“The 2018 outlook for global container carriers is decidedly mixed. Although the industry enjoyed modest improvement in 2017, it still needs to address the dual challenges of rising costs and oversupply - driven mostly by fleet expansion - to keep the momentum going,” AlixPartners said.
Repeating the usual refrains, AlixPartners noted that fleet capacity is once again rising and said: “Rates will continue to be squeezed as long as supply continues to outpace demand for containerized services.” It pointed out that “consequently, total demand - at the very least - will have to meet expectations of a 4% to 5% increase to provide any real opportunity for margin growth”.
AlixPartners also warned carriers to beware of higher costs as operating expenses start to tick upwards partly due to rising bunker prices, which more than doubled between the beginning of 2016 and the first month of this year.
This is compounded by factors such as larger customers rejecting surcharges such as the low-sulfur-fuel surcharge and frequently demanding contract rates with bunker adjustment factor included, eliminating carriers’ ability to pass on fuel price fluctuations, it said. As such, carriers will need to boost efforts to manage expenses and lower their cost base in other ways, AlixPartners added.
The consultancy also alluded to so-called black-swan events which have the potential to have significant financial impact on the carriers. These range from the impacts of shifting geopolitics to cyberattacks, with broad-ranging issues such as Brexit, America First policies as well as volatile financial markets highlighted.
Amidst the warnings, AlixPartners also saw opportunities for the carriers. “At the same time, we see a number of opportunities for carriers to significantly improve performance through effective management in areas actually within their control,” it said.
The first of these is pricing discipline. The consultancy noted that one of the benefits of the ongoing fleet consolidation is a market situation where the five top carriers now control almost two-thirds of global capacity. “That realignment of ownership creates a unique opportunity for the industry to demonstrate a level of price discipline that has been lacking for years,” it reiterated.
Fleet consolidation also provides an opportunity to improve operating expense management. AlixPartners noted that although capacity management skills have improved, carriers have yet to produce the anticipated cost savings from fleet consolidation. “Therefore, major opportunities remain for fleet operators to make dramatic cuts in redundant expenses and to modernize operations,” it noted.
The clearest message however was to call for restraint in new ordering. “Finally, it is imperative that carriers curb their voracious appetites for new ships,” AlixPartners emphasised. “New orders slowed, and deliveries were deferred during much of 2017, but in September, the buying spree resumed in earnest, thereby ensuring the continuation of the current margin-crushing balance of supply and demand unless scrappage activity accelerates dramatically,” it lamented.
Looking ahead to the rest of the year, AlixPartners predicted that the effects of the industry’s reconfiguration into two tiers may start to be seen, as the market bifurcates into five large global players and about two dozen much smaller players, many of which compete either as specialists or exclusively in niche markets.
“The traditional second tier of midsize carriers has been absorbed by the giants. As controlling power within the industry stabilizes, it becomes more important than ever for carriers to step up their efforts to improve their performance, discipline their investments, and sharpen their strategies for succeeding through scale or specialization,” AlixPartners advised.
On the market, the consultancy warned that as carriers have enjoyed improved revenue and profits in 2017, especially in the third quarter high season, tougher contract negotiations should be expected going into the upcoming transpacific contracting season.
“Shippers will have to be knowledgeable about their regional trades so they can know how each market is doing; rate volatility won’t happen on a global level but, rather, on a trade-by-trade basis,” it suggested, adding that with the expected rate volatility in 2018, carriers might consider allocating a portion of their business to the spot market rather than going all-in on long-term contracts.
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