This year container lines are optimistic that their collective financial performance will be an improvement on 2011, when they lost an estimated US$6 billion between them. The effectiveness of capacity management and securing freight rate rises in the first half of the year has generated hopes that the sector will move back into profit for the full year. However, growing worries about market prospects in the coming months are starting to dampen expectations and it remains in the balance whether they will achieve break-even overall.
Container carriers have experienced a roller coaster ride since the economic crisis. The dramatic slump in 2009 resulted in a huge combined loss of US$13 billion as they struggled to adjust to changed conditions. In 2010 there was a bounce as demand recovered and the industry returned a positive result of about US$12 billion. It proved short-lived, however, and they have had to re-adjust plans, as the one-off gains from slower steaming move out the equation. Freight rates declined by about 12 per cent in 2011 compared with 2010, while fuel costs soared. This year lines have so far maintained discipline and achieved significant improvements in freight revenues.
At the time of writing most leading carriers had not published results for the second quarter of this year, but in the light of significant freight rate increases on the major trades during that period, it was likely that most would show a big improvement from the first quarter and even more so from the same quarter in 2011.
Market leader AP Moller-Maersk reported continued loss-making container rates in the first quarter, but commented that efforts to increase rates appeared to be paying off. Overall group profit was the same as a year earlier at US$1.2 billion. However the Maersk Line container operation made a loss of US$599 million in the first three months of this year compared with a profit of US$424 million in the first quarter of 2011. This was despite an 18 per cent rise in volumes. It noted that at the end of the first quarter it applied a rate increase combined with an effective 9 per cent capacity cut by reducing average speeds.
Improved freight rates pushed Maersk Line back into profit in the second quarter with a positive result of US$227 million. It is now expecting to be slightly in the black for the whole of 2012.
The second ranking liner operator in terms of capacity, MSC, does not publish any financial results, and how it fares can only be speculated, but there is no reason to suppose that it is substantially different to other major carriers. However, the absence of any definitive figures means that its results are not included in any aggregate industry profit or loss statistics.
French carrier CMA CGM has experienced a difficult time and was forced to secure external funds from Turkish investor Yildirim Group in return for a stake in the business. It has sold off some non-core shipping and terminal interests. However, CMA CGM remains upbeat and has predicted a profit for 2012.
German carrier Hapag-Lloyd blamed high fuel costs for its first quarter loss of €132.4 million (US$165 million), a figure equivalent to its increased fuel bill, compared with the first three months in 2011. Higher revenue and freight rates turned around Hapag-Lloyd’s operating result in the second quarter to a €30.8 million (US$38.2 million) surplus, although it still made a small net loss.
Japanese carrier NYK has reported an improved result in the second quarter of this year – though that is in the form of a smaller loss compared with 2011 – and made an operating profit. Its container business reported an operating loss of 1.6 billion (US$20 million) in the three months to June, but this is healthier than the 8.5 billion (US$108 million) loss in the same quarter in 2011. Its report commented: “The supply-demand balance improved and freight rates recovered at a faster pace as a result of the full-fledged implementation of the global alliance and the rationalisation efforts by each company including operating vessels at reduced speeds.” It now expects to see a profit on its container operations in its financial year ending March 2013.
Fellow Japanese carrier Mitsui OSK Lines also reported a reduced net loss overall. Its container business reported a net loss of 2 billion (US$25 million), compared with a deficit of 5 billion (US$63 million) in the same period in 2011. It has revised upwards its full financial year forecast for container operations to a profit of 3 billion (US$38 million).
China Cosco reported a huge operating loss of US$1 billion on its container operations in 2011. It has not yet reported segment figures for this year, but overall the company expects to report a net loss of US$650 million in the first half of 2012, with about half its turnover accounted for by container operations. In the first quarter it reported increased revenue on the transpacific year-on-year, but a decline in the Asia-Europe trade, a trend that should be reversed with freight rate rises taking effect in the second quarter.
