Big ships, tariffs cloud container carrier outlook

AlixPartners says overcapacity could worsen as the year progresses.    Continuing deliveries of large numbers of ultra-large container ships and the threat of a trade war between the United States and China could result in a worsening outlook for the shipping industry during 2018, say Brian Nemeth and Henry Pringle of the consultants AlixPartners.
   New ships with capacity of more 13,000 TEUs are expected to add about 2 million TEU capacity to the world fleet this year. Those ultra-large container ships will represent 20 percent of the global fleet next year, up from 13 percent in 2016, they noted in a webinar hosted by the investment bank Stifel on Friday.
   While the big ships can help carriers drive unit costs down, Pringle noted during a webinar those economies are only pertinent if the ships are filled.
   There is also a possibility that more Panamax ships may be ordered in the coming year.
    However, the political climate threatens to lessen demand for freight.
   Nemeth noted that earlier in the year, while preparing a paper on the outlook for the container industry, AlixPartners had expected trade growth would be in the 4 percent to 5 percent range, but he said comments from other analysts indicate that could be reduced to 2.5 percent growth because of commodities impacted by higher U.S. or Chinese tariffs.
   “At the beginning of the year we were anticipating that oversupply in the market would be reduced over the year, given the prior forecasting for demand growth, but given the impact of protectionism … it’s more likely to increase,” said Pringle.
   They said there is a great deal of volatility in the container freight market. Spot rates have continued downward on both the Asia-Europe and transpacific trade lanes, with a great deal of volatility as well.
   Alixpartners said the industry remains in poor financial condition with low operating earnings and the industry’s overall “Altman Z-score,” a tool to forecast bankruptcies, remains low.
   There are indications that low rates and earnings are leading to an erosion in quality of service. They cited statistics gathered by SeaIntel Maritime Analysis that show global on-time performance for ships has fallen for nearly every carrier.
   And because carriers operate in space-sharing alliances with other carriers, there may be less motivation to spend money to make sure that ships are on schedule. If a carrier’s ships arrive consistently on time, it may not be evident to its customers if the customers’ containers were carried on the ship of an alliance partner.
   Because of consolidation in the industry, AlixPartners does believe there is opportunity for carriers to benefit from synergies and cost reduction, to push disciplined pricing and leverage their buying power to get suppliers such as container terminals to lower prices.
   Carriers have maintained a strong focus on reducing selling, general and administrative expense, but AlixPartners suggested there are more reductions yet to come.
   Savings from “digitization” will probably take longer to be realized, though Nemeth said it is possible they could come into play even later this year.