Shipping Industry Sinks
Even with the global economy recovering from the financial crisis, the shipping industry remains lumbered with crushing debt after investing heavily during the boom years, and has failed to capitalize on steeply lower oil prices. The industry has struggled for years, grappling with the cost of investing in fleets at a time when the Baltic Dry Index, which measures the price of moving raw materials by sea, knocking around all-time lows. The index fell to a 30-year low of around 500 in February.
Now, containerized shipping rates are taking a majestic drubbing, and those from China to Europe have collapsed to all-time lows. Shares in dry-bulk shipping lines have tanked as a result.The Guggenheim Shipping ETF, a weighted index of such shares, lost 23% of its value in the first nine months of the year. Some highly indebted operators, such as DryShips, an Athens-based outfit, have performed even worse: its shares have fallen by about 80% so far this year
Significant increases in fuel costs during the past decade drove global carriers into a race to build and operate the largest, most-fuel-efficient vessels in order to drive down slot costs. As a result, carriers have taken on huge debt to match the similarly sized price tags of these assets. Shippers are trying to get through this period by cutting costs and improving their network through mega-alliances. 2014 did see the first merger in many years between top 20 lines, with Germany’s Hapag-Lloyd merging with Chilean carrier CSAV. Alliances remain in vogue in 2015. Longtime independents such as China Shipping and Evergreen joined with major alliances Ocean Three and CKHYE, respectively, in the past year.
These alliances continue to make for odd bedfellows as global competitors form unexpected partnerships such as the 2M agreement between Maersk and MSC, which drove the need for CMA CGM to align with United Arab Shipping Co. and China Shipping in the newly formed Ocean Three alliance. Many of these strategic and tactical decisions were caused in recent years by historically high oil prices. Maersk currently controls 15.3% of the global container capacity. The big three carriers together – Maersk, MSC, CMA CGM – control 38%, up from 26% in 2005. Including Hapag-Lloyd and Evergreen, the top five control 48%, up from 37% in 2005.
The container carrier industry has grappled with financial distress for much of the past decade. The rate of decline appears to be moderating, but these results are not sustainable. The Shanghai Containerized Freight Index (SCFI) tracks spot rates of shipping containers from Shanghai to 15 major destinations around the world. In just one three-week period in August, container rates on routes between Asia and Europe dropped by nearly 60 percent year over year. In some cases, market rates have dipped below fuel costs. At the time, rates from Shanghai to Rotterdam had plunged to $399 per twenty-foot container equivalent unit (TEU), down 67% from a year earlier, the lowest rate ever, and half of what was considered the break-even rate for these routes. The Asia-Mediterranean routes have experienced a similar collapse in shipping rates. The SCFI for these routes plunged 11% from a week ago to $540 per TEU, down 60% year over year, also setting a new all-time low. On the routes from Shanghai to the US West Coast, carriers also tried to implement rate increases effective April 1. But after an ephemeral uptick of $300 to $1,932 per forty-foot container equivalent unit (FEU), spot rates re-swooned.
Earlier this year, Danish shipping company Copenship filed for bankruptcy after losses in the dry bulk market. This came after a number of bankruptcies in 2014, including that of OW Bunker, a major supplier of ship fuel, and ship-owning companies Genco Shipping and Nautilus Holdings. Meanwhile, revenues for 15 major publicly traded carriers fell 3 percent in 2014 on the previous year and 5 percent on 2012
Between the start of the financial crisis and January this year, the index—a measure of bulk freight rates—had fallen by 95%. Many in the industry had hoped it would start to recover this year. But there is not much sign of that—and it looks as if more pain is still in store for shipowners. On October 23rd Maersk, the world’s largest container line, told investors to brace themselves for a fall in profits when it announces its third-quarter figures on November 6th.
The link between the global economy, external trade, and the shipping industry is clearly felt in the freight market. The global container shipping industry continues to struggle financially, and there is no clear end in sight. The industry will continue to face significant headwinds in terms of supply-and- demand imbalances for years to come.
Slowing global trade and a bloated orderbook of large vessel capacity mean that container shipping is set for another three years of overcapacity and financial pain, according to the latest Container Forecaster report published by Drewry. Shipping lines will need to idle a much larger portion of the fleet than they have. Otherwise, short of an unexpected recovery in traffic volumes, container shipping is set for several years of overcapacity and mounting financial losses.