Lower fuel prices deliver profits in a tough shipping market

If any proof were needed the most recent results from the third largest container shipping line released on Monday demonstrate the impact of lower oil prices on the short-term profitability of the logistics sector.

CMA CGM saw profits rise despite a fall in both revenue and freight rates. Revenue was almost flat year-on-year over the half-year but gathered downward momentum over the second quarter, falling by 2.1%. This was despite a 6.2% rise in the number of ‘twenty foot equivalent units’ (TEUs) carried in the second quarter. Of course the driver of falling revenue has been falling freight rates which, in the case of CMA CGM, fell by an average of 7.8%.

Yet pre-tax profits for the half year jumped from US$234.3m in H1 2014 to €614.7m for the same period this year. For the second quarter adjusted ‘core’ EBIT (Earnings Before Interest and Tax) climbed 59% year-on-year to $325 million.

What lay behind the rising profit numbers was a 10.9% fall in the company’s cost base which management stated was largely due to a sharp fall in the oil price. The company’s expenditure on bunker fuel fell from $1,760.1m in the first half of 2014 to $1,174.5m in the first half of 2015. The year-on-year numbers for the second quarter also saw similar 60% fall.

Such results illustrate that although growth in demand for container shipping is not absent, it is weak, whilst in contrast capacity is growing strongly: CMA-CGM, for example, expects a further two 18,000 TEU vessels to be delivered in the next few weeks. Of course this is leading to lower freight-rates. Yet the lower costs of fuel enable these lower rates to be sustained at least over the short-term. Other sectors of the logistics economy may differ especially in terms of the level of supply, however the underlying trend of lower freight rates is still there. The presumption should be that these lower prices will stimulate greater demand in the long-run although the poor state of global trade made hinder this.