02 February 2012

Dry Bulk Freight Index Drops and Container Shipping Line Forecasts and Profits Slump  

With No Rate Controls Big Box Carriers Face an Uncertain Future

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WORLDWIDE – This is probably not a good time to have all your investments in global shipping. Everyone is currently raving about the plummeting Baltic Dry Index but, despite the fact it now sits at a record low, at 662 one point below the previous 25 year low achieved on the 5th December 2008, any analyst worth his salt knows that oversupply is the big problem for some vessel sizes tasked with moving bulk freight commodities. The situation which the world’s container shipping lines face however may be even more serious in the long term for one or more of the major players.

Both bulk and box traffics are dependent on free market forces only giving a limited amount of control to any of the players in either field. The preferred method of medium to long term charters softens the blow somewhat for many bulk carriers, as with any business spot prices tend to highlight the highs and lows of the indices and the simple fact is that during a slump older vessels will either be scrapped or sold off cheaply to be reflagged and run with minimal attention at rock bottom prices to bring the entire industry into disrepute.

This gradual devaluation of the bulk industry tends to pass almost without notice in terms of trade headlines as it is a slow death for some as the traffic evens itself out. The case of the box carriers may well turn out to be far more spectacular. As global anti trust legislation does its best to restrain container carrying companies this past few months has seen grim news from all the major box lines who, despite slow steaming policies eking out their fleets by decreasing available capacity, still find that the battle for traffic is lowering unit rates to unacceptable levels.

As with any multi million dollar outfits the day of reckoning can be a long time coming and all that can be done in the absence of firmly agreed tariffs, the only sure way to ensure survival let alone prosperity in hard times, is to hunker down and try to wait it out by optimising what reduced income there is. Many shippers will have little sympathy for the plight of any company which has over ordered capacity during good times when rates were flying high.

Some of the figures just published will already be sending an icy shiver down the collective spines of those dependent on container freight for their living. Maersk’s bold move to introduce a daily service was almost inevitable as the largest container carrier in the world had already seen its huge new breed of Triple E box ships ordered and due to come off the blocks and with their 18,000 TEU capacity they can only be viable if they suction up the bulk of trade on some key routes despite their economy of scale.

This past week saw Hanjin, South Korea’s premier container line, which has been expanding its portfolio of dry bulk capacity, announce a massive loss approaching $490 million yet, such was the mood, this saw the company’s shares rise by around 7%, indeed the dry bulk sector of its portfolio went some way to redress the Hanjin groups overall loss of around $730 million as against a profit of over a quarter of a billion dollars the previous year.

One worrying factor is that Hanjin apparently carried around 12% more boxes in 2011 than in 2010 but the fall in rates more than offset this. The company, in league with Cosco, 'K' Line and Yang Ming its fellow members in the CKYH Alliance, has just signed a route sharing agreement with Taiwanese container line Evergreen, a strategy which, along with revised cooperative schedules, is being adopted more and more by the big outfits as things tighten up.

Korea’s main carrier is not the only container company suffering at the moment. In Japan Mitsui OSK Lines (MOL) has announced a downward tick against its combined container and bulk financial forecasts originally made at the end of October, estimating that revenue from all activities will fall about $260 million for the financial year ending 31st March 2012. This will result in a net income loss of approximately $380 million not the $52 million previously predicted.

Similarly another Japanese stalwart, Nippon Yusen Kaisha (NYK Line), says in a statement that ‘Revenues and recurring profit decreased comparing to FY11/3 1-3Q due to lower container freight rates, weak dry bulk market, stagnation in car transport volume and higher bunker oil prices’ has caused it to predict a loss of around $340 million for the year as against the previously forecast $236 million. The group lost around $180 million in its Q3 to the end of 2011, a drop year on year of over $275 million.

It was a similar story at Kawasaki Kisen Kaisha (K Line) where Q3 profits last year of almost $70 million were more than wiped out when the shipping group posted a loss for the period of over $170 million. Back in October Neptune Orient line (NOL Group) announced a net loss of US$91 million for the third quarter of 2011 compared to a profit of US$282 million in the same period last year. With figures like these and other heavy losses at huge container groups such as Maersk and CMA CGM the message is clearly that overcapacity is slowly destroying the ability to maintain services with so many companies competing for trade which has not increased, and in many sectors actually reduced.

The next problem will be if one of the major carriers was to lose the confidence of its backers but it is hard to see that a major collapse will actually resolve the problem. As with the recent SeaFrance situation there will always be those who know that one mans problems are another’s potential fortune and if ships are snapped up to trade, and not to scrap, the rates war we are watching develop so tortuously may only worsen.

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