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TRANSPORTCEO - 20/06/2018
Rising fuel costs lead to Drewry downgrade on carrier profitability in 2018.
Making money in the container shipping game is as much to do with luck as anything else. Whether a carrier ends the year in the red or black is often decided by external forces outside of management control, such as oil prices or the macro-economic inputs that drive demand for their services.
An unexpected surge in the former has dramatically altered the cost base of carriers and has forced Drewry to significantly downgrade its profit expectations for the industry this year. Following research for our upcoming Container Forecaster report to be published at the end of June, we now believe the industry will only break-even at best in 2018, having previously expected an operating profit of approximately $5 billion.
The importance of fuel prices on carrier results was demonstrated yet again in the first quarter 2018 income statements. Despite relatively strong demand growth and higher sales, a 20% year-on-year rise in bunker costs saw a majority of the lines post operating losses. In addition to higher fuel costs lines have also had to absorb extra cost from a resurgent charter market (see Figure 1).
Our preliminary research shows that container shipping suffered its first negative operating margin quarter in 12 months in the first quarter of 2018 (see Figure 3). We don’t anticipate a return to positive territory in the second quarter due to the fact that fuel rose even more sharply from April onwards (Rotterdam IFO380 was up by nearly 50% in May compared to what it was in May 2017) and because carrier efforts to recover some of the extra cost in the form of controversial emergency fuel surcharges only started in June and even then won’t fully compensate them.
Profitability should improve in the third quarter peak season, but with the fourth quarter being a seasonally slack period, industry profitability for 2018 might struggle to reach break-even. The end-year result will largely depend on the direction of oil prices and how successful lines have been in enforcing the new surcharges. Given the current situation it is unsurprising that carriers are considering ways to trim their cost burden, including further slow steaming as suggested by MSC recently.
The steep rise in fuel costs has taken the gloss off what has otherwise been a strong year for container demand. Drewry data for world port throughput in the first quarter showed that the momentum from 2017 was carried into the early months of this year, rising by 6% year-on-year. Drewry will provide new five-year forecasts for world and regional container handling in the next Container Forecaster report at the end of this month.
Carriers’ lack of cost control has come back to bite them this year. Emergency fuel surcharges should limit carriers’ fuel cost exposure in the second half, but very few lines will be in the black come the end of the year.
The definitive container market analysis and forecasts
The Container Forecaster is Drewry’s flagship quarterly analysis and outlook for the container shipping market. This long-standing product is highly respected in the market and is widely considered as the go-to reference for what is happening now and what will happen in the future of the global container industry. Helmed by a team with decades of experience the Container Forecaster provides unparalleled insight, data and forecasts for container trade and regional port volumes. Each quarterly update provides both historical and forecast analysis of the market, including:
• World container trade and regional port volumes forecasts
• Global supply and demand outlook
• Trade route supply and demand analysis
• Global and East-West trade freight rate forecasts
• Carrier profitability analysis
• Charter market and sales & purchases
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