Container ships can’t go any slower.
Shipping lines are running out of options to stop losses as sailing speeds reach their lower limit, exhausting a solution that helped restore profitability in 2010.
The global container fleet is now cruising near record-low speeds after slowing 11 percent from August when the freight rate market collapsed, according to data compiled by Bloomberg and Lloyd’s Register. Drewry Shipping Consultants Ltd. estimates some of the smallest shipping lines will run out of cash in the second half of this year as the industry fails to adjust to overcapacity that’s allowing customers to push down rates.
“Container lines have already exhausted most of the tricks for absorbing capacity,” said Bjorn Vang Jensen, a Singapore-based vice president at Electrolux AB who oversees about 150,000 shipments a year. “Some of these container ships are now so slow that they’re close to the speeds of the old sailing ships. The clippers might actually have been faster.”
With options running out, investors in container-line stocks should brace themselves for losses. Still, shares in Copenhagen-based A.P Moeller-Maersk A/S, the world’s biggest container line, may fall less than smaller competitors this year because its bigger ships are more cost-efficient, said Rikard Vabo, an analyst at Fearnley Fonds ASA in Oslo.
Slow-steaming, pioneered by A.P. Moeller-Maersk’s container unit, Maersk Line, helps carriers cut costs when times are tough. By sailing at lower speeds, ships need less fuel and can offset capacity stresses by using more vessels to make up for the longer sailing times.
With speeds unlikely to get any slower, the industry is growing more vulnerable to rising fuel costs, and all container lines are now losing money, according to BIMCO, the biggest international shipping association.
“The potential for further slow-steaming seems to be of little significance to the overall market balance,” said Peter Sand, a Bagsvaerd, Denmark-based analyst at BIMCO, whose members control 65 percent of the world’s tonnage. “Compared with the 2009 crisis, we don’t see the same level of idling.”
That’s the message the industry is hearing from advisers including Paris-based Alphaliner, which estimates that slower-steaming may even start raising costs for carriers as they deploy more vessels to meet demand.
“There’s much less potential than in 2009 to mop up excess capacity in reducing the speed further,” Alphaliner said in a Jan. 23 e-mail.
Nomura International Plc today cut its recommendation on Maersk shares to “neutral” from “buy,” saying the container unit will also be unprofitable this year.
“Burdened by an unfavorable supply/demand balance at the industry level and an unwillingness by the bigger operators to remove vessels from service, we see only a modest recovery at Maersk Line in 2012,” Nomura analysts, including London-based Mark McVicar, said in a note.
Maersk B shares slipped as much as 0.8 percent today before trading 0.2 percent lower at 40,160 kroner as of 9:52 a.m. in Copenhagen. The 20-member OMX Copenhagen benchmark index gained 0.3 percent today.
For a nine-week trip with ships that carry 8,500 containers, a carrier can cut 3 percent of costs by slowing to 17.2 knots from 19.8 knots. Slowing further to 15.2 knots, by contrast, actually pushes up costs 0.5 percent as the expense of operating the additional ship starts to outweigh fuel reduction, Alphaliner estimates.
Maersk Line says it may be able to bring its speeds down even further. The company cut its average speed to about 17 knots last year from 20 knots in 2008, according to Morten Engelstoft, Maersk Line’s chief operating officer. The company’s whole fleet currently sails at about 16-18 knots, he said.
“There is still some potential for slow-steaming, both for us and probably for the industry,” Engelstoft said in a Jan. 23 interview. “We are looking into the possibility of super slow-steaming. That would be 12-16 knots.”
The 19th-century clippers, the fastest ships of their time, transported tea to the U.K. and U.S. from China and India, according to the website of the U.K. Tea Council. The ships, which had three or more masts and dozens of sails, could reach a peak average speed of more than 16 knots.
Slow-steaming, coupled with idling ships, helped turn a 2009 industry-wide operating loss of $19 billion into a $17 billion profit the year after, according to Drewry. The industry reverted to a $5.2 billion loss last year and prospects for 2012 are “dire” because the gap between supply and demand will grow even wider, the London-based consultant said in a Jan. 4 report.
Engelstoft said Maersk Line hasn’t yet committed to even slower-steaming as a strategy for weathering the crisis.
“We are looking at Asia-Europe, but it’s still too early to say if we will introduce super slow-steaming there and to what extent,” he said. “It’s also important for us to maintain a high level of reliability for our customers.”
Maersk may emerge a winner among the world’s biggest container lines, according to analyst Vabo. Still, the company’s shareholders probably will lose money in the short term because there are no immediate solutions for overcapacity, he said.
Vabo estimates Maersk shares will plunge 18 percent over the next three to six months from their levels of Jan. 17, while TUI AG, the listed owner of the world’s fourth container line, Hapag-Lloyd, will fall 21 percent. Neptune Orient Lines Ltd., the world’s sixth-largest listed line, will drop 37 percent, he estimates. Shareholders of Hyundai Merchant Marine Co. Ltd., the world’s 18th-largest line, will suffer the most: The company stands to lose more than half its value.
“The winners will be the companies that have the lowest costs on their ships, run them efficiently and have good balances,” Vabo said. Maersk could gain more than 50 percent after the container market has recovered, he said. The shares lost 25 percent in 2011, its second-worst share performance over the course of a calendar year since 1998.
Other options for adjusting to overcapacity in the shipping industry are also proving untenable. Many ships haven’t yet been paid off by their owners, and scrapping vessels that represent a financial liability isn’t feasible, Sand at BIMCO said.
The average age of the world’s container fleet is less than five years compared with about 11 years for the global dry bulk fleet and nine years for tankers, according to BIMCO.
Closely held CMA CGM SA, the world’s third-largest line, said “there is still room to reduce the speed” of its vessels, though the Marseille-based company didn’t provide details in an e-mailed reply to questions. Hapag-Lloyd, based in Hamburg, could also sail slower, though it doesn’t have any plans to do so, Rainer Horn, a spokesman, said by e-mail.
Meanwhile, freight rates earned by carriers weren’t enough to cover fuel costs in the fourth quarter, according to BIMCO’s Sand. The price of container-ship fuel rose to a record on Jan. 20, up 32 percent from a year earlier, according to a Bloomberg index on global average prices for 380-centistoke bunker.
Global freight rates dropped on average 25 percent last year, according to RS Platou Markets AS. Prices fell the most on Asia-to-Europe routes, where the decline was almost 60 percent, the Oslo-based broker said in a Jan. 4 note.
“The container market can’t stay at this level for a prolonged period of time as everyone then will basically go bankrupt,” Vabo at Fearnley said. “It’s at unsustainable levels.”