News / July GRIs are 'last chance' for shipping lines to stem severe losses

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With the next round of general rate increases on the Asia-Europe trade set to be introduced in 10 days, new analysis has painted a dismal picture of the financial health of some of the mid-sized carriers on the trade.

In the shadow of this week’s news that the three largest carriers – Maersk, Mediterranean Shipping Co and CMA CGM – are set to create the P3 alliance covering the three major east-west trades and offering a combined 2.6mn teu of capacity over 255 vessels, Drewry Maritime Equity Research has claimed that supply and demand on the main container trades are unlikely to see any balance until 2016.

Rahul Kapoor, senior analyst at Drewry Maritime Equity Research stated: “Even as the market awaits the fate of 1st July Asia-Europe GRIs, the sheer collapse in Asia-Europe freight rates in the past two months shows how fickle the industry’s demand supply balance remains. Short term, industry profitability has become highly volatile, driven not only by underlying supply demand dynamics but increasingly by carriers’ actions with respect to short-term capacity management. Accurate forecasts on a recovery in 2014 are especially difficult since the industry dynamics are highly fluid.

“Longer term, we expect the industry to be plagued by overcapacity and the global supply and demand balance will not reach equilibrium until 2016.”

Mr Kapoor said that the forthcoming peak season is a make or break for the chances of lines making a profit in 2013. However, conversations between carriers and forwarders in the Asia-Europe trade suggest that lines have limited their ambitions to simply breaking even.

While the latest Shanghai Containerised Freight Index for 14 June showed a rate of $520 per teu from Shanghai to Rotterdam, forwarders said this week the rate being quoted had dropped to $475 per teu, less than half the general break-even level of $1,000 per teu.

“Freight rates have crashed on the key Transpacific and Asia-Europe trade lanes and there are few indications of a favourable demand environment. Carriers have a narrow window of opportunity to get their act together or risk severe losses as they are losing a lot of money at current rate levels. With no likelihood of an imminent demand surge, the only way to minimize losses is to address effective capacity immediately, or else any hope of full-year profitability can be written off after a very weak second quarter. Having said that, carriers can still expect to achieve GRI success outside of supply and demand fundamentals if they were to take a hard-line and aim for profitability,” Mr Kapoor said.

The July GRIs range from Hanjin, which is aiming for an $800 per teu increase, to a whole host of carriers that have announced an increase of $1,000 per teu. However, forwarders believe that the lines are unlikely to achieve this, given the overcapacity and the continuing poor levels of demand in Europe. Sources told The Loadstar that German forwarders are expecting to see increases of $600-675 per teu, noting that while the recent success of large GRIs on the Med were supported by some capacity withdrawals, “for North Europe, it might be a different story because all mega ships are inducing onto this trade lane, and also due to the alliance agreement between carriers”.

“July will be the only chance for carriers to implement GRIs in 2013 as the overall purchasing power in Europe is not as strong as before. People’s buying attitude has changed,” one forwarder said.

Volumes into the Benelux region are said to be down year-on-year, although some growth has been seen inbound into Germany, the UK, Scandinavia and Russia.

According to a source, one unidentified shipping line is understood to be losing around $2m per day on the westbound leg. The precarious nature of the carriers’ financial position was underlined by Drewry Maritime Equity Research analysis of Singapore line NOL, owner of APL, and China Shipping Container Lines. In particular it cautioned investors who might be eyeing the Chinese carrier.

“Drewry sees CSCL as a risky play. It expects the company’s core business to remain unprofitable in FY13, despite building in a modest 2H13 recovery in freight rates. Drewry believes that CSCL’s higher-than-industry-average exposure to spot markets in key long haul trades is the real nemesis for the company,” it said.

Similarly, the cost restructuring efforts at NOL are deemed to be unable to solely turn around the financial position of the company, which remains heavily indebted. However, it did note that its terminal portfolio, which is described as a “hidden gem”, could attract a buyer, given that investors appear to be returning to the sector.

“An opportune divestment of terminal assets even while retaining control will potentially unlock and add tremendous value for shareholders. Drewry accords fair value in its base case for APL Terminals of $720m with a high case valuation reaching as much as $1bn,” it said.

In contrast, praise was reserved for Hong Kong-based OOCL, which has managed to continue to post profits despite the weak economy and industry headwind, and “ticks all the boxes of a quality company”.

Industry-wide, carriers’ debt has doubled over the past five years and has now reached $100bn. But the fact that lines have become so financially weak, has led to the unexpected upshot that the battle for market share based on undercutting freight rates is unlikely to continue for any prolonged period.

“The current financial pain will limit carriers’ ability to fight purely for market share. Drewry expects to see intermittent market-share campaigns but no single carrier can do it on a sustained basis,” the company said.