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Orient Overseas turns to $57m loss on weak market, lower revenue

Orient Overseas turns to $57m loss on weak market, lower revenue
Hong Kong-based Orient Overseas (International) Ltd, the parent of Orient Overseas Container Lines (OOCL) turned to a $56.7m loss in the first half on a 16% plunge in revenue to $2.56bn from $3.04bn previously as a weak market drove down revenue per teu.

Highlighting developments during the period, cfo Alan Tung said the poor market environment was due to disappointing demand, more newbuilding deliveries, although this situation is improving, slow withdrawal of vessels and most trades being under pressure.

While there have been bright spots, with scrapping at record levels and expected to reach 2.2% overall for the whole year, and this is resulting in net supply grwoth dropping, Tung pointed out that the bigger issue is muted demand growth. Global trade and GDP growth has been "uninspiring", he said.

The cfo also noted that supply has actually been coming off and it has been the demand side that has not been catching up. He cited typical growth figures on the Asia-Europe trade of high single digits in the recent past but which now have become a distant memory for example.

OOIL chairman CC Tung said: “Market conditions in the first six months of 2016 have been difficult for the industry. Weak economic growth in many key economies has constrained consumer demand, and global uncertainty seems to have given rise to some level of slowdown in corporate and government investment.”

“In addition to global economic uncertainty, the industry continues to face a supply and demand imbalance. A combination of weak global growth on the demand side and excessive shipping capacity growth, exasperated by the industry’s relentless pursuit for scale and efficiency in recent years, has compounded the overcapacity. The result is a weak freight market where rates fell to levels that at times failed to cover voyage costs in selected trade lanes”, the group chairman noted.

This has been clearly seen in the rates environment. OOCL liner liftings increased by 5% and load factor by 1% compared to the previous corresponding period, but revenue dropped by 17%. Average revenue levels in some trade lanes reached new post-Global Financial Crisis lows, with an average revenue per teu drop of 21% in the first half from $987 per teu to $778 per teu.

As a result, Tung pointed out that OOCL has been doing much fewer long term contracts during the Transpacific negotiating season this year, a departure from their usual preference for contracts as opposed to spot. However, as the rates have been so low in the earlier part of the year, this has become a necessity.

Looking ahead the group chairman noted: “Looking ahead, notwithstanding the fact that there have been some tonnage withdrawals and pockets of volume growth in selected trade lanes, if deployed capacity continues to be substantially in excess of demand, the second half of 2016 will be challenging and difficult.”

He added: “The industry continues to face a supply and demand imbalance. While the orderbook as a percentage of existing fleet is anticipated to drop to 6.7% and 5.5% respectively in 2017 and 2018, the challenge for the next half decade is on the demand side. The world economy seems uninspiring at best."

Continuing, the elder Tung said: “The first half of 2016 was disappointing for OOIL. We expect continued challenges given the global landscape. However, we remain confident that our prudent and deliberate management approach will lead the group through the challenging times."