In the latest Container Insight Report released by Drewry, the advisors take a look at what the end-year numbers might look like for carriers, after Q1, 2016 saw some surprising findings, while giving three likely scenarios for global carriers by the year’s end.
The rate erosion was much worse than expected, but unit cost savings were bigger than predicted.
In Drewry’s most recent Container Forecaster it was predicted that the carrier industry could lose around US$6 billion in 2016.
Our rationale was that rapidly decreasing freight rates would overtake lower unit costs, with savings to the latter tempered by additional expense from more ship lay-ups (and reactivation), empty container repositioning and M&A integration.
The results for Q1, 2016 that have so far been published do show industry-wide losses and have not yet made Drewry change its headline forecast, but they have made us re-think some of the inputs.
From the admittedly smaller sample data, the preliminary findings are that freight rates crashed harder than expected, but the losses were softened by bigger unit cost savings.
While we may have misjudged the immediate direction of each input, they ultimately cancel each other out and Drewry believes it is still on course with its full-year loss forecast.
The available first-quarter results are patchy in as much that some carriers – Maersk Line and Matson – made an operating profit while others sank further into the red.
However, there are some universal trends, from double-digit revenue declines to worse operating margins.
Matson’s improved sales were in large part the result of its acquisition of Horizon Lines’ Alaska operations. Average freight rates were also a common feature with Maersk reporting a 26% year-on-year slump.
While the world’s largest carrier did see its EBIT decrease by 98% to $16 million, its first-quarter results defied expectations as most analysts were predicting further heavy losses after the $138 million loss incurred in Q4, 2015.
Maersk’s turnaround was achieved on the back of a 16% unit cost saving, helped by a 50% reduction in fuel expenditure. The Danish carrier’s data is not the easiest to interpret as its average freight rate for the period was below that of unit costs, which naturally implies a loss.
However, additional revenue from demurrage that is outside of the freight rate helped to push them into the black, while complicating matters further Maersk’s unit costs also includes income from its vessel sharing partners as a cost reduction so that unit cost reflects net slot-charter.
Maersk’s huge size differential to almost all of its peers means that it is not necessarily the best bellwether for the industry at large, as its profits and losses get multiplied by factors out of line with the competition.
Nonetheless, it seems that Maersk’s improving trend is also happening to the rest of the industry.
Based on the available sample the preliminary EBIT margin for the industry was -1.8%, which is a full percentage point better than recorded in Q4, 2015.
Carriers may still be losing money but they have at least halted the quarter-by-quarter deterioration that started from Q2, 2015.
Earnings before interest and tax margins for carriers. (Source: Drewry)
Drewry calculates that the carrier industry made an operating profit of around $5 billion in 2015 as they were able to keep unit costs below unit revenue for most of the year.
The gap between the two inputs narrowed as the year progressed; hence why the operating margin diminished with each passing quarter until unit costs exceeded unit revenue in Q4, 2015.
While the early data suggest they remain the wrong side from carriers’ point of view the differential narrowed to $16/TEU in Q1, 2016, from $25/TEU in Q4, 2015.
How carriers align those two lines will dictate whether they can avoid heavy losses or even turn another profit again this year.
The prognosis is not great. The fact that carriers have not had any success in raising spot market freight rates – baring some temporary GRI-induced hikes – and anecdotal reports of significantly reduced contract rates suggest that worse is still to come on the revenue side, while bunker prices have been steadily creeping upwards since mid-January.
To try to give a feel for what carrier profits/losses might look like by December 31, 2016, Drewry has presented three possible scenarios, ordered by Drewry’s opinion on their likelihood of happening.
Each scenario is influenced by changes to the unit revenues and costs and we have not amended our demand forecast in any of them.
3 likely scenarios for global carriers (Source: Drewry)
Drewry believes the chances of carriers making a profit this year are fairly remote as they will not be able to prevent rates from falling harder than costs.
The Drewry View: Carrier profit margins in 2016 will be influenced by big swings on both prices and costs, but as things stand carriers will lose between $6-10 billion this year. Repeating the same cost savings will get tougher as the year progresses with bunkers on the rise, making it even more important for carriers to get freight rates off the floor.