Container carriers suffered in 2012, and the 2013 financial outlook appears just as bleak.
By Chris Dupin
Is the container shipping industry’s tide of red ink ebbing?
2012 was another tough year for container liner companies, and the outlook for 2013 is far from reassuring.
Last year American Shipper estimated in 2011 that the 15 largest publicly-traded container shipping companies collectively had operating losses or earnings before interest and tax (EBIT) of about $6 billion.
In 2012, the combined operating losses of the same group were only about a tenth that size, about $676 million, but 10 of the 15 individual firms had an operating loss, only five made a profit.
(Many liner companies are part of multi-faceted shipping companies with operations in bulk shipping, terminals, logistics and even unrelated businesses such as oil and gas. American Shipper has traditionally published, where the company provides it, the operating profits or losses for their container segments. But some of these numbers may still include ancillary operations such as terminals, etc.)
Dirk Visser, senior shipping consultant at Dynamar, said his company does a similar exercise, but also includes the results of the privately-owned French liner giant CMA CGM. By Dynamar’s reckoning, the 16 liner companies it tracks actually earned about $500 million, which Visser notes “is not so much, considering the huge investments.”
CMA CGM reported earnings before interest, tax, depreciation and amortization (EBITDA) of more than $1.3 billion and net income of $361 million for 2012.
Collectively, the 15 public companies that have been followed by American Shipper over the years, made money in 2007, 2008, and 2010 (and 2010 was a very good year, indeed, with many companies making record profits), but had losses in 2009, 2011, and 2012.
The grand total for the same 15 companies over six years is a collective operating loss of $1.1 billion, which must give both managers and shareholders pause.
Indeed, Paul Bingham, economics practice leader at CDM Smith, said the willingness to make investments in the face of such losses invites comparison with the airlines or even the movie business.
“It almost calls for a behavioral economist,” he said.
But such optimism runs deep in shipping companies, whether they operate liner vessels or are in the bulk trades.
Masamichi Morooka, chairman of the International Chamber of Shipping, predicts most sectors or trades will not change fundamentally before 2015 or 2016, but said he remains positive and optimistic: “We are shipowners after all!”
Jim Lawrence, chairman, and George Weltman, publisher of Marine Money magazine, said there were few liner companies near the top of their annual list of top performers, although A.P. Moller-Maersk, Matson and OOCL’s parent Orient Overseas International Ltd. (OOIL) were in the 9th, 11th and 18th positions, respectively. The publication ranks these companies using a combination of total return to shareholders, turnover, profit, return on equity and assets, and price-to-book value.
This year its ranking found companies that build or acquire containerships and then charter them to liner companies, namely Costamare, Seaspan, Global Ship Lease, Diana Containerships, and Box Ships, did better than APL’s parent Neptune Orient Line (NOL), NYK, MOL, COSCO, “K” Line, and Yang Ming.
Headwinds. Last year, “the global economy faced strong headwinds. U.S. recovery was fragile, and the persistent recession in Europe cast a long shadow over the world. The container shipping sector was buffeted by weak demand growth and severe oversupply,” Kwa Chong Seng, NOL chairman, told shareholders in the firm’s annual report.
Lars Jensen, chief executive officer and partner at SeaIntel Maritime Analysis in Copenhagen, said “I can’t say I’m overly surprised at the general results of the year.” He added carriers would have had a “pretty decent year,” if they hadn’t cut prices sharply in the fourth quarter.
It’s not clear whether many liner companies will make money this year either.
Tan Hua Joo, an executive consultant at the information service Alphaliner, said in the first quarter “the year-on-year improvement that we have seen in the first quarter was achieved only because of the extremely poor performance in the first three months of last year.”
He said “I expect the rest of the year to be worse than 2012.”
Ken Hoexter, a senior air freight, surface and marine transportation analyst at BofA Merrill Lynch, said “first quarter earnings were modest, second quarter looks a lot worse. We have seen a collapse in spot rates down to $500 per TEU compared to about $1,000, $1,200 breakeven on the Asia-Europe lane. So, we are looking for some deep losses into that second quarter and expect the spot rate to drag until maybe some peak season pop,” perhaps in July and August.
