zoomIllustration; Image Courtesy: Hapag-Lloyd

Despite a modest increase in freight rates seen in 2017, a sustainable recovery in the container shipping market would be possible only by reaching a viable supply-demand balance through capacity cuts, Fitch Ratings said.

Container transport volumes outstripped capacity growth in 2016 for the first time since 2010-2011, helped by a higher rate of vessel scrapping and delayed deliveries. The reversal is expected to be only temporary, as net capacity growth “will accelerate in 2017 and 2018, exceeding demand growth and contributing to increased overcapacity.”

If maintained throughout the year, a moderate recovery in freight rates “should support an improvement in container shipping companies’ credit metrics in 2017, but the performance will vary significantly.”

Fitch Ratings informed that smaller, less diversified companies may struggle to achieve positive EBIT, while companies with scale, geographic diversity and a record of successful cost-cutting are likely to perform comparatively well.

The ratings agency said that market equilibrium is needed for a sustainable improvement in financials, adding that M&A deals, rather than alliances, are the most likely route to restoring the supply-demand balance in container shipping.

This trend is underway, with the top-five container shipping companies consolidating their market position through mergers and acquisitions. Their market share is likely to be around 57% in 2018, up from 45% in 2016.

“But many of the remaining smaller companies have weak credit metrics. Their ability to remain afloat will largely depend on freight rates, which are volatile, and the banks’ willingness to provide funding,” Fitch Ratings concluded.