“In the short term, the Asia-Europe route is showing signs of improvement. Further out, slow-steaming and the scrapping of old vessels should help solve the long-term oversupply problem over a number of years,” the report stated.
Lines with more exposure to the Asia-Europe trade are now better positioned through greater frequency of sailings because of the emergence of ever-bigger alliances. That reduces competition and helps carriers manage capacity through the seasons. The report’s authors said a pickup in demand in line with expectations and no risk of cascading (as this route already attracts the largest vessels) are reducing volatility of freight rates.
“A sharp decline in the average scrapping age, further reduction in sailing speeds to lower fuel costs and the use of longer routes could absorb capacity by as much as 25 percent by 2017,” they said.
Managing costs at container lines is also yielding benefits. “European lines have reduced operating costs by using more fuel-efficient vessels, slow-steaming and smarter use of their networks. We believe CSCL is best placed to follow suit over the next two years,” the report found.
The HSBC analysts said China Shipping Container Lines, which derives 32 percent of its revenue from the Asia-Europe route, is the most exposed to the spot market rate. As a result it should benefit from higher freight rates and volumes during the peak season. In addition, CSCL’s cooperation with Cosco and the CKYHE alliance and the delivery of its 19,000-TEU vessels position the company for a faster decline in slot costs, the bank report said.
The analysts took a snapshot of carriers in Asia:
- At Evergreen, almost 30 percent of its existing capacity is over 15 years old, so a risk of large write-offs looms in the event of accelerated scrapping. However, its current order book and recent joining with the CKYH Alliance on the Asia-Europe route should help lower costs.
- Hanjin is weakly positioned because of higher exposure to the trans-Pacific route. With mounting debt, “we forecast Hanjin will continue to generate losses in 2014 and 2015, despite profits at the operating level, and the focus will shift to its restructuring efforts,” the report said.
- APL parent Neptune Orient Lines (NOL) “remains weakly positioned with respect to vessel size and route exposure, and write-offs from accelerated scrapping will be a major risk,” according to the report.
- OOIL, parent of container line OOCL, is stable, although its competitive positioning is likely to weaken unless it starts ordering or chartering larger vessels.
- Yang Ming’s new vessel buildout through long-term charters will lower slot costs and improve profitability in 2016. Exposure to the trans-Pacific route and an inefficient fleet will remain a drag on earnings in 2014 and the first half of 2015.
The report’s authors also looked at container manufacturing. They said that although demand for new boxes continues to be driven by the gradual upturn in container shipping demand and new vessel orders, the growing clout of alliances remains a drag because of a greater possibility of shipping lines sharing containers.
With the P3 Network now out of the picture since it was rejected by China, the G6 and CKYHE alliances will control 57 percent of weekly capacity on the Asia-Europe route. That will allow participating shipping lines to introduce more direct calls and reduce costs associated with transshipment, increase slow-steaming and manage capacity effectively in the slow season without interrupting service levels.
The HSBC analysts also did not expect to see any larger vessels joining the Asia-Europe route beyond those already in the pipeline. Most ports are unable to handle loaded 18,000-TEU vessels and the Suez Canal’s inability to handle ships bigger than 19,000 TEUs will put a ceiling on ship orders.
The Suez has a depth of 66 feet, enough to accommodate Maersk’s 18,400-TEU Triple E ships, which draw 49 feet of water. Figures for the 19,000 TEU vessels are not readily available, but they will not be much greater in size than the Maersk vessels.
The good news for the container shipping industry is that it appears to be on the road to profitability, though most of the industry remains loss-making. “While we forecast most of the lines to report losses in the first half of 2014, we expect the sector as a whole to report profits in the second half and in 2015,” the report’s authors said.
