Container shipping sector challenges and opportunities are laid out in AlixPartners report

Date: Monday, April 16, 2018
Source: Logistics Management

Looking at the many facets that comprise the container shipping sector, it is fair to say that it is replete with many familiar themes, like overcapacity and rate pressures, as well as potential opportunities for future growth and stabilization. Those are a few of many takeaways in a report issued this week by global business advisor firm AlixPartners.

The report, entitled “2018 global container shipping outlook: Though challenges remain, opportunities exist for carriers,” takes an in-depth approach to various factors prevalent within the sector.

The financial health of the sector was a key theme in the report, with AlixPartners stating that the Altman Z-score, a formula for predicting the likelihood of a bankruptcy (a rating of less than 1.81 suggests financial distress), for the container shipping sector is at 1.44. That reading is less than optimal but represents an improvement over 2016’s 1.10, which is a historical low. And the score has not eclipsed 2.99, which represents the “safe zone” since 2009.

The report touched upon various factors at play that help to put the market outlook into perspective, including:

  • slow and steady growth in demand after a brief lull, with fleet capacity on the rise again;
  • 2018 fleet capacity growth estimates are between 4%-5%, up from 2017’s 3.3%;
  • total new container-ship capacity at around 1.3-million TEU is due for delivery in 2018, with 30% of that capacity for megaships of 18,000-25,000 TEU;
  • rates will remain “squeezed” with supply continuing to outpace demand for services, with total demand needing a minimum of 4%-5% growth to provide a true opportunity for margin growth; and
  •  2017 industry EBITDA saw a nearly 50% annual improvement, with revenue up 6%, and EBIT up 6%

Esben Christensen, global co-head of AlixPartners’ maritime practice, told LM that the most fundamental issue within the container shipping sector is capacity discipline.

“Carriers have talked for years about how consolidation was needed, and that has now happened to a large extent in the last couple of years,” he said. “That is good, because it leads to fewer decision makers that make decisions on capacity that can ruin if for everybody else. But the bad news is that the fewer decision makers that are out there are still more bullish on carrier growth objectives than what the market is. The problem with that is that each [carrier] feels they can outgrow the market and order capacity that outsizes market growth, but as they all do that then you end up in the situation we all find ourselves in, with capacity entering the market bigger than growth in the market. If this is not done right, then the picture does not dramatically improve.”

Conversely, Christensen said carriers have done a decent job of realizing some synergies from their positions, citing lowering SGA as an example, even though it has not come down in comparison to market revenues, which leave good opportunities for carriers to get more aggressive on trimming their cost structures and allow them to grow in what is a challenging rate environment.

The report made it clear that carrier fleet expansion efforts need to be paused, or at least slowed down, saying that they need to “curb their voracious appetites for new ships.” And it added that starting in September 2017, following a period of slowing new orders and deferred deliveries for much of 2017, the buying spree of new ships resumed, which it said essentially continued the current margin-crushing balance of supply and demand.”

When asked why carriers seem fixated on capacity expansion efforts, Christensen said that there are two parts to the story, with the mega carriers that are getting bigger and consolidating followed by the rest of the market.

“Companies that are on that bubble have to decide who they want to be, and if they want to be an East-West mainline carrier they have to invest in ships or they cannot keep up and get the scale of the benefits the bigger guys have,” he said. “They try to grow with the leaders or find their own niche. The trouble with finding a niche is that there are not a lot of players in the market and to be a player you need to grow your fleet. That is something we are seeing on a broader scale.”

Looking at the rate outlook for the sector, the report said the situation is not ideal, explaining that rates will continue to be squeezed as supply continues to outpace demand containerized services, adding that total demand, at the very least, will have to meet the expectations of a 4%-5% increase to provide any real opportunity for margin growth.

Christensen said it is a “stretch” to expect to see these kinds of growth rates, coupled with the ongoing push for capacity growth making it hard to see rates seeing that kind of increase.

“That is what we are seeing no during the Transpacific contract season [in March, April, and May],” he said. “We are seeing shippers being very aggressive on maintaining rates at last year’s level, which was low. Carriers are having a hard time getting rates up, because they also know they need to build ships. This year’s contract season is not off to a good start.”

Pricing discipline by carriers, said the report, is one of the areas that provides opportunities for them to significantly improve their performance through effective management, noting that ongoing fleet consolidation has created a situation with the top five carriers controlling around two-thirds of global capacity. And it added that that realignment of ownership creates a unique opportunity for the industry to demonstrate a level of price discipline that has been lacking for years.  

Another area that can improve their outlook, the report said, is operating expense management, with carriers improving their capacity management skills but have not produced the anticipated cost savings from fleet consolidation, leaving opportunities for fleet operators to make dramatic cuts in redundant expenses and modernize operations.

On the price discipline side, Christensen said carriers need to control capacity coming in and resist the urge to sub-optimize their individual demands, or freight needs, for the good of the overall trade.

“As long as carriers price into business aggressively, the margins are very transparent,” he said. “It is not like the good old days when nobody knew what each other’s rates were….everybody knows that now. It requires a lot of discipline, and it is just not there. I am hopeful, for the carriers’ sake, that with consolidation that this is something that will be easier to do, because there will be fewer people making decisions than there were in the past, but it has not happened yet, at least not consistently.”

Regarding costs, he said there are solid opportunities to make inroads, especially on the network side.

“Carriers have done a good job controlling their port-to-port expenses, hosting bigger and more efficient vessels, but they have not done a great job controlling their inland costs,” he said. “Those are more complex…but there are a lot of expenses there, especially in the U.S. alone with inland haulage and intermodal positioning. There is a lot to be done, and I think that should be a real area of focus for these carriers when faced with a challenging market and rate environment.”

Focusing on rates is somewhat easier, because it is so “obvious,” explained Christensen, while managing inland costs can be more complex and messy, and carriers have gotten out of the chassis business and divested some of their port assets. Things are happening, but there is much more to do. There is also digitization and blockchain technology that can help, too.”  

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