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Saturday, July 11, 2020

Maritime Logistics Professional

Lay up or lose are the choices facing carriers

Posted to Far East Maritime (by on June 21, 2013

No one is betting on a peak season posse riding in to rescue container lines this year, and unfortunately that’s what the industry needs.

“Peak season is a make or break for 2013 profitability,” are the chilling words of Rahul Kapoor, senior analyst at Drewry Maritime Equity Research.

Chilling in that there is no indication that a peak season will happen this year, which would suggest many carriers will be heading for “break” time and bellying up to the bar in the Red Ink Saloon (although most container lines are regulars here, anyway).

Demand from the developed markets is dismal and freight rates have collapsed on Asia-Europe and the transpacific. The capacity overhang on the benchmark Asia-Europe trade is estimated to be at least 10 percent over current demand.

The longer this toxic combination of weak demand and excess capacity lasts, the more it hurts the profitability of the carriers and the chances of ending the year in the black are looking increasingly remote.

Factory production in the first quarter was pulled down by an inconveniently placed Chinese New Year, but there has been little sign of inventory replenishing since then. HSBC just released their Flash China Manufacturing Purchasing Managers Index that shows June falling to a nine month low. New export orders decreased over May with a reduction in production and demand.

If there is to be a peak season, the orders will have to be placed soon, but no one is predicting a significant increase in cargo volumes out of China.

Rather than hanging on to capacity and wishing for a peak period, carriers need to radically reassess their capacity idling programmes. In the absence of a significant increase in revenue, operations and efficiency needs to be improved. The tie-up between Maersk, MSC and CMA CGM that begins in the second quarter next year is a way to utilize economies of scale to lower unit costs, vital when freight rates are so low. It will also offer more frequencies and service calls while maintaining the slow steaming employed on the long haul trades.

But a cornerstone to any strategy to improve profitability will be in the reduction of capacity, and that means laying up more ships. There is no way around that.

We all wish rates would improve (then we may be able to shake some advertising dollars out of the lines), but they are not going to do so with so much available space sloshing around. Load factors need to be improved and taking ships out is the only way to do that.

“… address effective capacity immediately, or else any hope of full-year profitability can be written off …,” is how Drewry put it.

Lay up or lose, is another way.

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