Gloomy revenue outlook for box carriers

TWO new reports highlight just how difficult it is going to be to make good money out of shipping. In addition, the first of them allows old timers to say: "Told you so!"

Unfortunately, there is little satisfaction to be had from knowing you were right to question the wisdom of the European Union regulators who effectively abolished the liner conference system across most of the world. Incidentally of course, they also unilaterally tore up the Unctad Code of Conduct for Liner Shipping. They were told then that scrapping conferences would not lead to more competition, as they believed, but less. They weren't listening then and they are still not listening now.

Surprise, surprise the blindingly obvious result of getting rid of rate-setting agreements is that the number of carriers has declined massively and now looks set to drop off a cliff.

In its report Drewry Maritime Research says: "Container industry revenues are contracting faster than carriers can cut costs. First-half results so far suggest sales are down by around 18 per cent, increasing the pressure to reduce costs."

As a result, Drewry says: "The container shipping industry is currently enduring a severe revenue contraction that is placing carriers under enormous pressure to squeeze more savings wherever they can and is driving the latest round of merger and acquisition activity."

According to Drewry, the first-half 2016 financial results that have been published so far from a handful of major carriers paint a very depressing picture for the industry. First-half revenue from a sample of companies was down by 18 per cent on average. Drewry says if that holds true for the industry as a whole across the full year, it would mean that carrier income will shrink by about US$29 billion against 2015. That means industry revenue would fall below the level seen during the industry's nadir of 2009.

Drewry comments: "In the current declining revenue era for box carriers the pressure to find cost savings is mounting. Prolonged losses will increase the likelihood of more container M&A or more industry consolidation among carriers."

Meanwhile, independent research and consultancy firm Maritime Strategies International (MSI) has forecast a structural change to future shipping cycles, driven by increased volatility in newbuilding activity.

MSI's Adam Kent argues that as a consequence of the current glut of excess shipyard capacity, many yards will be well positioned to take orders and deliver within two years, should freight markets show improvement.

Mr Kent suggests: "This may mean that we are set to see something of a structural change in the shipping cycles going forward, with shorter, sharper cycles with any bull run culled by the relative rapid delivery of legions of ships via the new dynamic shipyard capacity landscape."

He says that the speed at which shipyard capacity is able to react to increased contracting volumes was witnessed during the eco ship "boom" of 2013. After the rapid reduction in shipyard capacity when the Chinese-led contracting explosion ended in 2008, Mr Kent asserts, shipyard capacity was shown to be very elastic and responsive and increased again to meet the requirements of owners wanting to place new orders.

The bad news for shipowners, MSI warns, is that elasticity will act to dampen the outlook for earnings, which in many trades are expected to show improvement over the next five years as the demand-side improves, compared to the last five years.

There should be good news as, according to MSI, looking at Compound Annual Growth Rates based on MSI's assessment of demand in a number of major shipping sectors, crude tankers, containers, chemical tankers all have better prospects over the next five years.

But shipyards, Mr Kent says, will still be hungry for orders because, based on scheduled orderbooks and maximum historical output, the three main shipbuilding nations are only fully utilised for 2016. In 2017 utilisation drops to around 70 per cent in Korea and Japan and is close to 50 per cent in China.

So, in other words, extra shipyard capacity will come out of the woodwork if demand for new vessels picks up. That must mean timing will be all important. The "window" for enjoying a profitable market will be much smaller than previously. Throughout history astute shipowners have profited from buying and selling ships at just the right time. Judging when to act and when to do nothing is going to get much more difficult if MSI is right.