Carriers to Face Challenges in 2017

Carriers to Face Challenges in 2017

For this year, container shipping analysts are sensing a $10 billion industry-wide loss after a somewhat depressing 2016 that saw freight rates declining to somewhat negligible levels.

The “price war” rages on

As observed by offshore back office solutions providers, few carriers reported a profitable first quarter last year as they waged an intense price war that caused a severe drop in rates, led by Maersk Line. The world’s largest container carrier saw a 26 percent drop in revenue per 20-foot-equivalent unit that only yielded a 7 percent gain in volumes.

The price war between carriers in the container shipping market that started from the first quarter of 2016 continues, and this is resulted in substantial reductions in contract rates for exporters and importers buying under contract.

Shipping lines operating on the eastbound Pacific routes recently completed what has been called the most disappointing service contracting season on record.

Looking forward, the freight and shipping industry will continue to experience headwinds through the rest of the year as global demand continues to be very weak, and the adverse effects of the severe U.S. West Coast port congestion in early 2015 up to 2016 continue to be felt in the form of waning trust from Asian buyers.

However, while permanent capacity cuts have proved to be the only effective way for carriers to revitalize freight rates amid weak market demand, the relatively successful May 2016 general rate increases were not repeated by the following months. This was despite carriers reporting ships being fully utilized and cargo being rolled.

The rate decreases were more severe than they might otherwise have been because of the predatory commercial strategies of the first quarter of 2016. The basic supply and demand fundamentals were actually better for carriers in the first quarter than in the previous three months and the same period in 2015 as head-haul ship utilization in the east-west trades averaged close to 90 percent, aided by void sailings.

Alliances will be formed

Something else shippers are watching closely are the forming of industry alliances. From April 2017, new alliances will start operations, after Asia-Europe shippers have negotiated contracts at the end of 2016. Trans-Pacific contracts will run until April 2017, and the next contract rate negotiations will involve the new carrier partnerships.

Instead of four alliances in the freight and cargo industry, there will be three. The 2M between Maersk Line and Mediterranean Shipping Co. is the lone survivor of recent liner consolidation, with the neophyte Ocean Alliance (CMA CGM, China Cosco, Evergreen Line and Orient Overseas Container Line) and the formidable THE Alliance (NYK, MOL, “K” Line, Hanjin Shipping, Hapag-Lloyd and Yang Ming).

The air cargo industry will grow

This year, a small but growing and vital part of any major shipper’s transport portfolio is air cargo, and there are lots of space available on the major routes with the rapidly growing passenger side of the business continuing to ramp up belly cargo capacity.

This development happened at the same time that world trade is weakening. The first quarter of last year saw the first annual decline in trade volumes since the global financial crisis in 2009, and the World Trade Organization saw only sluggish growth for the remainder of 2016— which hopefully will not be the case for 2017.