Last updated: November 18, 2012 11:23 pm

Shipping sector caught in choppy waters

The last thing the container shipping sector needs when it is plagued by overcapacity and falling freight rates is the arrival of yet another mega-class of vessels that, literally, put most other maritime traffic in the shade.

But that is exactly what happened earlier this month when the Marco Polo, owned by France’s family-controlled CMA CGM, left the Chinese port of Ningbo on its maiden voyage between Asia and Europe, the world’s busiest container trade route.

Shipping charts

Shipping charts

The ship – about the length of four soccer pitches – is the biggest container vessel ever built in terms of capacity, capable of carrying 16,000 twenty-foot equivalent units (TEUs), the industry standard measure for a container.

It is, perhaps, not surprising then that Nils Andersen, chief executive of Maersk Line’s parent, AP Møller-Maersk, laments the state of the market and insists he will look elsewhere for growth. “The industry is definitely not earning enough money to be able to invest going forward. We need to see better rates and higher profits,” he says.

The irony of those comments will not be lost on rivals in an industry known for its irrational behaviour and volatility. Analysts say an obsession with scale to drive down costs and the defence of market share, rather than a focus on the bottom line, drive the desire for ever larger, more fuel efficient vessels.

Even the Marco Polo will not hold the mantle of world’s largest for long, as the first of Maersk’s new class of “Triple-E” ships, behemoths capable of carrying 18,000 TEUs, is due for delivery in the next 12 months.

After China started integrating into the global economy more than a decade ago, volumes of containerised goods rocketed and capacity struggled to keep up with demand. But when the downturn hit in 2008, container rates fell off a cliff, leaving many in the industry struggling for survival as new vessels, ordered during the boom years, continued to arrive.

There is no sign the market will stabilise any time soon.

“Consumer demand remains in the doldrums,” says Mark Williams, research director at Braemar Seascope, who estimates the market could be oversupplied by a third for the next three years.

“At the moment, there is too much capacity in the market because there are too many ships being delivered and demand is weak and getting weaker,” says Neil Dekker, head of container shipping research at Drewry in London.

Like the other two big shipping segments – dry bulk and tankers – the container market has had a tough few years, with spot rates in the Asia-Europe market hitting a rock bottom of $450 per TEU in December 2011, a long way below shipping lines’ operating costs. The industry managed to show unusual discipline in March this year when it pushed through an increase that saw rates treble.

This saw confident predictions from the big lines that profits in the second half would more than compensate for the losses of the first half. But in recent monthsrates have started to slide again.

This has forced the industry back into short-term capacity management – achieved by measures such as steaming at reduced speeds, returning chartered ships or, as a last resort, laying up vessels temporarily.

Marco Vetulli, a shipping analyst at Moody’s, says some lines are taking more drastic measures and “are negotiating postponements to deliveries of new vessels with the shipyards”.

Germany’s Hapag-Lloyd warned last week that the fourth quarter would be hit by the “intensifying effects” of the eurozone crisis that was leading retailers to reduce inventories.

But the sixth-biggest container line by fleet dismissed a recent downgrade by Moody’s over concerns about profitability. “We have a very solid liquidity reserve and financial structure,” Michael Behrendt, Hapag-Lloyd chairman, said.

CMA CGM, the world’s third-largest line by fleet, is likely to give further insight into the state of the market when it reports quarterly earnings on Tuesday. The industry will also be watching to see if the company has reached a debt restructuring deal with its banks after months of talks.

The worry for analysts is that the industry’s discipline in maintaining rates – they are still around twice the level seen at the end of 2011 – will start to slip.

“This market has not been famous for its discipline, and if freight rates continue to decline it will be a real test of some of the weaker players to see if they panic and break ranks, forcing the rates lower,” says Mr Vetulli.

These concerns undermine Mr Andersen’s apparent belief that things could get better. “The overall health of the industry is improving because everyone is behaving more rationally,” he says. The fear that this rational behaviour won’t last would explain why Mr Andersen believes AP Møller-Maersk’s fortunes lie elsewhere.

Additional reporting by Richard Milne

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