Container lines are ignoring a drop in freight rates and bringing the highest proportion of the shipping fleet out of mothballs since 2008, when the global slump resulted in the industry’s biggest losses.
The capacity of idled ships has dropped to about 80,000 containers, according to industry consultant Alphaliner. That’s the smallest number of vessels not in use since the collapse of Lehman Brothers Holdings Inc. three years ago triggered a worldwide recession.
Overcapacity threatens to limit the usual seasonal advance in third-quarter rates to Europe, hurting earnings for such shipping lines as Copenhagen-based A.P. Moeller-Maersk A/S, the world’s largest. About 45 percent of goods to Europe from Asia are being transported at a loss and shipping lines need to cut capacity for the route by as much as 10 percent to balance supply and demand, Nordea Bank AB said June 29.
“Our view on the container market is relatively negative due to the overcapacity there today,” said Torkel Aaberg, an Oslo-based fund manager at KLP Asset Management. The fund, which has about $46 billion under management, holds about $3.3 million in Maersk shares and is under-weighting the stock compared with other equity holdings, he said. “Rates are really bad. Our view here is that Maersk will perform worse than other stocks” in KLP’S portfolio.
Shares of Maersk, Denmark’s biggest company, have lost 13 percent this year compared with a 4.6 percent decline in the OMX Copenhagen 20 index. (KFX) The world’s second-biggest shipping line, Geneva-based Mediterranean Shipping Co., and Marseille-based CMA CGM SA, the third-largest, are both privately held.
Shipping lines are not cutting capacity because ships they have ordered are now coming on line, because vessel-sharing agreements require multiple negotiators to cut capacity and because the first company to do so loses market share until others follow.
“It’s a waiting game,” Rahul Kapoor, a container analyst at RS Platou Markets AS, said by phone from Singapore. “Every shipping line wants the other ones to cut capacity first.”
The difference between now and the 2009 slump is that the market is growing, not shrinking. Container volume will grow 6 percent to 8 percent this year, Maersk Line said May 11.
Maersk has orders for new ships equal to 22.9 percent of its existing fleet, according to Alphaliner. MSC has orders for 24.5 percent, while CMA CGM has orders equal to 14.4 percent of its fleet. Maersk on June 27 exercised an option with Daewoo Shipbuilding & Marine Engineering Co. for the 2015 delivery of 10 more of the world’s largest ships, which can each carry 18,000 20-foot containers.
Container companies will launch new ships that will add 9 percent to capacity this year, said Finn Bjarke Petersen, a Copenhagen-based analyst with Nordea, the Nordic region’s biggest bank. Most of those vessels were added in the first half of the year to be ready for the third quarter when deliveries of goods to Europe and U.S. peak ahead of Christmas sales.
The result may be overall losses for the industry in 2011, according to a July 5 note by London-based Drewry Maritime Research.
“The fuelling of the newbuild market is not helping current sentiment and we are running the risk of repeating the mistakes of the ordering frenzy of 2007/08 - the legacy of which the industry is still paying for now,” said the note, written by Neil Dekker, editor of Container Forecaster. “With current mid- year fundamentals in mind we forecast that the carrier industry could make significant losses in 2011.”
Return to Profit
The industry turned unprofitable in 2009 as container lines cut prices to maintain market share while demand fell. Companies, including Maersk, then began idling ships, sidelining capacity of as much as 1.5 million containers. That helped raise freight rates, guiding the industry back to profit a year later.
“There are certainly similarities between now and the situation two-three years ago,” said Kapoor. “Nobody wants to lose market share so rates are falling. If we don’t see rates recovering in July, then 2011 will be a pretty bad year for the container industry.”
Freight rates are now down 60 percent from March 2010, according to Paris-based Alphaliner. In June it cost about $850 to transport a standard-size 20-foot container to northern Europe from the Far East, according to spot rates provided by Alphaliner. It cost more than $2,000 15 months earlier.
Maersk wouldn’t comment on capacity issues as the company observes its silent period before the Aug. 17 publication of second-quarter earnings, John Churchill, a spokesman, said by e- mail last week.
‘Turn for the Worse’
“I’d prefer for the companies not to build as much new capacity as they are doing,” Aaberg, the KLP fund manager, said in the July 1 phone interview. If Maersk’s competitors start building ships the same size “then you’ll see rates taking a turn for the worse,” he said.
Shipping lines would have trouble cutting capacity even if they wanted to, said Bjoern Vang Jensen, vice president for global logistics at Electrolux AB (ELUXB), the world’s second-largest appliance-maker. Reason: Taking ships off-line thus requires negotiation among multiple participants in sharing agreements. With 150,000 shipments of 20-foot containers a year, Electrolux has benefitted from the rate decline.
“The vessel-sharing agreements are, at least to some extent, blocking individual carriers’ ability to adjust,” Jensen said July 4 via phone from Singapore. “I don’t think carriers will cut capacity because they’re still trying to persuade themselves that the recovery in the freight market is just around the corner and buying their own arguments.”
To be sure, some shipping lines have started to pull capacity. Cia. Sudamericana de Vapores SA, the Valparaiso, Chile-based container-shipping company that is Latin America’s largest, said July 5 it would suspend its Mare Nostrum Service trade from the Far East to the Mediterranean because of the “unfavorable economic environment” on the route.
Hanjin Shipping Co., South Korea’s largest shipping line, said June 16 it will suspend one of its Asia-North Europe routes. That move may be “too little, too late,” as average utilization is still at about 90 percent for traffic from Asia to North Europe, Alphaliner said in a June 21 publication.
There’s a risk that the industry will be unprofitable this year due to overcapacity, SeatradeAsia Week quoted Maersk Line Chief Executive Officer Eivind Kolding as saying in a June 29 interview.
CMA CGM and MSC declined to comment.
The container shipping industry lost $19 billion in 2009 before interest and tax as the market contracted for the first time since containerization became global in the 1970s, according to an estimate by Drewry. In 2010 the comparable profit figure was $17 billion.
“We now see these mega-ships being ordered by every carrier who can afford them, and some who probably can’t,” said Jensen of Electrolux. “That will lead to lower freight rates going forward.”
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