China Shipping Container Lines (CSCL) was expecting to report a turn-around into profit for the second quarter, following heavy losses in previous quarters. This improvement reflects higher freight rates and lower fuel costs. Unlike some other carriers, CSCL is not burdened with high charter costs incurred by fixing vessels when rates were much higher than they are currently.
Most Asian container operators reported first quarter losses, with Hanjin Shipping racking up a loss of US$290 million, Hyundai Merchant Marine US$175 million, and NOL US$250 million.
The one major casualty of the depressed container market in the last three years was Malaysian carrier MISC Agencies (Singapore), which has recently completed its exit from the market, and has sold its container ship fleet.
Carriers should benefit from the switch to higher rates and lower fuel costs in the second quarter of this year, but whether that is sufficient to move them into the black will depend on their individual cost base.
Freight rate restoration stalls
Carriers have sought to apply freight rate increases on both the Asia-Europe and transpacific trades in an effort to restore their finances to profit. This has been combined with management of capacity to restrict surplus slots and improve vessel utilisation.
On the transpacific trade, which sees annual contract negotiations concluded in May, the Transpacific Stabilization Agreement was seeking to use higher volumes to justify increases and was trying to apply further rises in the approach to the peak season, starting in August. As economic and trade forecasts became more cautious it remains to be seen if those rises will be maintained.
On the Asia-Europe trade peak season surcharges of about US$500 per teu were postponed in the light of falling spot rates and uncertainty about how big the boost to demand would be.
Even so, lines have managed to sustain freight rates significantly higher than they were in 2011, and the recent fall in rates is at least partly due to lower fuel prices.
Charter owners invest in future cash flow
Container shipowners chartering vessels to liner operators have felt the effects of the downturn, but those securing long-term charters to major carriers have the benefit of relatively secure earnings. Danaos Corp, which is listed in the USA, has recently completed delivery of a series of 13,100 teu ships, which are chartered to liner companies. It has a total fleet of over 60 container ships.
Danaos reported that one of its 13,100 teu ships is employed on a 12-year charter with Hyundai Merchant Marine Co, generating annual net earnings of US$18.8 million. In the second quarter Danaos reported a profit of US$9 million. It commented that improved freight earnings by liner companies will reduce the counterparty risk faced by charter owners, when operators struggle with cash flows.
Another leading listed charter owner, Costamare, reported a net profit of US$21 million in the second quarter, from its owned fleet of about 50 ships. It says that it will continue to acquire container ships selectively, and it has also invested in newbuild tonnage.
Danaos and Costamare are two prime examples of the emergence of major charter owners, which also include Seaspan Corp, Zodiac Maritime Agencies and various investment companies such as First Ship Lease Trust and Global Ship Lease, which is linked to CMA CGM. Greek shipowners avoided the container market for many years, but have recently started investing heavily as owners in newbuild and second-hand tonnage but not, so far, as operators.
Alphaliner recently calculated that Greek container shipowners have placed orders for 73 new container ships, with an aggregate 463,000 teu capacity, since September 2008. A recent example is Greek owner Enesel which has ordered 10 ships of 13,800 teu. These will be operated by Evergreen, which is chartering them for an initial five years at a rate believed to be about US$50,000 per day, with options to extend. Other Greek owners investing in container ships include Eastern Mediterranean Maritime, Thenamaris Ships Management, Technomar Shipping, Embiricos Shipping, Diana Container ships and Dynacom Tankers Management.
Technomar and Embiricos have recently chartered seven newbuilds to Maersk Line. The 6,700 teu vessels have been chartered for up to five years at rates reportedly up to US$35,000 per day.
Another New York-listed, Greece-based owner Box Ships has recently acquired two 5,344 teu container ships from Orient Overseas Container Line and chartered them back for three years for a reported US$26,465 per day. Box Ships purchased the ships with loan finance from Dutch bank ABN Amro.
The charter owner sector is still dominated by traditional German KG owners, but the difficulties faced by many KG finance houses means that their future prospects for investment in container ships is uncertain.CST
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