Fitch: Staying Profitable May be Tough for Container Shippers

HMM

01/03/2018 16:16

(The following statement was released by the rating agency)


Fitch Ratings-London-March 01: Sustaining last year's improved profitability in 
2018 may prove challenging for container shipping companies, Fitch Ratings says. 
The fact that some companies are likely to have remained loss-making in 2017 
highlights the ongoing weakness in sector fundamentals due to persistent 
overcapacity, which may undermine a longer-lasting recovery.

Financial reports or preliminary results released so far indicate that container 
shipping companies had stronger performance in 2017 than 2016. We expect most 
carriers to have boosted profitability, although performance varies company by 
company. Maersk Line generated EBIT of USD634 million in 2017 compared to a loss 
of USD421 million in 2016, while Hapag-Lloyd and COSCO Shipping also materially 
improved their financial results. But while Hyundai Merchant Marine's (HMM) 
operating loss in its container division halved last year, it remained large at 
USD280 million. 

Container transport volume growth ranged from 3% for Maersk Line to 30% for HMM, 
and economic and trade growth should support further increases in 2018. We 
forecast container transport volumes to increase by more than 4.5% this year, 
consistent with the IMF's global trade growth forecast of 4%. 

Higher freight rates supported better financial outturns even as operating costs 
increased due to higher fuel prices. However, it is not clear that higher 
freight rates will be maintained. The Shanghai Containerised Freight Index was 
on average 27% higher in 2017 than in 2016. But its average reading in 4Q17 was 
lower than in 4Q16. It has increased marginally in early 2018, but remains lower 
on average than in the same period last year. 

Sustainable recovery of freight rates depends on continuous and consistent 
capacity discipline in the industry. Freight rates are volatile and many 
previous increases reversed when the supply and demand imbalance returned.

Supply growth is expected to have been about 4% in 2017 with a further 
acceleration to over 5.5% in 2018, again exceeding demand growth. This may put 
pressure on rates and make it challenging to sustain the profitability achieved 
in 2017. 

New orders were low in 2016-2Q17 but surged in 2H17, including mega ships, as 
market sentiment improved with a focus on scale and vessel size. In 4Q17 Maersk 
Line exercised an option for two new vessels, each with a 15,200 TEU capacity to 
be delivered in 2019. CMA CGM ordered nine 22,000 TEU mega vessels in September 
2017. HMM also announced an ambitious growth strategy, targeting a 5% market 
share and using ultra-large container vessels. 

Deployment of mega vessels on Europe-Asia trading lanes will continue to 
contribute to overcapacity on this route, and to "cascading down" elsewhere. We 
also expect lower scrapping and fleet idling in 2018 due to improved market 
conditions, further reducing the gap between net and gross capacity growth. 

In the medium term, continued consolidation in the sector should lead to more 
prudent capacity management and support freight rates. The market share of the 
top five container shipping companies was 45% in 2016 and is forecast to rise to 
57% in 2018. 

However, no single company is dominant - sector leader Maersk Line's share is 
expected to remain below 20% after its merger with Hamburg Sued. We believe most 
container shipping companies will continue to regard their market position along 
with the operation of mega ships as key to their success, which may prompt 
further M&A and new vessel orders as the top three companies try to sustain 
their market leadership and smaller companies seek to increase scale.

Fitch 2018 Outlook: 
Global Shipping  /a 

Contact: 

Angelina Valavina

Senior Director

Corporates

+44 20 3530 1314

Fitch Ratings Limited

30 North Colonnade

London E14 5GN

Josef Pospisil

Managing Director

Corporates

+44 20 3530 1287

Mark Brown

Senior Analyst

Fitch Wire

+44 20 3530 1588 

Media Relations: Adrian Simpson, London, Tel: +44 203 530 1010, Email: 
adrian.simpson@fitchratings.com.

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commentary page. The original article can be accessed at www.fitchratings.com. 
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