Jensen said he thought rate increases scheduled for July 1 in the Asia-Europe trade may stick because the losses for carriers on that trade route have become intolerable.
He is hesitant to predict what will happen on the transpacific, saying that much will depend on how these carriers decide to respond to the decision this spring by United Arab Shipping Co. to enter the Asia-to-U.S. West Coast trade with three strings.
C.C. Tung, chairman of OOIL, wrote in the company’s annual report “the year ahead looks as though it will be as difficult as 2012. More than other industries, container shipping is affected by global economic conditions impacting trade volumes and we expect a further protracted period of low economic growth to continue after the past four years of economic downturn.
“While economic conditions in the United States are improving, the pace of economic recovery remains slow and consumer demand continues to be muted,” he said. “Prolonged deflation in Europe has caused a decline in imports from Asia, and with Eurozone economies continuing to struggle, there is a possibility of further contraction before recovery occurs.”
Noting a possible trend toward “re-shoring” of production in the United States, Tung added “combined with the increasing domestic consumer market in China, this may see Chinese manufacturers focusing further on their own domestic markets, resulting in a slowdown in China’s export growth rates.”
Mixed Bag. Drewry said in June carriers presented a “mixed bag’ of financials for the first quarter, similar to what typified 2012. “Some carriers made a little money but more lost cash, meaning that the industry at large started 2013 in the red,” the London-based consultants said.
The outlook for the second quarter did not seem encouraging with anemic trade, large amounts of new capacity being introduced onto some trade lanes, and many carriers having trouble making rate increases stick.
Drewry said “the second quarter has undoubtedly been worse. Rates have been in free-fall since the start of the year, particularly in the core Asia-Europe westbound trade where Shanghai-to-Rotterdam spot rates as assessed by the World Container Index have lost half their value.” The World Container Index is a joint venture of Drewry and Cleartrade Exchange.
“We would not be surprised if the second quarter would turn out to be one of the worst in history, because everything (the liner companies) built up it seemed in the first quarter, fell a little bit — well collapsed, in the second quarter,” Dynamar’s Visser said.
He also noted there is a paucity of strong trades around the world. For example, Visser said in the first quarter of 2013 Brazil’s containerized trade increased by only 1 percent.
Despite that, a great deal of capacity has been added on the Asia-east coast South America trade, in part because carriers are looking for places to put large ships as they are cascaded out of the Europe-Asia trade where many new, even larger ships are being delivered.
It’s not a unique story, said Hoexter of Merrill Lynch: “The problem with container shipping, and we have seen this over the past couple of years, any pocket of strength the carriers immediately ‘hit the bid’ and bring out additional vessels.”
“There’s nowhere to go in the world where you can find significant enough growth in an economy to have demand that’s sufficient to provide the TEU volumes that would really be needed for carriers to raise rates enough to be really making a lot of money again,” Bingham said.
Visser said increased rate transparency may also be increasing volatility and helping drive down freight rates. “In my view that whole Shanghai Shipping Exchange thing should never have existed. It’s increased transparency of non-relevant rates, but everybody takes it for granted that that is the real rate,” he said.
Each week, panels of freight forwarders and container carriers assembled by the exchange give estimates of container freight rates from Shanghai to 15 different parts of the world, which it then publishes on its Website.
Visser believes the Shanghai Containerized Freight Index is relevant for only a small amount of business, perhaps 15 percent of the trade out of Shanghai. “And that dictates everything nowadays and this is crazy. In my view the carriers are nuts if they carry cargo for that,” he said. “It has made rates more volatile and driven down revenues, because it seems to be true that whenever there are low rates, the shipper demands a reduction of his rates to that level.”
SeaIntel’s Jensen said he is slightly surprised with how long the carrier price war on cargo moving between Asia and Europe, the container shipping industry’s largest trade route, has continued. “That is definitely going to cost them this year. Basically it’s going to end up having the same effect on the 2013 results that the bad Q4 had on the 2012 results,” he said.
