Rising fuel prices add to container line's stress

PUBLISHED : Tuesday, 13 March, 2012, 12:00am
UPDATED : Tuesday, 13 March, 2012, 12:00am


Overcapacity, sluggish cargo growth and high fuel prices are set to make 2012 a difficult year for container shipping lines even though carriers have started to increase freight rates, a senior executive at Orient Overseas (International) said yesterday.

Ken Cambie, chief financial officer at the shipping and property company controlled by the family of former Hong Kong chief executive Tung Chee-hwa, said capacity was forecast to grow by 9 per cent this year as new container ships were delivered to ship owners and operators.

By comparison, overall growth in cargo demand was expected to be between 5 per cent and 6 per cent, with 'significantly lower growth rates on Asia-Europe services'. He said the impact of the new tonnage, with more deliveries this year compared with last year, would especially be felt on Asia-Europe trades because a higher proportion of the new ships were mega vessels of more than 10,000 teu (20-foot equivalent units).

Cambie pointed to Mediterranean Shipping, the world's second largest container line, which has 16 such large ships due for delivery, including 12 by mid-year. All will be deployed on Asia-Europe services.

Turning to fuel costs, he said had reached US$740 per tonne, up from an average of US$458 in 2010. He thought there would be more chance of successfully imposing fuel surcharges as freight rates increased.

Cambie was commenting after OOIL saw net profit slump to US$182.4 million last year, down from US$1.87 billion in 2010 although this included a US$1 billion profit contribution from Orient Overseas Developments. Revenue was unchanged at US$6 billion.

Profit from Orient Overseas Container Line, OOIL's container shipping company, dropped to US$86 million last year, against US$834.3 million a year earlier, while revenue slipped to US$5.9 billion, down from US$6 billion a year earlier.

Cambie said OOCL lost money in the second half of last year, although OOIL remained in the black. He pointed out that overall revenue per teu dropped 6.7 per cent last year to US$1,703 per teu. This included a 9.4 per cent fall to US$1,055 in average revenue per teu in the fourth quarter.

To counter the drop in rates, OOCL, along with several other carriers including Maersk and Hapag-Lloyd, had announced rate increases this year on Asia-Europe and transpacific trades. Outlining the impact of these increases, figures from the Shanghai Shipping Exchange show spot freight rates from Shanghai to Europe surged 163 per cent between January 1 and March 2.

Cambie said a further round of rate increases was planned for May, adding that 'freight rates are moving back to break-even'.

But, he added, for OOCL to return to profit, 'freight rates need to rise further from where they are. I would expect us to keep announcing freight rate increases for the rest of this year.'

While OOIL shares slumped by more than 4 per cent yesterday before recovering to end the day 2.8 per cent down at HK$51.35, analysts were satisfied the company's results.

Jon Windham, the Asian marine transport analyst for Barclays Capital, said actual net profit was better than BarCap's forecast of US$58 million. OOIL's second half operating result 'was a loss of only US$14 million, an impressive achievement given the level of stress in the industry during the second half. The better-than-peers performance is partially a result of OOIL's limited exposure to Asia-Europe routes.'

Tom Kim, head of regional transport research for Goldman Sachs, said OOIL's results would likely beat most peers including China Shipping Container Line and China Cosco.