Container Shipping Capacity Threat for Profitability
The rapid expansion of container shipping capacity this year threatens to reverse the strong profitability ocean carriers showed in the first quarter, Drewry Shipping Consultants Ltd said.
Carriers weathered a storm of low rates in the first quarter to deliver some of the best profits in recent times. Will big newbuild deliveries and rising costs mean that was the peak, it asks.
The London-based consultants said in a report this week that carriers will add at least 100,000 containers, measured in 20-foot containers, of carrying capacity in June and more than that in each month through the end of the year even as shipping prices on major trade routes are declining.
The first-quarter 2015 was the most profitable for the container industry in four years with a preliminary estimated operating margin of about 8%. Unlike in previous quarters when only a handful of lines – usually Maersk Line and CMA CGM – made significant headway this time every one of our 10 sample carriers were in the black.
Carriers’ success in the first three months was achieved on the back of continued lower unit costs that have offset weakening freight rates. Drewry calculates that average unit revenues were down by 6% year-on-year, but this was more than covered by an 11% fall in unit costs.
From June onwards there will be a minimum of 100,000 teu per month joining the world containership fleet with July seeing twice that amount. The data in the below chart does not include 28,000 teu that as of yet we’re not certain of the delivery month.
In total there are 35 ships of 10,000 teu or more that will need to find a home in the East-West trades by the year’s end.
Worryingly for carriers, as freight rates continue to fall, bunker costs are creeping upwards. After two months of the second quarter the World Container Index is averaging 28% lower than it was for the first quarter, whereas IFO 380 in Rotterdam has increased by 15%.
The pressure to fill those new ships and maintain market share will continue to suppress freight rates through the remainder of the year. With costs now rising the chances of carriers beating their first quarter performance seems remote.
By focusing on costs, which are largely out of their control, carriers are subject to the whims of the energy market. They will need the peak season to exceed expectations to achieve ship load factors that would support rate increases. Otherwise their income statements will turn red once again.
