Drewry Shipping Consultants Ltd. says losses in the container shipping sector could grow to $5 billion in 2016, as fuel prices bottom out but freight rates continue to fall.
Ocean freight rates declined 9% in 2015 and rates on major trade lanes are at their lowest since 2009. Last year, container traffic at the world’s busiest ports grew at its slowest rate since the recession, rising an estimated 0.8%, according to shipping industry data provider Alphaliner. Weak demand left carriers struggling to fill their ships, even as new vessels hit the seas at a record pace. Last year, ships with a combined capacity of 1.7 million twenty-foot containers entered the global fleet. Falling prices for bunker fuel, which powers ships, have helped mitigate the pain from plunging rates. This week, bunker fuel prices hit their lowest level in 11 years. Freight rates have partially recovered so far in 2016. However, those gains are unlikely to last, Drewry said. The firm predicts going forward, rates are likely to fall faster than fuel prices.
Conditions in the container shipping market are comparable to the depths of the recession in 2009. The industry will likely need to mothball ships to stabilize rates as they did seven years ago, analysts say. However, it may take months for that to happen, said Drewry analyst Neil Dekker. “The industry is not there yet as some lines are still making a profit and the very low fuel prices are propping them up,” Mr. Dekker said in a statement. “But a further two or three quarters of declining financial profitability may trigger a notable rise in the idle fleet as we enter the second half of 2016.”
Drewry analysts expect that the costs of laying-up vessels and positioning empty containers will increase this year. Carriers “are no longer able to cut costs faster than the prevailing declines seen in the freight rate market,” the report found. The result will be industry-wide losses this year. Carriers are employing various strategies to cut costs, including building larger, more efficient ships. But that won’t be enough, Drewry said. The firm recommended eliminating unprofitable routes and idling more vessels.
And while consolidation in the industry, such as the merger of China Ocean Shipping Co. and China Shipping Group Co. and the pending acqusition of Singapore shipping company Neptune Orient Lines Ltd. by France’s CMA CGM SA, may reduce the number of players and improve efficiency for those companies, it won’t reduce the vast oversupply of capacity, the report said.
Source: http://www.wsj.com/articles/dark-days-ahead-for-container-shipping-drewry-1452196567
