Seasoned analysts are saying container lines have finally turned the corner and return to profitability is imminent during this tumultuous “watershed” year for many players in the shipping sector.
Drewry Shipping Consultants predicts ocean carriers will gain $5b in revenue during 2017 and recent data released by some liners support these optimistic forecasts. Senior industry figures are now urging shippers to play a long-term game to reap the full benefits of much-needed stability in the container industry.
One of the main factors behind this upturn, according to Martin Rowe, managing director, Clarksons Platou Asia Limited, is this year’s “scissoring” of demand versus supply compared to 2016 when supply was running significantly ahead of demand. His team of analysts in London predicts demand growth of 4.5% for containers during 2017, and this is higher than predicted net supply growth of around 2%. These figures, which show a shortfall between demand and supply growth, are backed up by other analysts such as Drewry.
Projecting into the near term, Trevor Crowe, head specialist container analyst, Clarksons Research Services (CRSL) in London, commented, “Our analysts forecast that demand growth for 2018 will be even greater at around 5%, and this trend appears sustainable into 2019.”
He cited strong trade growth during the first six months of 2017 combined with port congestion behind a sharp improvement in both freight and time-charter rates.
It was recently reported in The Loadstar that there are now effectively two tiers for liners in their negotiations for charter rates. Larger carriers consistently obtain better deals, it was claimed.
Crowe continued, “Several liner companies have been hoovering up capacity for new routes, especially in Asia where we expect around 6% regional demand growth for 2017.” He added, “Supply growth has slowed – for 2018 we expect it to be slightly higher than 2017 – at around 3%, but that is still tidily below expected demand growth.”
These statistics and similar forecasts by Drewry should bode well for container line profitability. Maersk Line and Hapag-Lloyd both recently reported year-on-year first quarter revenue growth of around 10%, as cited in SupplyChainDive, while other liners have reported strong half yearly uplifts in container volumes. However, analysts at Clarkson Platou remain “cautious” about making too rosy a prognosis, especially given “the calamitous recent past”. Rowe urged against potential oversupply by “rushing out and ordering more ships”. Former director of market intelligence at Maersk Line Lars Jensen recently criticised his former employers on LinkedIn for poor vessel utilisation figures.
One interesting point much debated in shipping circles is how the recent spate of merger and acquisition activity, which has seen the number of carriers reduced to 11, down from 20 not so long ago, will affect capacity and freight rates. Shifting alliance structures has long been known to alter container terminal volumes.
As for capacity, Rowe and his team suggest recent consolidation in the industry will be “capacity neutral”, unless “the move is part of a larger ‘masterplan’ which is combined with newbuilding ordering.”
Rowe then turned to market rates, “Overall we expect a gradual firming in box rates. Time-charter rates for vessels supplied by non-liner shipowners are also likely to gradually improve for the right types, especially the Neo Panamax class.”
The analysts have predicted an average upturn in rates of about 16% across all routes during 2017, and in the light of these forecasts, Drewry now suggests shippers should rethink their space-procurement strategy and consider alternative options. Exactly how they advise shippers to respond remains unclear.
The container sector has seen plenty of turmoil over recent years, and Rowe believes shippers are naturally wary of post-consolidation rate hikes. He considers the possibility of rates shooting up unlikely as the container market remain competitive, despite the recent bout of mergers.
However, he suggested shippers were partly to blame for previous fluctuations in rates through behaviour which could be described as myopic.
To illustrate his position, he cited a recent episode in shipping history – the collapse of a South Korean container liner – when shippers acted in a way which could be deemed short term and counter-productive. He explained, “To some extent it was their relentless determination to drive rates down which resulted in the 2016 Hanjin bankruptcy – stranding many shippers’ cargo for weeks on end during peak season.”
Rowe then explained why rates then shot up, “the subsequent snap back in rates because of the sudden withdrawal of substantial capacity from the market left shippers paying more than they had budgeted to shift their boxes in the first quarter of 2017.”
He urges shippers to adopt long-term strategies, “to work with reliable long-term liner partners and recognise that a high level of service is still something worth paying a premium for. This is likely to be a wiser policy for shippers.”
Rowe remains upbeat about container demand moving forward into the longer term, citing the march of “global inter-connectedness” and trade growth as prevailing trends, with only economic nationalism, on-shoring and 3D printing as possible growth dampeners. The full consequences of the Panama Canal widening project are yet to be played out, but this could cause a further realignment of traditional container trade flows, he pointed out.