The Race for Profitability in Container Shipping
While the $500B global container shipping industry remains the backbone of global trade, it continues to struggle from the effects of the financial crisis nearly a decade ago. In the years leading up to the crash of 2008, freight giants such as Maersk and Cosco were locked in an arms race for capacity, building larger and larger ships to accommodate swelling global trade. When global trade not only slowed but fell a whopping 9% in 2009, carriers were left holding the bill for capacity that no one needed While the container shipping market reported a collective operating loss of $3.5B in 2016, the tribulations the industry has faced over the past decade are giving way to an improved outlook in 2018. Innovation driven by technological breakthroughs such as blockchain offer opportunities for deep cost cutting and increased efficiency, while the effect of recent industry consolidation has improved pricing power for large carriers. Companies that have based their supply strategy on historically low freight rates to make outsourced production viable may have to rethink their footprint in the coming years as carriers find themselves.
Since global trade came to a virtual standstill from the effects of the 2009 financial crisis, the shipping container industry has been unable to match supply with demand, with shipping capacity growing faster than trade nearly each year. According to the WTO, full recovery of global trade has not been achieved yet. The 6% average growth from 1990-2008 has now been replaced with a meager 3%. The double-edged sword of poor growth and oversupply paved the way for a major down turn for shipping companies, which count on high utilization of ships to break-even. To make matters even worse, shipping container operators had been pouring money into the development of mega-ships, such as the CMA CGM Benjamin Franklin, a 396 meter long and 54 meter wide container ship that is longer than the Empire State building is tall. These mega ships have only yielded to greater oversupply, making profitability an even bigger challenge.
As a result, massive consolidation and even complete company failure ensued- climaxing with the bankruptcy of South Korea’s Hanjin Shipping Co in 2016. Hanjin was the world’s seventh largest shipping company and its collapse rocked the once impenetrable industry. Members of the industry, including the CEO of Seaspan considered fall of Hanjin to be their “Lehman moment”, referring to the tumultuous fall of Lehman Brothers in 2008. Since then, of the twenty major global players two years ago, eight have either been acquired or gone bankrupt- a trend that could very well continue.
Improvements in 2018?
Despite the turmoil, a recent analysis from Alphaliner suggests the GDP-teu multiplier (the relationship between economic growth and container volumes) is rising for the first time since crisis. The report suggests the multiplier will lift from 1.0 to 1.7, but that onlookers should remain bearish that we will see anything close to the 2-3x norm ten years ago. The Baltic Dry Index, an index compiled by the London-based Baltic Exchange, covers prices for transported cargo such as coal, grain and iron ore and also points to a recovery. The BDI is based on a daily global survey of agents and is currently nearly 12x less than its 2008 high. While the index is off to a slower start in 2018 than expected, steady increases compared to February and Summer 2017 are encouraging. Finally, industry consolidation among carriers is beginning to reap benefits of increased efficiency and supply management.