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Challenges brewing in liner carrier industry
An economic downturn, coupled with trade volatility and fuel cost challenges will bog down carriers’ earnings in the coming quarters.
   In the wake of liner carriers posting mixed financial results for the third quarter of 2018, it appears any benefits to carriers’ earnings in the coming quarters likely will be overshadowed by an array of challenges.
   Spot rates are still holding strong year-over-year, especially on routes from Asia to North America, and it seems carriers may be getting better at managing capacity, although newbuilds of over 20,000 TEUs that will continue to be introduced on the Asia-Europe trade over the next few years will pose a threat to the global supply-demand balance.
   Additionally, trade uncertainty and dimmer global economic growth projections, coupled with bunker price volatility and added costs carriers will face to comply with the International Maritime Organization’s (IMO) 2020 sulfur cap, will likely put a wrench in their earnings.
   For the third quarter of 2018, A.P. Møller – Maersk, CMA CGM Group, COSCO Shipping Holdings, Evergreen Marine Corp. and Hapag-Lloyd all posted a net profit, while Hyundai Merchant Marine (HMM), Yang Ming Marine Transport Corp. and ZIM were all in the red, as illustrated in the chart below, which was constructed using data from the carriers’ financial statements. Currency conversions to U.S. dollars were as of Dec. 10.

   Maersk, COSCO and Hapag-Lloyd performed better compared to Q3 2017, with Maersk turning a profit and COSCO and Hapag-Lloyd increasing profits, while CMA CGM, Evergreen, HMM, Yang Ming and ZIM recorded weaker results from Q3 2017.
   For the first nine months of 2018, Maersk, CMA CGM, COSCO and Hapag-Lloyd posted a net profit, while Evergreen, HMM, Yang Ming and ZIM recorded losses, as illustrated in the chart below.

   Although Japan’s three primary liner companies — Kawasaki Kisen Kaisha (“K” Line), Mitsui O.S.K. Lines (MOL) and Nippon Yusen Kabushiki Kaisha (NYK Line) — did not post results for the quarter ending Sept. 30, they did post results for the six months ending Sept. 30. “K” Line and NYK fell into the red, while MOL posted a smaller net income compared to the corresponding prior year period.

Spot Rate Trends. Spot container rates have been collectively declining in recent months, illustrating the traditional, seasonal downfall after peak season, likely coupled with the surge in moving goods from China to the U.S. ahead of tariffs starting to dwindle down, but are still substantially higher from a year prior, according to data from Drewry’s World Container Index (WCI) and the Freightos Baltic Index (FBX).
   The WCI measures spot container rates on routes between Asia, Europe and the United States, and the FBX measures spot container rates on routes between Asia, Europe, North America and South America. As of the first week of December, the WCI stood at $1,643 per FEU, down from $1,773 per FEU during the first week of September, but still substantially higher from $1,157 per FEU during the first week of last December, as illustrated in the chart below, which was built using data from the WCI.

   The FBX mirrors this trend, standing at $1,589 per FEU as of the first week of December, down from $1,647 as of the first week of September, but still higher from $1,016 per FEU as of the first week of December 2017, as illustrated in the chart below, which was built using data from the FBX.

    Looking at routes from Asia to the East and West Coasts of North America, the WCI and FBX illustrate spot container rates during the first week of this December were drastically higher from a year prior, but took a sharp downturn from a week earlier, as illustrated in the charts below.

   In regard to the top players on the Asia to North America trade in general, based on weekly allocated capacity, data from BlueWater Reporting’s Carrier Trade Route Deployment Report shows the Ocean Network Express (the combined container operations of “K” Line, NYK and MOL) comes in first at 68,292 TEUs per week, followed by Maersk at 64,231 TEUs per week, Evergreen Line at 48,124 TEUs per week, COSCO at 46,891 TEUs per week and CMA CGM at 40,644 TEUs per week.

Capacity Management. On a bright note for carriers, container volumes growth in 2019 is expected to be stronger than capacity growth during the year, which potentially could help keep spot rates strong.
   Clarksons Research said in its October issue of Container Intelligence Monthly that container trade growth is expected to stand at 4.4 percent for 2019, while containership capacity growth is expected to total 3.3 percent.
   Yang Ming said in November, “Going forward into next year, Alphaliner’s latest projection predicts an increase of 4.3 percent in global throughput, which will exceed forecasted capacity growth of 3.9 percent.”

