It’s a shipper’s market in the Asia-North Europe trade as freight rates on the key lane continue to sink.
Carriers are in danger of falling back in the red as spot rates on the Asia-North Europe trade fall to near-record lows, and Drewry warns that cost-cutting may no longer be enough to keep lines going.
Carriers’ roadmap for recovery has centered on cutting costs faster than unit revenues are falling. This, according to Drewry’s recently published “Container Forecaster,” enabled the container industry to make a collective operating profit of about US$6 billion last year, up from $2.7 billion in 2013.
Even then, however, profits were sparsely spread between carriers, and the overall margin was still very slim at roughly 2.8% of industry revenue.
“We do not expect carriers to deviate from their cost-cutting plans but the lack of attention paid to lifting rates is threatening to send many carriers back to the red,” said Drewry.
The consultancy added that lower bunker fuel and some network improvements through the mega-alliances could help carriers achieve similar overall profit as last year, but not if there’s no stopping the decline of freight rates in many Asia export trades.
The erosion is most damaging to carriers in the big Asia-North Europe route, with the Shanghai to Rotterdam assessment of the World Container Index (WCI) falling for 11 consecutive weeks to slump to its lowest point since December 2011. As of April 16, the WCI benchmark put average rates at around $480 per twenty-foot equivalent unit (TEU).
The saving grace for carriers has been lower bunker costs, but even then, with weakening load factors, many ships will not be covering their unit costs, as Drewry sees more ships falling into loss-making territory.
It added that as a consequence, carriers have announced a raft of blank voyages for this month, while MSC has delayed the maiden voyage of the 19,200-TEU newbuild MSC Oliver.
Predicting which carriers are most at risk from this latest spot market downturn, it said 2M carriers, despite having the largest market share, will have a lower break-even line because of the bigger ships they operate. The G6 and CKYHE alliances have comparable market shares to the Ocean Three, but their ships are much smaller on average.
“These are clearly very difficult times for carriers and while they have shown an ability to raise spot rates almost as fast as they have fallen they will need to repeat that trick pretty quickly,” said Drewry.
A prolonged spot rate downturn will force carriers to consider the “nuclear option” of laying up ships, and make it incredibly hard to implement general rate increases (GRIs).
“While spot rates are probably close to the bottom, they can still fall a little further until the higher-cost carriers are forced to pull capacity. Pushing through GRIs in an oversupplied market is a very tough sell,” said the report.
Photo: SounderBruce
