Are ocean carriers still sailing through troubled waters?

2016 has been a tumultuous year for ocean carriers, with the container shipping industry seeing five mergers and acquisitions and one bankruptcy. Carriers have been drowning in red ink, with Maersk Line booking a loss of $367m for the year. They have bundled together to stay afloat, resulting in the creation of three major alliances.

However, a mood of optimism appears to have entered the shipping industry with some commentators arguing that the worst is over as the industry shake-up appears to have stopped the decline in freight rates. Overall spot rates on container ships were higher at the turn of the year, driven by strong consumer spending and a drop in available space. As published on the Ti Dashboard, spot rates from China to Europe and the U.S. are showing an upward trend, suggesting that the turnaround could be real. In February 2017, China to U.S. spot rates were up 23.1% year–over–year, whereas China to Europe rates were 30% higher. March 2017 has also seen shipping lines pushing through modest rates increases. The shipping consultancy Drewry announced that spot freight rates from North Europe to Asia increased by 45% in the second week of March 2017, with the consultancy going as far as suggesting that the industry may break even this year.  

Does this indicate an inflection point in the shipping industry? Is the sailing through troubled waters over for ocean carriers? The industry bit the bullet in 2016 in terms of scrapping and consolidation and it is logical to expect that these measures would translate into improved revenues for ocean liners. Some shipping line executives hold this optimistic outlook and are talking up 2017, with Maersk predicting it will improve its profit by $1bn in 2017.

Others are less convinced this is a turnaround year and anticipate that 2017 will see another year of stiff competition. The main argument supporting such a development is the large number of new vessels heading into the market over the next two years. New ships are expected to add 8% more capacity this year, sparking a net increase that is estimated to be over twice the level of forecast growth in demand. The slowdown in scrapping since June 2016 further exacerbates the problem with overcapacity.

That being said, it is hard to predict whether the recovery prospects will materialise and whether the industry is finally returning to more stable markets. To complicate things even further, the GDP and container growth relationship is considered to be at an end, making it even more difficult to make accurate container growth forecasts on the basis of GDP growth rates. Overall, stronger demand, increasing rates and the more disciplined commercial approach among carriers do imply that this optimism is justified. It is likely, though, that the addition of new vessels will partially offset the recovery, ultimately resulting in only moderate growth for the shipping industry in 2017.

Source: Transport Intelligence, March 16, 2017

Author: Violeta Keckarovska