Shipping industry heads for profit

The shipping industry

will go into profit this

year. Small, yes, and not

necessarily evenly spread

round all the lines, but profit

nonetheless.

Last year’s -US$3.7-billion

loss looks very much like it’s

going to turn into +US$1.5

to +US$3bn profit for 2017.

That was the gist of

what Simon Healey, senior

manager of container

research at London-based

shipping analysts Drewry,

said during the company’s

recent webinar on the

container shipping market

outlook.

Looking at data on

the industry’s market

performance in the first

quarter of this year, he noted

that East-to-West freight

rates were up 40% on what

they had been in Q1 2016.

Also, in March, freight rates

strengthened on the intraregional

routes such as intra-

Asia, intra-Med and intra-

Europe, along with strong

spot rates on Asia-Middle

East, Asia-South America

and Asia-West Africa trades.

And Drewry data also

showed a significant volume

recovery in Latin America

and Africa.

“We see a slightly better

outlook for demand in 2017

in these regions,” said the

company report, “but that

is not to say we expect any

return to 5% to 10% growth

scenarios. Any future view

on improvement is based on

how bad the recent past has

been.”

They also highlighted

that, in 2016, the Asia to

East Coast South America

(ECSA) trade volumes had

declined by 15% year on year

and from Asia to West Africa

by 11% y-o-y.

This, according to Drewry,

was all closely linked to the

recession in Brazil, the weak

oil markets in key African

economies such as Nigeria

and Angola, and poor

performance and outlook

for SA – the continent’s

economic powerhouse.

“The outlook for 2017,”

said Drewry, “is a return to

some gross domestic product

(GDP) growth in Brazil and

a slightly better view in the

oil markets. The view is

that the worst of the really

awful cargo declines is over

and that while we may not

see strong growth in 2017,

we will not see continuous,

double-digit declines in

cargo f lows.”

“And,” Healey added,

“we are quite confident the

market is on the turn and

carriers are once again price

givers rather than price

takers.”

But, while carriers may

be winning at the moment,

Healey pointed out that a

four-year sample of Drewry

data showed that “it is clear

from the linear trend line

that they’re fighting against

a long-term downturn in

rates that previous upturns

had failed to arrest”.

“To avert this long-term

downturn,” he added, “it’s

going to require a very

prolonged period of spot

rates above the average.”

Eventually, as all things

do, the current bull-run will

come to an end, according

to Healey. “And, once again,

things will regress back to

the mean. The big question

of course is when?”

You’d have to look at the

factors behind the recent

realignment, he reckoned.

“We think a lot of the reason

for the upturn of late has

been the intense efforts in

terms of how they’ve looked

to carriers and looked

to suppress the supply

expansion structurally

through greater scrapping.

Also, more temporary fixes

in the form of idling and

void sailings.”

Then there are other

factors that are difficult

to quantify in terms of

the impact. That would

be things like the Hanjin

bankruptcy, the mergers

and alliances (m&a) activity

that has been seen. “And, of

course,” Healey added, “the

slightly improving demand

growth story that we’re

seeing.”

Ultimately, what needs to

happen for that long-term

trend to start levelling off?

To answer that, Healey

came up with one of those

economist’s clichés. “There

need to be underlying supply

and demand fundamentals,”

he said.

Looking at 2017, he said

that the Drewry thinking

was that actual E-W rates

would bend a bit closer

to that trend line for the

remainder of this year. “But,

crucially, they will stay above

it. That’s going to keep that

running average creeping

upwards.

“In the final analysis it

is going to go quite a way

towards helping carriers

remove a lot of red ink from

their income statements.”

So, for the time being,

carriers are enjoying a

spot-market renaissance

but Drewry is convinced

the long-term trend

will continue to point

downwards unless there

is an unusually sustained

period of dominance.

“Nonetheless,” the

consultants said, “even

a soft regression back to

the baseline shouldn’t

prevent carriers from being

profitable in the East-West

trades this year.”