Container Shipping Will be Lucky to Break Even in 2015
A mixture of overcapacity, weak demand and aggressive pricing is threatening liner shipping industry profitability for the rest of 2015, according to Drewry, the London-based shipping consultancy.
The conclusion is a departure from Drewry’s earlier forecast that container shipping carriers would collectively generate profits of $8 billion in 2015.
“This means that some lines will be back in the red by the end of 2015,” said Neil Dekker, Drewry’s director of container shipping research. “The only way to address this is for carriers to take much more radical action to address overcapacity which is now plaguing virtually all major trade routes.”
During the first quarter of 2015, industry cost savings brought on by falling oil prices were passed onto shippers by carriers in the form of much lower freight rates. But going forward, said Dekker, “shipping lines will struggle to continue reducing unit costs in line with the expected erosion in freight rates, given stabilising bunker costs.”
Drewry estimates that this year average global freight rates will decline at their fastest pace since 2011, when the fall in industry unit revenue was 10 percent. Second quarter spot rates in the four main East-West trades fell by 32 percent year-on-year.
The recent decision by three container lines to remove four percent of the capacity in the Asia-North Europe trade should push rates up, Dekker noted, but is “only a very temporary solution. As many as 129 ships of 8,000 teu and above still need to find homes across a number of trades in the second half of 2015.” Each quarter 10 to 15 ultra-large vessels enter the market, he added.
The average global head-haul utilization fell to 83 percent during the first quarter of 2015. The perceived weakness in the market pushed many lines into a rate war mode across a number of trade routes.
“Ocean carriers need to be thinking of average head haul trade route fill factors of 80 to 85 percent as the norm, rather than 90 percent or more,” said Dekker. “They cannot keep adding capacity and expect there to be no substantial impact on unit revenues.”
The Westbound Transatlantic and Asia-to-Middle East trades are currently the bright spots in an otherwise gloomy picture for carriers. “Rarely have we seen so many major routes performing so poorly all at once,” said Dekker. “Spot freight rates have reached historical lows on the Asia-to-Europe and Asia-to-East Coast South America trades. Carriers’ emphasis on ordering so many big ships is starting to backfire and virtually all major head haul trades are plagued by overcapacity.”