The world’s seventh-largest container shipping line filed for bankruptcy in September and will either be liquidated or restructured as a smaller, niche operator in early 2017. If current trends persist, there could be more bad news to come.
Six years of flat demand have taken a toll on container shipping. The top 20 global carriers have seen only 11 out of 24 profitable quarters, four of those with average gains below 1.5 percent. Analysts forecast that the top 20 lines could lose a combined $10 billion in 2016. Trans-Pacific freight rates are down by as much as a third from 2008 levels.
Amid one of the slowest post-recession recoveries in memory, central banks have printed money and kept interest rates at near-zero levels in hope of stimulating demand. Businesses have parked cash and tightly managed inventories, lenders have retrenched, and consumers have shown little confidence to spend.
In such a market environment, shippers have gravitated toward commoditized service at low rates. Carriers have responded with larger ships, carrier alliances offering rationalized services, and M&A — all as a defensive play against rising costs and weak pricing power. Cost pressures will only increase going forward — for environmental compliance, terminal and near-dock cargo handling and storage, and inland rail and truck transport.
Few container lines operate as stand-alone entities; most are cross-subsidized within larger global shipping or trading companies, or are government-financed, in support of national trade and shipbuilding objectives. So it is significant that a sovereign lender has now indicated to a major national carrier that enough is enough.
Could this be the shock to the system that resets industry assumptions and reaffirms the dual role of scheduled container shipping services as discreet business entities and, in combination, as critical, privately financed infrastructure in support of global trade?
A key indicator will be the outcome of 2017-2018 trans-Pacific service contract negotiations. Lines are individually looking to shore up recent revenue gains as the basis for contract rates to follow, and reduce or end equipment-related giveaways in areas such as chassis, free-time and per-diem charges.