AlixPartners: Container carriers face grim 2017

The New York-based consulting firm suggested shippers carefully reexamine their procurement strategies to ensure supplier diversity, make sure they use multiple alliances, and study carriers’ financials.    A new report from AlixPartners on the global container carrier industry said the outlook for 2017 remains grim, but there is reason to hope for a change in fortune.
   The Hanjin Shipping Co. bankruptcy “helped create a rare seller’s market that lasted through the close of 2016,” the consulting firm said. Rates improved in the transpacific, an area of focus for Hanjin, which was “welcome news for an ailing industry whose operators have been regularly undercutting each other on price for years. The carrier community’s ability to drive rate levels higher into the transpacific contract negotiations will likely decide whether 2017 will be the turning point the industry desperately needs – or just another bad year in a growing string of losses.”
   The impact from Hanjin’s bankruptcy on the Asia-Europe trade has been less noticeable, but carriers have been able to keep rate levels moving slightly higher nonetheless, AlixPartners said.
   “Carriers must use this unique opportunity to maintain higher rate levels and take additional steps to relieve their financial woes,” the consulting firm said.
   AlixPartners noted how sluggish demand is exacerbating supply-and-demand imbalances. The firm also said, “Events like Brexit and the new U.S. administration’s policies threaten to add insult to injury as they inject even more uncertainty into the future of global trade. Spreading protectionist stances could reverse the past several decades’ steadily easing trade barriers that have supported the growth of containerization since the 1950s.”
   AlixParnters’ Global container shipping outlook for 2017 said, “Carriers have to make some hard decisions in 2017.” While carriers have slashed capital and operational spending and stepped up scrapping, “they should continue to drive down costs through effective post-merger integration and fleet rationalization activities that can bring supply and demand back into balance.”
   Looking at the financial statements of companies in the industry, the authors of the report said, “Nearly every key financial indicator worsened from the previous year.”
   “The fact that Q3 2016 results were especially discouraging does not bode well for the 2017 calendar year, because the industry usually sees peak volumes during that period,” it said.
   AlixPartners annually calculates the liner industry’s average Altman Z-score – a formula for predicting the likelihood of bankruptcy based on a number of metrics. Looking at the latest 12 months for companies where public information is available, the firm said the score was at its lowest point since 2010, with a score of 0.9.
   Any score below 1.8 is considered in the “distress zone,” and the average for the industry has not been out of that range since 2010. Even eliminating Hanjin from the mix only budges the score up to 1.0.
   The consultants advise that shippers “should carefully reexamine their procurement strategies to ensure supplier diversity. They should make sure they’re using multiple alliances and studying carriers’ financials as a way to protect themselves from the disruption that a potential bankruptcy could cause. Executive management teams should be aware of the dynamic state of the market, because they may want to begin positioning their budgets to prepare for an era of increasing rate levels.”