Tighter Environmental Regulations make Container Shipping Survival of the Fittest

The container shipping companies are faced with the perfect storm with the ever tighter environmental regulations coming into force and oil prices jumping, exerting further pressure on liners to squeeze out profit from the buoyant demand.

Asset quality, size and diversification will determine the success of shipping companies in the next 18 months, German rating agency Scope Ratings said.

“Only container shipping companies with the biggest fleets and most efficient vessels are likely to turn a profit this year and meet longer-term challenges,” the agency explained.

One of the major issues faced by liner majors is the high oil price which has seen carriers introduce emergency bunker surcharges as a means of recovering costs.

Scope expects a rise of around 25% in bunker prices this year compared with 2017, squeezing thin profit margins despite robust global economic growth and buoyant trade, notably in Asia.

“Strong demand is creating a better-than-expected supply-demand balance, but another headwind is the industry’s excess capacity which weighs on freight rates,” says Denis Kuhn, analyst at Scope.

Shipping consultants Drewry recently upgraded its container demand forecast by two percentage points to 6.5% from 4.5% for 2018 amid favourable supply-demand-fundamentals.

However, this has not yet translated into visibly higher shipping rates, as supply has also been slightly higher than anticipated, mostly due to less capacity taken out of the industry via scrapping.

Kuhn expects scrapping to accelerate in the second half of 2018 and 2019, easing the capacity glut amid new environmental regulations as owners scrap older ships and invest in new ones.

For this reason Scope believes that fleet efficiency and quality will become even more important over the next few quarters for container companies to be able to generate operating profits and maintain their credit-risk profiles.

“Shrinking operating results will drive up leverage (typically measured by Net Debt/EBITDA) and may result in increased borrowing costs for shipping companies.

“Credit spreads on many shipping bonds have widened recently amid weaker-than expected freight rates but could tighten again if liners can mitigate the effect of higher bunker costs via rates increases as well as improved efficiency,” Scope added.

Another topic adding to the overall challenging situation are growing trade disputes.

Even the current impact has been dubbed as subdued, on the longer term, the impact on the global trade volumes could be far greater should further tariffs and retaliatory measures be introduced.

“The net effect for shipping firms from further deterioration in relations between the US and its major trading partners, China and the EU included, could be less dramatic than it first looks,” says Kuhn.

Shipping volumes are determined by consumer demand and suppliers’ strategies for meeting it. If consumers substitute imports from countries with increased tariffs for cheaper ones from other countries, the impact on overall trade volumes might be modest but will favour operators of large, diverse fleets able to adjust routes quickly to changing trade patterns, the rating agency explained.

As such, being part of a strong alliance like M2, THE ALLIANCE or OCEAN is essential, in Scope’s view, to meet shifting customer demands in a flexible and reliable way.

WMN