers have endured tough financial times almost it seems since the start of the Great Recession.
Supply Chain Digest Says...
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| Last year "was very toxic for the industry, and we saw a price war starting in April that has continued until now," Skou told the Journal. |
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The issue at the end is as usual simply one of supply and demand. At the beginning of the year, the analysts at Alphaliner estimated that net capacity - considering new ship deliveries and planned scrapping of existing ships and laying up others - would grow 4.6% in 2016, far below the growth of 8.5% last year, and even less than the 5.5% growth seen in 2009 in the midst of the Great Recession.
However, that 4.6% rate will still result in new capacity of almost 800,000 TEU - roughly equivalent to about 45 new 18,000 TEU megaships. And while the growth in industry capacity will slow in 2016, it will still be several percentage points above volume growth.
Since 1990, the total cumulative growth of ocean container capacity in terms of TEU has been 10.3%.
Of course, the ocean container industry has been plagued by over capacity for a number of years now, leading to collapsing rates and big losses by many carriers.
Nearly all major carriers - led by Maersk Lines - have tried to address the bottom line by investing in ever larger ships (18,000+ TEU capacity) that offer the potential for much lower operating costs per container, but have been adding those types of ships to their fleets without laying up or scrapping ships of equal total capacity.
Source: Alphaliner
So total industry capacity continues to grow - and consistently much faster than container volume growth.
As can be seen below, the impact on shipping rates has simply been astonishing. Last Friday's China Containerized Freight Index came in at a level of 643 - less than half the level in 2014, in what even then was not a great time for carrier pricing from a historical perspective.
That in turn of course has led to red ink all over the income statements of the ocean carriers. Maersk Line, the industry's largest carrier, managed to earn a profit in Q1, according to its recent earnings release, but just barely, posting funderlying earnings of just $32 million for parent company A.P. Moller-Maersk.
That barely break-even performance came even as container volumes at Maersk rose a healthy 7% in the quarter - but rates fell by 26% and declined across all trade routes, including key European, North American and Latin American lines.
All this of course is good for shippers in form of rock bottom rates, which are often now below variable cost for the carriers and barely covering bunker fuel costs on some routes. But the situation is also destabilizing the industry, leading to a growing number of mergers and a shifting group of alliances or so-called vessel sharing agreements among changing groupings of carriers - changes which in the end may not be so good for shippers. (See The Alliance Wars in Container Shipping Continue On, as New OCEAN Consortium Roils the Marketplace.)
In an interview this week in the Wall Street Journal, Maersk Line CEO Soren Skou noted the industry's capacity excesses, saying container shipping capacity rose last year by 8%, while volumes grew a mere 1%. In 2016, however, Skou he expects volumes to increase between 1% and 3%, while capacity growth should fall to a much slower 4%, close to the aforementioned Alphaliner forecastof 4.6% for the year.
Still, at the low end of Skou's demand estimate, capacity growth would still exceed volume growth by three percentage points - hardly a recipe for moving rates back up.
Last year "was very toxic for the industry, and we saw a price war starting in April that has continued until now," Skou told the Journal. He noted it is now a new world, where container volumes mirror global economic growth - at best - versus the situation for many years before the Great Recession in which container volumes far exceeded overall economic growth.
"Consolidation is good for the industry. It's a natural response to an industry which is now low growth and mature," Skou said. "Investors are responding to the fact that a significant amount of carriers have not made any money in the past five, six years."
Skou continued: "The product that we offer has been commoditized and those who have the lowest cost will ultimately be the winners. Lowest cost requires scale."
That, he said, is driving not only all the action in alliances, but the move to super-megaships of 18,000-plus TEU - which in turn are a factor in alliances formation, as the carriers look to find enough volumes to fill up these giant vessels and achieve the cost efficiencies available when the megaships are close to fully utilized.
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