TIM eMagazine Vol.2 Issue 4
Fitch: Container
Shipping Freight
Rates Rise,
Capacity Still Key
While cost-cutting can provide financial support,
market equilibrium is needed for a sustainable
improvement in financials. We see M&A deals,
rather than alliances, as the most likely route to
restoring the supply/demand balance in container
shipping. This is because alliances have limited
ability to manage networks and capacity as well
as optimise cost structure, while M&A can lead to
more prudent capacity management.
C
ontainer shipping companies have
benefited from a modest increase in
freight rates since the start of the year, but
a sustainable recovery in the container
market will only be achieved by reaching
a viable supply/demand balance through
capacity cuts, Fitch Ratings says.
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. We expect this to be only a temporary
reversal, as net capacity growth will accelerate in 2017
and 2018, exceeding demand growth and contributing
to increased overcapacity. The relatively strong 1Q17
performance suggests there is some upside to our demand
forecasts, but we believe this would lead to lower scrappings
and the return of idled fleet into employment, rather than a
better supply/demand balance.
A moderate recovery in freight rates if maintained
throughout the year should support an improvement in
container shipping companies’ credit metrics in 2017, but the
performance will vary significantly. Smaller, less diversified
companies such as Yang Ming may struggle to achieve
positive EBIT, while companies with scale, geographic diversity
and a record of successful cost-cutting, such as CMA CGM and
COSCO, are likely to perform comparatively well. Higher fuel
prices could offset some gains from the rate increase. There is
also likely to be a limited impact on the sector from the Qatar
diplomatic dispute, to which the combined Hapag-Lloyd/
United Arab Shipping Company has the highest exposure.
While cost-cutting can provide financial support, market
equilibrium is needed for a sustainable improvement in
financials. We see M&A deals, rather than alliances, as the
most likely route to restoring the supply/demand balance
in container shipping. This is because alliances have limited
ability to manage networks and capacity as well as optimise
cost structure, while M&A can lead to more prudent capacity
management.
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 and 27% in 1996.
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.
For more information on the key issues for the sector, see
“What Inv