While there are some carriers and observers who believe the 2008 ban on shipping conferences by European regulators spurred volatility in the Europe-Asia trade, Jensen said “I must admit I am not a proponent of that theory.”
He agrees freight indexes show price swings increased after the elimination of antitrust immunity in Europe, but said it’s also “the same point where the financial crisis hit and therefore from that point onwards you had a severe structural overcapacity.
“The way I read the market it’s the overcapacity that drives up volatility. You would have more or less the same volatility irrespective” of the changes in regulations, Jensen explained.
Alphaliner projects after the new ships and delivery delays are accounted for, the amount of capacity being added to the world fleet will be 6.7 percent this year and 7.3 percent in 2014, following a 6 percent increase in 2012. The majority of that new capacity will be in big ships, like those used in the transpacific or Asia-Europe trades.
Hoexter expects ships on order of more than 10,000 TEUs capacity — which Alphaliner statistics show made up about 12.7 percent of the world container fleet at the end of 2012 — will eventually grow to more than 20 percent of world capacity, while greater numbers of ships in the 3,000- to 5,000-TEU range will be laid up or scrapped. At the end of June, Maersk took delivery of the largest containership ever, the 18,000-TEU Maersk Mc-Kinney Møller, and China Shipping has already ordered five ships that will be even larger, capable of carrying 18,400 TEUs from Hyundai Heavy Industries.
“The development in fuel-saving technology and new engines is also the reason why I believe that over the remainder of 2013 and into 2014 you are going to see a large amount of orders of more of these ships,” Jensen said.
Ron Widdows, former chief executive officer of APL who is now CEO of Rickmers Holding, said some 10,000-TEU ships delivered as recently as 2011 and 2012 burned 110 tons of fuel per day. (Though to be fair, he said some were more fuel efficient.) Today, because of better technology, similar size ships can be purchased that burn just 70 tons a day.
The economics of such ships are compelling, and he said they may become even more so for some trades when the expanded Panama Canal opens. For example, carriers in the Asia-U.S. East Coast trade might be able to combine two 5,000-TEU loops into a single service.
In its annual report for 2012, Maersk noted it was able to reduce bunker consumption per container by 1 percent and adjust capacity adjustments through slow steaming, scrapping, idling and blanked sailings.
Hoexter said there may still be some room for carriers to reduce fuel through super-slow steaming, going down to 15 knots from 16-17 knots on backhaul trades. But he suggested carriers need to have more discipline—meaning “if they are running 20 services, then cut it to 18, cut about 5 percent of capacity to offset the upsizing of the vessels.
“We will likely need to see some parking of vessels, especially given modest demand heading into this peak season,” he said.
An article in a June issue of Drewry Container Weekly contends that with the big ships being deployed in the transpacific, the three largest container shipping lines, Maersk, Mediterranean Shipping Co. and CMA CGM, “now have such big economies of scale in the transpacific that they can ride out the current eastbound freight rate war more comfortably than the rest of the pack, should they choose to do so.”
Jensen said, however, he does not believe volatility or rate drops are a deliberate strategy by some carriers to harm other competitors.
“It costs them too much. It’s not worthwhile doing it. It’s more the result of basically the dynamics of the trade. If somebody lowers rates the other carriers have no choice but to follow, so you’re sort of caught in a game that everybody knows is destructive, but as long as one player lowered the rate you really have no choice,” he said.
“I clearly do not believe you can muscle anybody out of any trade as it is right now,” he added.
Are any carriers so weak that shippers need to worry about one of them failing?
Alphaliner’s Tan said despite the poor performance of carriers, “I do not see any carrier consolidation or bankruptcies this year.”
Jansen is also doubtful the shipping industry will see a great deal more consolidation, noting potential buyers would likely only be willing to pay a “very, very low price.”
“My view is over the years we have seen carriers be phenomenal at finding additional sources of funding when times get really tough,” Jensen said. “If you look back over the past many decades you never had any of the top 20 carriers default ever and, if there is going to be a change, I would be highly surprised.
