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  September 15th, 2016 | Written by

Rising Rates Disguise Fundamental Weakness in Container Shipping

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  • Severe overcapacity has hamstrung the container shipping business.
  • European economies are fragile, U.S. inventory levels are high, and Chinese imports have receded as a result.
  • Mergers, acquisitions, and canceled voyages won't be enough to fix container shipping's underlying problems.

Xeneta, a global benchmarking and market intelligence platform for containerized ocean freight, believes the container ship sector remains mired in troubled waters, despite a recent rate rise on key east-west trades. This positive swing, it says, belies an industry still suffering from weak demand, increased void sailings and devastated profit margins.

Xeneta crowd-sources data from more than 600 major international businesses, providing real-time information across over 12 million contracted rates, covering more than 60,000 port-to-port pairings. This gives the Oslo-based business a unique insight into a sector where the only constant appears to be constant change.

“The container ship sector has been in a state of flux for some time,” said Patrik Berglund, Xeneta’s CEO, “and, unfortunately for its key players, the prospect of stability remains a distant speck on the horizon.”

Short term rates have been rising on the main Far East-to-North European route, the world’s most important trade channel, since hitting lows in March, Berglund noted. “At that point the market average price for a 40-foot container stood at $552,” he exaplined. “Now it’s climbed to $1172. On the face of it, this is a strong development for container ship companies, but the industry has been undermined by weak fundamentals for so long that it’s not quite that simple.”

Berglund points to structural problems within the segment, including severe overcapacity. In the last calendar year 208 newbuilds were introduced to a market already awash with a new breed of megaships, leading to an 8.1-percent oversupply of TEUs. This, he suggested, has effectively hamstrung businesses.

“There’s simply been too much space and not enough demand,” said Berglund. “European economies remain fragile, U.S. inventory levels are high, and Chinese imports have receded as a result. The industry is trying to respond, with mergers, acquisitions and an increased number of void sailings, but is that enough to fix the underlying problems in the near future?” Berglund’s answer is in the negative.

The Xeneta CEO points to the difficulties that even giant players are facing, with A.P. Moller-Maersk recently announcing a 90-percent fall in year-on-year net profit for the second quarter of 2016. April-to-June figures saw the result stand at $101 million, short of the forecast $196 million and way below the previous year’s $1.069 billion.

“Carriers have still managed to lock in customers with long-term contracts, but at much reduced levels,” said Berglund. “The market was so tough that they’ve been forced to accept such rates; the alternative is not moving the cargo. This has damaged revenues.”

Xeneta’s feedback from shippers shows that they’re now struggling to negotiate market average prices from suppliers. This provides a strong indication that the upwards rate trend will continue, according to Berglund, and that container ship operators don’t want to get locked in to long-term contracts at the same low levels they’ve previously offered.

Berglund believes the news of Hanjin’s bankruptcy adds yet another twist to the unpredictable container segment storyline.

“Competitors will now be battling for market share and scrambling to fill the holes created by the firm’s demise,” he suggested. “This should allow them to crank up prices.”