Mergers may be only viable option for industry as 'all indicators continue to point downwards'
A key monthly shipping report projects further consolidation of companies operating on the container-trade routes if the lines receive no respite from plummeting freight rates, over-capacity and shrinking revenues.
Days after an apparent merger between P&O Nedlloyd and NOL Group subsidiary American President Lines was called off, UBS Warburg's Crow's Nest: Monthly Shipping Outlook for October was pessimistic about the industry in the short term.
'All indicators continue to point downwards - volumes, load factors, pricing and returns,' the report warned. 'The signals for an upturn are limited and this appears well priced into the market. We have been looking for reasons to be more positive on the outlook, these are very limited.'
The report suggests the market to and from the United States remains the key to the health of the industry, and the latest Journal of Commerce projections on US container trades appear to bear out the report's pessimism.
On the transpacific trades westbound, the journal projects an annualised 3.1 per cent decline in export volume by the end of the year to 3.15 million teu (20 ft equivalent units), reflecting diminished consumer buying power and confidence in Asia.
Eastbound, the journal projects zero volume growth, but the levelling off comes as global fleet capacity is increasing at an annualised 13 per cent, sending freight rates to their lowest levels in the past decade.
There have been some efforts lately to counter declining revenues, particularly on the Asia-Europe trades, but the report suggests the alliances will have to maintain strict adherence to the new levels for them to be effective.
Crow's Nest was critical of some surcharges, particularly the US$10 per teu levy for transiting the Suez Canal which, it said, had been couched by the lines as a cost-recovery mechanism for the higher war-risk insurance costs they faced.
'[Shipping lines] claim it is for insurance premiums, bonuses for crew members to work in a war-risk zone and additional bunkers but . . . the maths do not quite add up,' it said.
'Lines are generally paying 0.02 per cent insurance on a 3,500-teu vessel, which is worth about US$40 million [for a new vessel]. This works out to about US$8,000 per voyage [assuming average load factor]. On the other hand, customers are paying an additional US$22,000 to US$28,000 per vessel to the [shipping lines].'
The negative outlook was accentuated by the recent downturn of rates on the transatlantic trades, which account for 22 per cent of US container trade and had been holding up comparatively well until the third quarter.
But volumes on the trade, led by a 7 per cent annualised dip in August, are now off 2 per cent year-to-date.
The journal projects annualised import volume to the US will shrink marginally by the end of the year to 2.25 million teu, while containerised US exports will fall 5.6 per cent.
'The steeper-than-expected fall in rates and returns is likely to accelerate consolidation. The formation of a new alliance between Cosco [China Ocean Shipping Co], Hanjin and Yang Ming is just one signal the industry is aware immediate measures should be sought to improve utilisation and ultimately returns.
'Unfortunately, alliances have been poor at exacting true savings, which is where mergers have come into their own,' the report concluded.