Ocean carriers are enjoying a bull run of profitability, thanks to demand spikes and inflated freight rates, and now there is a unique opportunity for them to break out of the boom-and-bust industry cycle.
According to consultant AlixPartners’ 2021 Container Shipping Outlook, “the fundamentals that would support a breakaway from that cycle are in place”, adding: “Long the sick man of the transport ecosystem, the container shipping industry stands on the brink of a new era of sustainable profitability.”
But, it adds: “Just as a lot of things had to break exactly right for container shipping to arrive at its current advantageous situation, so a lot of things have to break right for containership operators before they can step off the boom-and-bust treadmill.”
However, the authors suggest most of those things that had to “break right” are within carriers’ control.
“For instance,” says the report, “it is within their power to balance capacity against demand, hold the line on pricing and opportunistically pursue industry consolidation through mergers, acquisitions and liquidations.”
It suggests if they manage to execute these facets, “they’ll have an opportunity to reshape container shipping into an industry built to withstand all manner of demand shocks”.
The report says: “Carriers will be challenged to maintain their newfound discipline and hold the line on rates, to refrain from ordering new vessels and to firm up their balance sheets so as to move quickly when and if acquisition opportunities arise.”
As far as the threat of slowing demand is concerned, AlixPartners cautions that consumers will most likely shift their spending back to services, as the US and Europe comes out of lockdown. This softening of the markets will exert downward pressure on the record high rate levels – but the question is by how much?
However, recent data on long-term contract rate deals suggests carriers are succeeding in locking-in a sizeable slice of the short-term market price hikes, which will help insulate them from the volatility of the spot market.
On the other side of the equation, the containership orderbook is currently at a historical low, and AlixPartners believes this augers well for no repeat of the oversupply period seen between 2009 and 2015.
“Although several carriers have placed large orders for new vessels recently, it will take several years to replace the tonnage that was demolished,” says the report.
It adds that liner capacity management has improved because carriers have “increased blank sailings, reduced sailings speeds and suspended service on some routes”.
And carriers appear confident they will be able to hold up rates beyond the end of the year, and that demand will remain tight, given their aggressive activity in the second-hand tonnage market and their willingness to go for ever-longer periods with chartered tonnage.
Broker sources told The Loadstar this week there had been several recent fixtures concluded current high daily hires rates for charter hire periods of three or four years.
“In previous cycles, the industry was aggressively adding to capacity when demand dried up, thereby creating a supply glut that took years to work off,” notes AlixPartners’ report, adding that, in contrast, in the current cycle the industry was already slashing capacity when the pandemic hit.
Article sourced here: https://gcaptain.com/ocean-carriers-face-opportunity-to-break-boom-and-bust-cycle/