An Economic Downturn. Although world trade currently remains strong, it appears that strength is expected to soon weaken.
   LogIndex, the data company of global third-party logistics provider Kuehne + Nagel, said that at the end of November, its gKNi World Trade Indicator (WTI), which measures the momentum of cross-border merchandise trade, stood at a reading of 143.7 points, up 0.3 percent month-over-month and up 6.4 percent year-over-year.
   Measured in nominal USD terms and seasonally adjusted, the WTI summarizes LogIndex’s export and import estimates of prominent trade partners, accounting for more than 60 percent of international trade and more than 75 percent of global GDP.
   Commenting on the late November WTI reading, LogIndex said, “The World Trade Indicator not only reached a new record high, but this was also the fifth sequential increase since June. The main driver is strong domestic demand in the United States, but also in China.”
   However, data from the World Trade Organization (WTO), the International Monetary Fund (IMF) and the Organisation for Economic Co-Operation and Development (OCD) illustrate an economic downturn is likely on the horizon.
   In late September, the WTO said it expects growth in merchandise trade volumes will total 3.9 percent for 2018 and 3.7 percent for 2019, below the organization’s estimates in mid-April, when it said it expects growth in merchandise trade volumes would total 4.4 percent for 2018 and 4.0 percent for 2019.
   The WTO said in September that its economists expect that “escalating trade tensions and tighter credit market conditions in important markets will slow trade growth for the rest of this year and in 2019.”
   Furthermore, the latest reading of the WTO’s World Trade Outlook Indicator (WTOI), which was released Nov. 26, illustrated the index stood at 98.6, below the prior reading of 100.3 that was released Aug. 9 and the lowest level since October 2016.
   The WTO said the latest reading signals that “trade growth in the coming months is expected to be below trend.”
   Readings of 100 indicate growth in line with medium-term trends, while readings over 100 suggest above-trend growth and readings below 100 indicate a decline.
   Meanwhile, the IMF said in its World Economic Outlook released in October that it expects the global economy will grow 3.7 percent in 2018 and 3.7 percent in 2019, down from its April projection of 3.9 percent in 2018 and 3.9 percent in 2019.
   “The downward revision reflects surprises that suppressed activity in early 2018 in some major advanced economies, the negative effects of the trade measures implemented or approved between April and mid-September, as well as a weaker outlook for some key emerging market and developing economies arising from country-specific factors, tighter financial conditions, geopolitical tensions and higher oil import bills,” the IMF said.
   “Global growth is expected to remain steady at 3.7 percent in 2020, as the decline in advanced economy growth with the unwinding if the U.S. fiscal stimulus and the fading of the favorable spillovers from U.S. demand to trading partners is offset by a pickup in emerging market and developing economy growth,” the IMF added. “Thereafter, global growth is projected to slow to 3.6 percent by 2022-23.”
   Meanwhile, the OECD said in November it expects global GDP will expand by 3.7 percent in 2018, 3.5 percent in 2019 and 3.5 percent in 2020, compared to its September projection of 3.7 percent growth for 2018 and 3.7 percent growth for 2019 and its May projection of 3.8 percent growth for 2018 and 3.9 percent growth for 2019.
   “Global economic growth remains strong but has passed its recent peak and faces escalating risks, including rising trade tensions and tightening financial conditions,” the OECD said in November, adding that annual shipping traffic growth at container ports, which represents around 80 percent of international merchandise trade, has fallen to below 3 percent from close to 6 percent in 2017.
   Maersk said when releasing its third-quarter results in November that “the moderation of container demand growth compared to 2017 mirrors the gradual slowdown in global macroeconomics and global export orders.
   “Global container trade continued to lose momentum in Q3 2018, with growth down to around 2.7 percent compared to Q3 2017,” the Danish shipping conglomerate said, adding that global container trade was projected to increase by 3 percent to 4 percent in 2018 and “in the lower part of” 2 percent to 4 percent in 2019.
   “Aside from the cyclical slowing of the global economy, the main risks to global container demand relate to the introduction of additional tariffs and other trade restrictions and a sharp slowdown in global growth because of tightening U.S. monetary policy and investors taking an increasingly risk off attitude toward some economies,” Maersk added. “The impact on global trade remains uncertain, but we estimate that the combined effect of all trade restrictions introduced during 2018 could reduce global container trade” by 0.5 percent to 2 percent during 2019-20.
   In particular, the future of U.S.-China trade also will continue to have a substantial impact on liner shipping, considering data from the U.S. Trade Representative shows that China was the United States’ third-largest goods export market in 2017 and the United States’ largest supplier of goods imports in 2017.
   The White House issued a press release on Dec. 1 saying that President Donald Trump “at this time” agreed to leave the third tranche of Section 301 tariffs, which are on goods that collectively have an annual import value of $200 billion, at the 10 percent rate rather than raise them to 25 percent on Jan. 1. 
   “China will agree to purchase a not yet agreed upon but very substantial amount of agricultural, energy, industrial and other product from the United States to reduce the trade imbalance between the two countries. China has agreed to start purchasing agricultural product from our farmers immediately,” the White House said. “President Trump and President Xi have agreed to immediately begin negotiations on structural changes with respect to forced technology transfer, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft, services and agriculture.
   “Both parties agree that they will endeavor to have this transaction completed [by March 1]. If at the end of this period of time, the parties are unable to reach an agreement, the 10 percent tariffs will be raised to 25 percent,” the White House added.
   The OECD said in November, “If the U.S. hikes tariffs on all Chinese goods to 25 percent, with retaliatory action being taken by China, world economic activity could be much weaker. By 2021, world GDP would be hit by 0.5 percent, by an estimated 0.8 percent in the U.S. and by 1 percent in China.”

