Drewry: Boxship Rate Erosion Worse than Expected

Image Courtesy: Hapag-Lloyd

The container shipping freight rates crashed harder than it was expected, according to Container Forecaster from shipping consultancy Drewry, and the losses are now expected to reach between USD 6-10 billion this year as carrier profit margins will be influenced by big swings on both prices and costs.

Based on the results released so far for the first quarter 2016, Drewry said that, although that freight rates plunged further than expected, the losses were softened by bigger unit cost savings.

“Our rationale was that rapidly decreasing freight rates would overtake lower unit costs, with savings to the latter tempered by additional expense from more ship lay-ups (and reactivation), empty container repositioning and M&A integration,” Drewry said.

The available first-quarter results are patchy in as much that some carriers – Maersk Line and Matson – made an operating profit while others sank further into the red. But there are some universal trends, from double-digit revenue declines to worse operating margins.

Drewry calculates that the carrier industry made an operating profit about USD 5 billion in 2015 as they were able to keep unit costs below unit revenue for most of the year. The gap between the two inputs narrowed as the year progressed; hence why the operating margin diminished with each passing quarter until unit costs exceeded unit revenue in the fourth quarter.

“How carriers align those two lines will dictate whether they can avoid heavy losses or even turn another profit again this year. The prognosis is not great. The fact that carriers have not had any success in raising spot market freight rates – baring some temporary GRI-induced hikes – and anecdotal reports of significantly reduced contract rates suggest that worse is still to come on the revenue side, while bunker prices have been steadily creeping upwards since mid-January,” Drewry said.

Drewry added that the chances of carriers making a profit this year “is fairly remote as they will not be able to prevent rates from falling harder than costs.”

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