Carrier profitability is now driven by cost cutting
Drewry Maritime’s 4Q13 Container Forecaster report highlights that freight rates are now largely determined by carrier behaviour. Furthermore, industry profitability has little to do with carrying more boxes since freight rates remain historically weak. Profitability is driven by cost cutting which is also bolstered by the continued sale of non-core assets.
Despite ten GRI attempts last year on the Asia-North Europe trade, average spot rates were still some $450 per feu below where they stood at in previous January 2013. Ocean carriers managed capacity well in the headhaul east-west trades last year and in October, operational capacity had increased by only 0.6% year-on-year. Carriers reported decent industry load factors of around 90% throughout the year despite the absence of a significant 3Q peak season, but freight rates fell drastically on the Asia-Europe trade to well below break-even levels in June and October.
Many carriers reported carrying more boxes this year, but a third quarter industry EBIT margin of 0.9% (excluding the best performers Maersk and CMA CGM), proves that carriers cannot rely on revenue or better carryings to secure their financial future.
Our slow steaming analysis shows that little was done on this front in 2013 to save further costs or absorb additional capacity and the majority of lines will finish in the red for last year.
The immediate successes of GRI attempts, such as the mid-December implementation in the Asia-Europe trade which has pushed spot rates back up to $3,000 per feu continues to give false hope to the industry, since the majority of trades remain over-tonnaged. This positive news for carriers is undone by the realisation that many 2014 contracts have been signed with core shippers on the Asia-Europe trade at rate levels of between $300 and in some cases up to $700 per feu below those signed in 2013. Even with the bigger ships now being deployed, carriers will still find it difficult to make a substantial profit.
The sale of non-core assets is a distinct strategy by many lines to retreat to core businesses and release new cashflow, but this should not detract from the fact that some of their business plans are not working. In this sense, the advent of the P3 alliance in 2Q14 is a game-changer for the three biggest lines to obtain more cost savings.
With 56 ships of at least 10,000 teu lined up for 2014 delivery and 52 next year – and more orders in the pipeline, the industry has an enormous challenge on its hands to manage such a process of change. Operational alliances and vessel sharing agreements will increase out of necessity on all trade routes and the day of the independent operator is over.
Neil Dekker, head of container research at Drewry, stated: “The industry’s major players are continuing to adapt to a new era in the container industry, characterised by too many ships and cargo volumes on many trade lanes that refuse to live up to previous expectations. Some of their strategies are sound and we have highlighted for some time that the formation of new operating alliances are essential if the industry is to stabilise. However, if these are more positive developments, there are unfortunately the same old negative trends that refuse to go away, and these ultimately take the gloss off the good things that are being done.“
Source: Drewry