Box Rebound on the Far Horizon

Thursday, January 07, 2010

Drewry’s latest Container Forecaster indicates that the momentum of the industry has entered a new phase as financial aspects and implications seem to have become even more important than poor global demand and over-supply of ships, although clearly all are very inter-related.

Neil Dekker, editor of the Drewry Container Forecaster, stated: “ Several large container operators would have gone to the wall in 2009 if major benefactors or governments had not stepped in to bail them out. There is a strong argument for thinking that if a major carrier had been allowed to fail, the market would have had a much better opportunity to correct itself and lay the foundations for a more profitable industry in the long-term. A fairly large chunk of capacity would have been taken out of the market, allowing load factors and freight rates to improve.”

Drewry understands that at least ten one-ship KG owners have gone under recently and vessels have been sold, indicating that non-operating owners will continue to have an extremely tough time in 2010 given the propensity for carriers to return as much chartered tonnage as possible.

Many large banks are highly exposed to the containership sector and this is why they are taking so much interest in the financial re-structuring of CMA CGM which may eventually set new standards for how some companies are run in the future. While a $500m credit line will address the short term issues, the company still needs to resolve the financial overhang of its enormous orderbook.

A number of companies have raised much-needed funds through rights issues, but how much longer will this persist?

Neil Dekker added: “ Even if the industry can secure the same amount of fresh cash in 2010 as it received from shareholders in 2009, it will not be sufficient cash to cover its needs. Another estimated $1.4 billion of cash may need to be found from other sources to keep the carriers trading. This may then prove to be the catalyst that leads operators to start selling assets – such as their terminals.

“What would happen if the banks or the shareholders refuse to inject more cash? There seem to be three scenarios: either the carriers are liquidated, causing financial harm to shareholders, suppliers and banks or carriers walk away from vessel orders with shipyards, causing damage to the shipyards or governments are forced again to rescue the carriers.”

Drewry believes that the industry has seen the worst of the global recession, but we are forecasting a very cautious recovery in 2010 with global container traffic expected to increase by 3.4%.

Freight rate recovery in the core Asia-Europe trade also needs to be put clearly into perspective. Late 2009 westbound rates were in the region of $1,700 per 20 ft all in, but this is only just about reaching a break-even scenario. It is important to fully appreciate that this has only happened because carriers have pulled so much capacity in the last 12 months – by the beginning of 2010, headhaul capacity on this trade will be 11.6% less than one year ago. In the long-term, carriers still have to successfully deal with a large increase in supply and slow-steaming strategies are only one part of the solution package.

Carriers have to substantially improve revenues in 2010 and this means that the transpacific rate negotiations with shippers this year are the most crucial ever. There are no real signs yet of US consumers changing their spending habits and it will be very much a case of shippers bailing out the carriers. The big question is how much will they acquiesce to the rate demands of carriers against a backdrop of tight supply?

Drewry is forecasting that all-in rates in the key east-west headhaul routes will improve by as much as 14.1% this year, but this also has to be set against a 2009 decline of 26.2%.

Our overriding message is that the industry still has a long way to go before it can be considered to have reached any kind of stability despite the fact that there are some encouraging signs to be found.


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