Concerns expressed about liner profitability

Concerns expressed about liner profitability    While container shipping has outperformed other industry segments in the past couple of years, concerns of another downturn were expressed Wednesday at a panel discussion at the Marine Money Week 2011 conference in New York.
   “While folks are forecasting reasonable EBITDA (earnings before interest, taxes, depreciation and amortization) levels, it is questionable whether all the liners will generate a positive net income,” said Loli Wu, managing director for Bank of America Merrill Lynch.
   Following a strong performance in 2010, Wu noted companies have raised significant amounts of money, both through debt and equity offerings, repositioning them for growth, and that this has given the sector a lot of confidence, and asset values have risen. But he said freight rates in Asia have come under pressure and the order book for new ships have been building. While the stocks of both container ship and leasing companies have done better in the past two years than dry bulk and tankers stocks, they have given back some of their gains in recent months.
   “That is a reflection of the volatility of the markets, but also the volatility of the underlying freight rates of the liner companies,” Wu said.
   “Supply/demand looks relatively balanced, but there is a lot of skepticism of how good 2011-2012 will be for the liners,” he said.

Keller

   “After the disaster of 2008-2009, the industry came back very strongly in 2010, and normally we would expect the up cycle to last two or three or four years,' said Peter I. Keller, a consultant and former executive vice president and chief operating officer at NYK Group Americas. 'It would appear, however, that there are a lot of lessons not learned, and it looks like we are going into another down cycle already, at least in the transpacific and the U.S. trades.”
   He said there has been little capacity withdrawal by the liner industry, a tactic that helped shore up rates in 2010.
   Joseph S.K. Kwok, chief executive officer of SeaCube Container Leasing and former chief operating officer of NOL, noted the trend toward employment of larger ships has become more pronounced in recent years as a result of higher fuel costs.

Kowk

   Randy Chen, a special assistant to the president Wan Hai Lines, said it appears cyclicality in shipping is intensified by varying agendas of shipping companies, with some carriers wanting to grow quickly.
   “Different carriers may not be margin-focused, but volume-focused because they have a scale they want to grow to,” Chen said. This is particularly true in the east/west “glamour trades,” he added.
   Participants on the panel spent considerable time discussing the increasing size of ships and whether ports can handle those ships.
   “I’m a big believer that port infrastructure around the rest of the world — I want to make a qualification about this — will get to absorb these ships,” said Graham Porter, a director of Seaspan Corp. But he added, “the weakest link in the whole global infrastructure is the United States.”
   Kwok said due to infrastructure needs and the cascading of ships, it may be five to 15 years before trade grows to the point that the largest mega ships come to the United States.
   Kwok also questioned how important the expanded Panama Canal would turn out to be for the container trades, noting that because of sharply higher bunker fuel prices, it may be cheaper for Asian exports to the United States to move through West Coast ports and be railed to inland points than to use the canal and East Coast ports to reach the same points.

Coustas

   John Coustas, president and CEO of ship leasing company Danaos, also agreed the lower per-slot cost is beneficial to shippers. The inability of some ports to accept bigger ships was a “blessing in disguise,” since they will be able to absorb smaller vessels cascaded out of other trades.
   Companies that specialize in midsize and smaller containerships believe that demand for those vessels will remain strong.
   Ioannis Zaffirakis, COO of Diana Containerships, said there are some trades where using bigger ships just is not economical. Just because Airbus is building the A380, he noted, doesn't mean it's not selling smaller airplanes.
   Michael Bodouroglou, CEO of Box Ships, said his firm is concerned about cascading of vessels over the next five to 10 years, and felt more comfortable in investing in midsize ships.
   Aristides Pittas, CEO of Euroseas, said he did not disagree there is a trend to larger ships, but there will still be a need for smaller ships for quite some time. About 40 percent of container trade is regional, he said, and 90 percent of that trade is done with ships with a capacity of 3,000 TEU or less. But in the north/south trades, the trend to upsizing is more pronounced — about half is handled with ships of 3,000 TEUs or less compared to about 80 percent six or seven years ago. ' Chris Dupin