“I do not believe you’re ever going to see a major carrier default. Worse comes to worst you might see a takeover from one of the other carriers, the terms of course will be very beneficial to the acquiring carrier,” he said.
He noted when CSAV ran into financial difficulty it was able to find other investors in Chile to help with its recovery, and CMA CGM was able to secure an investor in Turkey’s Yidrim Group.
Bingham said while some analysts have postulated the industry is in the midst of a multiyear transition period where large carriers are seeking to force consolidation, there seems to be little evidence of that happening.
A rare exception was the decision by MISC Berhad, the Malaysian shipping company, to exit the liner business at the end of 2011. The carrier remains active, however, in other shipping sectors such as the LNG and tanker market.
However, Drewry cautioned last month that shippers may see deterioration in service if the current price war in the ocean container industry continues.
“Carriers will be forced to curb their losses somehow. Service quality might be forsaken as some operators might ask what benefit they get from offering reliable port-to-port services,” said Simon Heaney, research manager at Drewry.
“We expect the first step to be further slowing down on ship speeds, which in itself should not lessen reliability but will lengthen transit times even more,” he said. “After that, if they are still losing cash, the incentive to offer reliable services will be sorely tested.”
Tung also expressed concern about service levels, stating in his letter to shareholders in the OOIL annual report that “the industry’s ability to further absorb additional capacity are being tested and there are risks to service levels given the reduced number of loops being run on the major trade lanes.”
While some observers believe the container industry is becoming more of a commodity business, there is wide variation in the performance of individual companies.
“They’re all different. There’s hardly any two that are comparable,” Widdows said.
The trade mix is different for almost every carrier. Different trades don’t behave all the same way and some are more volatile than others, he noted.
The intra-Asia short-sea business is less volatile than the Asia-Europe lane, and Widdows said that’s reflected in the performance of carriers that have a large proportion of their business there — for example, Wan Hai and OOCL.
This spring carriers that were heavy in the Asia-Europe trade suffered more than others.
Visser of Dynamar said OOCL has consistently done well, and he attributes that, in part, to the fact that the company is involved in many adjacent markets, which reduces its container-repositioning costs.
Widdows said the biggest variable in determining the performance of a carrier “is the cost of the fleet that they operate. The difference between companies is really substantial. And that’s probably the largest contributor.”
That’s determined both by how much of the fleet a carrier owns versus charters, and also when it ordered ships and whether it was able to take advantage of attractive shipyard prices.
While it might seem attractive in the current environment to charter ships because rates are low and supply of ships plentiful, most carriers want to own and control some vessels, at least for some core level of capacity, because ultimately “you extract the most from that asset as opposed to having some intermediary charterer collecting a piece of it,” Bingham said.
The downside is that it becomes more difficult for liner companies to shrink during a recession when no other carrier wants to buy their vessels.
CSAV, which just a year ago had one of its biggest operating losses, is making an adjustment to its mix of owned and chartered tonnage.
In early 2011, the carrier owned 8 percent of its fleet. By reducing its size and taking delivery of eight ships during 2011 and 2012, it increased that percentage to 37 percent.
“Despite this important improvement, we believe that the industry as a whole, but particularly CSAV, still has a high level of operating debt in ship charter contracts and container leasing. These must be corrected in order to reduce volatility in the company’s results and allow it to have the assets necessary and essential for its development, without having to pay rentals for them which imply, and thus oblige, taking long contract positions that can produce economic losses when freight rates fall, as has been evident in the results of the whole industry and of CSAV in recent years,” the company explained in its annual report. To remedy this, the Chilean liner ordered seven 9,300-TEU ships, which will boost its percentage of owned tonnage to 55 percent.
Reducing debt can also have a major impact on a carrier’s results. CMA CGM said it sharply reduced net debt to $4.2 billion by March 31, 2013 — $1.1 billion less than it was a year earlier.
Another factor that drives carrier performance is whether a carrier is a large wholesaler of space on its ships to non-vessel-operating common carriers or other intermediaries. When spot rates are down and a carrier is significantly weighted to the wholesale side, that’s bad, Bingham said, but they can benefit when spot rates are high.