Shipping lines are running out of options to stop losses as sailing speeds reach their lower limit, exhausting a solution that helped restore profitability in 2010, according to Bloomberg news.
The global container fleet is now cruising near record-low speeds after slowing 11 percent from August when the freight rate market collapsed, according to data compiled by Bloomberg and Lloydโs Register. Drewry Shipping Consultants Ltd. estimates some of the smallest shipping lines will run out of cash in the second half of this year as the industry fails to adjust to overcapacity thatโs allowing customers to push down rates.
โContainer lines have already exhausted most of the tricks for absorbing capacity,โ said Bjorn Vang Jensen, a Singapore- based vice president at Electrolux AB who oversees about 150,000 shipments a year. โSome of these container ships are now so slow that theyโre close to the speeds of the old sailing ships. The clippers might actually have been faster.โ
With options running out, investors in container-line stocks should brace themselves for losses. Still, shares in Copenhagen-based A.P Moeller-Maersk A/S, the worldโs biggest container line, may fall less than smaller competitors this year because its bigger ships are more cost-efficient, said Rikard Vabo, an analyst at Fearnley Fonds ASA in Oslo.
Slow-steaming, pioneered by A.P. Moeller-Maerskโs container unit, Maersk Line, helps carriers cut costs when times are tough. By sailing at lower speeds, ships need less fuel and can offset capacity stresses by using more vessels to make up for the longer sailing times.
With speeds unlikely to get any slower, the industry is growing more vulnerable to rising fuel costs, and all container lines are now losing money, according to BIMCO, the biggest international shipping association.
โThe potential for further slow-steaming seems to be of little significance to the overall market balance,โ said Peter Sand, a Bagsvaerd, Denmark-based analyst at BIMCO, whose members control 65 percent of the worldโs tonnage. โCompared with the 2009 crisis, we donโt see the same level of idling.โ
Thatโs the message the industry is hearing from advisers including Paris-based Alphaliner, which estimates that slower- steaming may even start raising costs for carriers as they deploy more vessels to meet demand.
โThereโs much less potential than in 2009 to mop up excess capacity in reducing the speed further,โ Alphaliner said in a Jan. 23 e-mail.
Nomura International Plc today cut its recommendation on Maersk shares to โneutralโ from โbuy,โ saying the container unit will also be unprofitable this year.
โBurdened by an unfavorable supply/demand balance at the industry level and an unwillingness by the bigger operators to remove vessels from service, we see only a modest recovery at Maersk Line in 2012,โ Nomura analysts, including London-based Mark McVicar, said in a note.
For a nine-week trip with ships that carry 8,500 containers, a carrier can cut 3 percent of costs by slowing to 17.2 knots from 19.8 knots. Slowing further to 15.2 knots, by contrast, actually pushes up costs 0.5 percent as the expense of operating the additional ship starts to outweigh fuel reduction, Alphaliner estimates.
Maersk Line says it may be able to bring its speeds down even further. The company cut its average speed to about 17 knots last year from 20 knots in 2008, according to Morten Engelstoft, Maersk Lineโs chief operating officer. The companyโs whole fleet currently sails at about 16-18 knots, he said.
โThere is still some potential for slow-steaming, both for us and probably for the industry,โ Engelstoft said in a Jan. 23 interview. โWe are looking into the possibility of super slow- steaming. That would be 12-16 knots.โ
The 19th-century clippers, the fastest ships of their time, transported tea to the U.K. and U.S. from China and India, according to the website of the U.K. Tea Council. The ships, which had three or more masts and dozens of sails, could reach a peak average speed of more than 16 knots.
Slow-steaming, coupled with idling ships, helped turn a 2009 industry-wide operating loss of $19 billion into a $17 billion profit the year after, according to Drewry. The industry reverted to a $5.2 billion loss last year and prospects for 2012 are โdireโ because the gap between supply and demand will grow even wider, the London-based consultant said in a Jan. 4 report.
Engelstoft said Maersk Line hasnโt yet committed to even slower-steaming as a strategy for weathering the crisis.
โWe are looking at Asia-Europe, but itโs still too early to say if we will introduce super slow-steaming there and to what extent,โ he said. โItโs also important for us to maintain a high level of reliability for our customers.โ
Maersk may emerge a winner among the worldโs biggest container lines, according to analyst Vabo. Still, the companyโs shareholders probably will lose money in the short term because there are no immediate solutions for overcapacity, he said.
Other options for adjusting to overcapacity in the shipping industry are also proving untenable. Many ships havenโt yet been paid off by their owners, and scrapping vessels that represent a financial liability isnโt feasible, Sand at BIMCO said.
The average age of the worldโs container fleet is less than five years compared with about 11 years for the global dry bulk fleet and nine years for tankers, according to BIMCO.
Closely held CMA CGM SA, the worldโs third-largest line, said โthere is still room to reduce the speedโ of its vessels, though the Marseille-based company didnโt provide details in an e-mailed reply to questions. Hapag-Lloyd, based in Hamburg, could also sail slower, though it doesnโt have any plans to do so, Rainer Horn, a spokesman, said by e-mail.
Meanwhile, freight rates earned by carriers werenโt enough to cover fuel costs in the fourth quarter, according to BIMCOโs Sand. The price of container-ship fuel rose to a record on Jan. 20, up 32 percent from a year earlier, according to a Bloomberg index on global average prices for 380-centistoke bunker.
Full story at Bloomberg