|After a tough 2016, in which rates were very low and nearly all ocean container carriers bled red ink in each quarter, Q1 2017 saw volumes head up a bit – but that did little yet to stem the losses.It has been generally tough time for the container carriers since 2008, with the exception of a brief period in 2010, during which as shown the chart below from the analysts at Alphaliner carrier operating profits were strong.
But all the rest of the nearly 10-year period saw collective operating income from the largest carriers negative or just barely above breakeven – and operating income doesn’t include other costs such as financing charges.
As can be seen in the Alphaliner chart, in 2016 the large carriers saw negative operating profit of between 5-9% through the first three quarters of the year, before losing just 1.2% in Q4 – and an identical negative margin in Q1 of 2017.
That’s a lot better than a year earlier, when Q1 2016 operating margins were -5.5%, but it still shows an industry plagued by low rates – good news for ocean shippers, but not for the carriers and their shareholders.
The majority of container shipping lines lost money in the first three months of 2017, as shown in the chart below from Drewry Shipping, which tracks large container carriers based on their revenues and operating profits in the quarter.
Just a handful achieve positive operating income in Q1.
Source: Drewry Shipping
Giant Maersk continued to struggle. It posted its fourth consecutive quarter of operating losses, with a core EBIT margin of -1.0% and an operating loss of $56 million in the first quarter on revenues of $5.4 billion. Although Maersk has set as its target an operating margin gap of 5% above the industry average and to be a top quartile performer in terms of operating margins, it not only failed to achieve both goals in the last two quarters but also slipped to the third quartile in terms of earnings performance relative to its main competitors.
The combined operating loss of $16 million in the quarter, however, was a lot better than the combined $500 million in losses seen in Q1 of 2016.
But Drewry is confident that higher rates and fast-growing demand will soon show up on the bottom lines of the carriers.
You wouldn’t guess that from this chart from Drewry, however, which shows that overall east to west container rates fell sharply in Q1.
Source: Drewry Shipping
Earlier, Drewry had forecast that the industry would make operating profit of about $1.5 billion in 2017. Did the weak Q1 derail that prediction?
No, says Drewry, noting that “our profit forecast already built in that the market recovery would only really push on from the second quarter onwards when new contracts roll over. Therefore, despite the disappointing start to 2017 we see no reason to downgrade our profit guidance and will most probably raise it for the next Container Forecaster.”
Drewry says it sees exceptionally strong demand growth for 2017 and that shippers will see far higher annual contract rates for the rest of the year.
We’ll see. We’ve heard that prediction other times in recent years, and rates have stayed low. But maybe this time shippers should plan for and budget sharply higher rates.