SINGAPORE -- While the lower fuel prices have helped to improve the earnings of the Asian container shipping operators late last year and early this year, the outlook of Asian container shipping sector is now darkened due to the overcapacity problem and weak European economic recovery.
At the beginning of this year, the future of Asian container shipping operators were seen bright largely thanks to lower oil price. As bunker fuel cost represented a large portion of shipping operating cost, lower oil prices improved their operating margin significantly. There were also expectations of strong growth in U. S. bound trade and anecdotal evidence of annual contracts on the trans-Pacific route suggested annual contract freight rates are likely to go up year-on-year.
However, the sense of optimism did not last long. Soon, there was a sharp reversal of fortune for the sector, with freight rates down sharply in all routes, the demand outlook worsened, and shipping liners leaving more and more ships idle.
The Shanghai Containerized Freight Index (SCFI), a weighted average of all-in spot rates across 15 major trades from Shanghai to destinations around the globe, touched an all-time low by the middle of this month since inception in 2009, suggesting the dire outlook of the sector.
The HSBC Global Research attributed this decline primarily to weak imports into Europe due to weak Euros, and weak North-South trade with West Africa and Latin America. Indeed, in the first quarter, Asia to Europe shipping volume began to decline 1 percent on-year, and was likely to get worse for the rest of the year.
According to JP Morgan Research, the freight rates of all container shipping routes decline this year to date, with the worst falling on China to Europe rates, which plunged 80 percent on-year. Those with the largest capacity exposure to the Asia to Europe trade, namely China Shipping Container Lines (around 39 percent), K-Line (36 percent) and Hanjin (34 percent), are expected to bear the brunt of the rate decline.
To make matter worse, the container shipping lines are now not only competing for marginal cargoes at low rates amidst weak demand, they also have to grapple with the delivery of a record number of new vessels in next three years.
According to shipping analyst Alphaliner, the capacity of container ships ordered so far this year rose 60 percent on-year at about a million twenty-foot equivalent units (TEUs, a cargo capacity unit of container ships and container terminals) driven by a new contracts for mega vessels placed this year to be delivered in 2017 to 18.
Some observers suggested industry consolidation to provide relief to the overcapacity pressure, with some even speculating the Chinese shippers may merge in the near term in response to the Chinese government's recent policies encouraging state-owned enterprises to undergo restructuring or consolidation to improve efficiencies.
But Citi Research believed industry consolidation is less likely as shippers compete in the global market and domestic consolidation will provide limited relief. Citi said hypothetically, if China Shipping Container Lines and Cosco Container Lines were to merge, this would create the fourth- largest container company globally, but the synergy from such consolidation may not be as large as many have anticipated. The market oversupply challenge will still put pressure on the China shippers, and any capacity reduction in this trade route due to such consolidation would still have minimal impact to the overall supply conditions.
As such, while the freight rates of Asian container shipping sector may recover in the third quarter with the summer peak season start, Citi expects the freight rate to remain weak in the whole second half of this year, giving the pressure from overcapacity.