Fuel Headwinds. The global average bunker price of IFO 380, which has a maximum sulfur content of 3.5 percent and is widely used by liner carriers today, stood at $450.50 per metric ton as of last Friday, up from $393.50 per metric ton as of Dec. 7, 2017. In recent weeks though, prices have fallen, as illustrated in the chart below, which was constructed using data from Ship & Bunker.

   However, on Friday, the Organization of the Petroleum Exporting Countries (OPEC) and some non-OPEC producers, including Russia, said they would collectively cut crude oil supply by 1.2 million barrels per day for the first six months of 2019, which could drive bunker prices back up in the coming months.
   Regardless, complying with the IMO’s 2020 sulfur cap, which kicks into gear on Jan. 1, will be costly for carriers. The sulfur cap will require them to use liquefied natural gas as a fuel, install scrubbers or use fuel with a sulfur content of 0.5 percent or less.
   CMA CGM said the cost for low-sulfur fuel oil is “expected to be significantly higher than IFO 380.”
   In recent months, several prominent liner carriers, including Maersk Line, MSC, CMA CGM and Hapag-Lloyd, have issued new bunker charge mechanisms from the start of 2019 to deal with higher fuel costs, but uncertainty remains in how successful carriers will be in recovering these higher costs from their customers.
   Scrubbers also are an expensive option, with the cost to retrofit a 12,000-TEU to 14,000-TEU containership with scrubber technology falling between $6 million and $7 million, Clarksons Research said in September 2017. To retrofit a 1,000-TEU to 1,999-TEU container vessel with scrubber technology would cost between $1 million and $2 million.
   Installing scrubber technology on a newbuild containership between 12,000 TEUs and 14,999 TEUs would cost $5 million to $6 million, the firm added, while installing scrubber technology on a newbuilding container vessel between 1,000 TEUs and 1,999 TEUs would cost between $900,000 and $1.2 million.
   In regard to the extra costs this will place on the industry and who will pay for it, Drewry said in October, “Everybody knows the fuel bill will rise, but with such a variety of solutions still being considered — LSFO, scrubbers and LNG — it is impossible to measure the quantum at this stage. The adoption rates for each solution will have a large influence on the future prices of heavy-sulfur fuel oil (HSFO) or LSFO by determining demand and availability of each fuel source.
   “Based on independent futures prices, low-sulfur marine fuel prices per metric ton will be 55 percent higher than current high-sulfur fuels, and Drewry considers that the probably worst-case scenario is that fuel costs (paid by carriers) and fuel surcharges (paid by shippers) in global container shipping will increase by 55-60 percent in January 2020.