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Spot rates on the Shanghai Containerised Freight Index (SCFI) for Shanghai to North Europe tumbled again on Friday to a new 12-month low of $738 per teu, and remain anchored in what has been described as “sub-economic” territory – but with unit costs also in fast decline, the defining bar of profitability is being lowered.
Indeed, carriers appear to be switching their emphasis to reducing their costs rather than making apparently futile attempts to increase freight rates – especially with the expectation of declining demand in a Eurozone economy heading towards a new recession.
Moreover, it would seem that the anticipated delivery of around 100 newbuild ultra-large container vessels during the next two years could not come at a worse time with the International Monetary Fund’s latest World Economic Outlook revising its headline GDP global growth forecast downwards.
Against this backdrop, Maersk Line and some of its peers seem to have quit the game of charades that has been played out over the past couple of years of issuing general rate increases that were either withdrawn or eroded within weeks.
In its latest Container Insight Weekly, transport consultant Drewry’s analysis of the second-quarter income statements from 15 of the top 25 ocean carriers indentifies that the number of profitable lines doubled, from five in the first three months of the year to 10 in the second period, on what it says were “sizeable reductions in unit costs to compensate for lower unit revenues”.
It explained: “Even though unit revenues are down by an estimated 4% year-on-year for the first six months of this year, the positive is that unit costs have been reduced by 6%.”
The lower unit cost race is being led by Maersk which, according to Drewry, made an average $115 profit for each of the 9.3m teu it carried in the first six months of this year. This compares with $76 per teu earned in the same period of 2013.
French rival CMA CGM produced an estimated average profit per teu of $66, with “business-efficient” OOCL coming third with $48 per teu profit.
Another reason why ocean carriers will not be panicking too much about the freefalling SCFI is that one of the biggest cost factors on a voyage, the cost of fuel, is plummeting much faster than freight rates.
Despite slow-steaming, ULCVs still burn more than 100 tonnes of bunkers a day at sea, but since June the cost of IFO 380 heavy fuel oil has fallen by more than $100 per tonne to around $490.
At its Capital Markets Day in Copenhagen recently, Maersk Line executives acknowledged that it had been “fortunate” that the cost of fuel had declined at the same time as its big ship unit cost reduction strategy was working through.
However with the bunker prices beyond carriers’ control, Drewry argues: “For more sustainable industry profits, carriers will need to reverse the unit revenue trend at some stage.”