Global container-shipping operators’ efforts to boost freight rates this year are failing to bring results because of overcapacity and weak demand.
That may undermine the recent rise in container-shipping stocks after second-quarter industry results were better than expected, according to Robin Byde, an analyst at Cantor Fitzgerald Europe in London. The industry’s traditional peak season in the third quarter probably will disappoint, he added.
The world’s biggest container lines, including A.P. Moeller-Maersk A/S (MAERSKB), CMA CGM SA and Mediterranean Shipping Co., have been trying to push up freight charges after fees between Asia and Europe fell to an 18-month low in June. Maersk, the largest, announced four increases in five months. A proposed multi-carrier pooling alliance, a spate of mergers and a move to mothball older ships are all failing to bring the industry back into balance amid subdued demand and a glut of new ships.
“I think we’ll see at least a stall in the stock rally,” Byde, who has a hold rating on Maersk’s shares, said in a telephone interview. “I think they’ve probably overanticipated a big boom in global trade. There’s a lot of capacity around. That suggests rates are going to be under some pressure.”
The industry has yet to recover from a downturn, now in its fifth year, as carriers struggle with overcapacity after a boom in ship orders collided with the global financial crisis, triggering a record slump in world trade.
Investor sentiment toward ocean carriers was boosted after earnings per share in the industry were 20 percent more on average than analysts’ expectations in the second quarter. Seven of the 15 companies reporting results in the Bloomberg Industries container shipping peer group beat estimates.
At the same time, the euro area’s emergence from a record-long recession in the second quarter helped boost equities. The MSCI World Index rose 7.6 percent in the three months through yesterday. That compares with a 14 percent increase in the Bloomberg Industries container shipping index. South Korea’s Hyundai Merchant Marine Co. climbed 25 percent, Maersk’s B shares posted a 23 percent gain and Hanjin Shipping Co. rose 17 percent.
Having suffered a decline in rates during the previous 12 months, carriers orchestrated a “remarkable” turnaround at the beginning of July even as market fundamentals remained adverse, according to Rahul Kapoor, a Singapore-based analyst at Drewry Maritime Equity Research. In the week ending July 4, the rate to ship a 40-foot equivalent unit container, or FEU, from Asia to Europe jumped 165 percent from the lowest level since December 2011, according to World Container Index data.
Since then, charges have weakened. The average global rate to ship an FEU fell 7.9 percent to $1,665 for the week ending Sept. 26, the third straight weekly decline, WCI data showed. The drop was led by the Asia-Europe route, with the fee from Shanghai, China’s busiest port, to Rotterdam, Europe’s biggest, falling 19 percent to $1,703. That rate has fallen 41 percent from $2,881 on Aug. 8, the highest in almost a year.
“I think the stocks have got ahead of the fundamentals,” Kapoor said in a telephone interview. “The sharp up move and early signs of weakness emerging in the sector could see the container shipping stocks rally stall in the near term.”
Maersk, the Copenhagen-based owner of the world’s largest shipping line, and Neptune Orient Lines Ltd. were among companies reporting better-than-expected second quarter earnings. Maersk Line reported a doubling of second-quarter net income to 2.5 billion kroner ($453 million) even as revenue declined 10 percent as cost cuts countered the decline in freight rates. It also raised its full-year forecast.
“The main cause of freight rate volatility stems from the weakest of the Asian container lines, which are cutting prices the most when they lose market share,” Maersk Chief Executive Officer Nils Smedegaard Andersen said in a Sept. 26 interview. “There will be overcapacity in the market for a long time” and “this market will remain very tough and very volatile.”
The spot rate to ship a 20-foot equivalent unit, or TEU, to northern Europe from Far East Asia is currently $765 per box, down from $1,501 at the beginning of August, Alphaliner said, citing Shanghai Containerized Freight Index data. It could fall to $500 per TEU in the next few weeks, the Paris-based industry consultant said in an e-mailed note distributed yesterday.
Maersk said yesterday it planned to increase its rate to ship a TEU between Far East Asia excluding Japan and northern Europe and the Mediterranean by $950 on Nov. 1, compared with an announcement last month to raise it by a minimum of $600. It already had increased the charge on July 1, Aug. 1 and Sept. 1.
“Maersk Line continues to face unsustainable market rates and the rapid decline of rates in the past few weeks has made it apparent that the previously announced increase of $600/TEU will be insufficient to run the service at financially viable levels,” the carrier said in an e-mailed newsletter.
The industry’s busiest season in the northern hemisphere comes in the third quarter, when stores in the U.S. and Europe look to stock up before the beginning of the school year and the Thanksgiving and Christmas holidays. Also, many haulers bring forward shipments ahead of China’s “Golden Week” holiday, which extends from Oct. 1 to Oct. 7 and sees many factories in Asia’s largest economy shuttered.
“There hasn’t been a peak season,” Drewry’s Kapoor said. “Normally, around the Golden Week, you see wide scale capacity restructuring, but we haven’t seen that this year. I think that is taking its toll on rates.”
With no potential fundamental catalyst to drive charges higher before the end of the year and capacity growth set to exceed demand at least through 2014, there probably won’t be any sustainable uplift in rates before 2015, Cantor’s Byde said.
Until rates improve, investors will favor shares of shipping lines that are seeking to boost earnings by cutting costs, according to Kapoor.
Maersk, which also owns an oil unit, a drilling division, a port business and a supermarket chain, said on Aug. 16 that unit costs fell 12.7 percent in the second quarter at its container line, compared with a drop of 7.1 percent in the first quarter.
“The guys who will manage to cut costs, they’ll stay profitable this year, and that is going to continue for the next few years,” Kapoor said. “The rates won’t be profitable, it’ll be the costs that will be the big leveler. Maersk will continue to do well.”
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