Home » Breaking News, Maritime » Ocean vessels now rely on cost cuts, not GRIs, for profit

container shipWith freight rates remaining weak despite bigger volumes carried, box ships no longer base profitability on market fundamentals like general rate increases (GRIs).

Instead they engage in cost cutting and the continued sale of non-core assets, according to Drewry Maritime Research’s Container Forecaster’s fourth quarter 2013 issue.

Despite 10 attempts last year to raise rates on the Asia-North Europe trade, especially the successful implementation of rate hikes in mid-December, average spot rates were still some US$450 per FEU (40-foot-equivalent unit) below January 2013 levels, the report said.

Freight rates fell drastically to well below break-even levels in June and October, even though capacity was well managed in the head-haul east-west trades last year, and industry load factors were around a decent 90 percent despite a mild third quarter peak season.

And while many carriers reported carrying more boxes this year, the industry—excluding Maersk Line and CMA CGM—realized a third quarter EBIT (earnings before interest and taxes) margin of only 0.9 percent.

This “proves that carriers cannot rely on revenue or better carryings to secure their financial future,” said Drewry, predicting that majority of lines will finish in the red for 2013.

Even with the bigger ships now being deployed, carriers will still find it difficult to make a substantial profit, said the maritime research group.

This is because most trades remain “overtonnaged,” and many shippers on the Asia-Europe trade have already signed 2014 contracts at rate levels of about $300 to $700 per FEU below those signed in 2013.

Many lines are now selling their non-core assets to focus on core businesses and release new cash flow.

With 56 ships of at least 10,000 TEUs lined up for 2014 delivery and 52 next year—and more orders in the pipeline—the industry “has an enormous challenge on its hands to manage such a process of change,” the report said.

It predicts an increase in operational alliances and vessel-sharing agreements on all trade routes out of necessity, noting that the days of the independent operator are over. “In this sense, the advent of the P3 alliance in the second quarter of 2014 is a game-changer for the three biggest lines to obtain more cost savings.”

Said Neil Dekker, head of container research: “The industry’s major players are continuing to adapt to a new era in the container industry, characterized by too many ships and cargo volumes on many trade lanes that refuse to live up to previous expectations.”

He said some of these strategies are sound, such as the formation of new operating alliances to stabilize the industry. But other business plans are not working, pointing to “the same old negative trends that refuse to go away, and these ultimately take the gloss off the good things that are being done.”


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