This year's outlook for the container shipping industry is "bleak" and publicly-listed global container shipping companies “face a greater risk of financial distress, including possible bankruptcy, than at any time since 2010," according to the global business-advisory firm AlixPartners, which Tuesday released a new study titled “Change on the Horizon: The 2014 Container Shipping Outlook.”
The firm said the container industry’s problems stem from both sluggish demand as well as the “drive to build, fill and route ‘mega-ships’ – a drive that over the past decade has steadily increased leverage across the industry.”
The industry has an average EBITDA interest-coverage rate of just 4.9, less than half the rate it was in 2011 (10.8) and less than a third of what it was in 2010 (15.0).
“Carriers face a prolonged fight for survival -- especially those facing heavy debt burdens,” the study said. “Although the container shipping industry has for decades been subject to a vicious cycle of mismatches in supply and demand, this time, the cycle has been different: there has been no sustained period of recovery -- no seller’s market -- in which the carriers could rebuild their finances,” it added.
For shippers, the study recommended these steps:
- Closely monitor the financial health of the carrier base.
- Keep a NVOCC in the mix to provide both a view to the market outside key carriers and a safety valve for excess capacity requirements should the market tighten unexpectedly.
- Avoid over-consolidating the carrier base. Key carrier programs have drawbacks as well as the well-publicized benefits.
- Benchmark rates and service levels via objective third-party resources.
- Consider index-linked or long-term contracting options if operating with high volumes on lanes with low volatility.
- Pay carriers for bunker fuel via a clearly defined -- and fair -- fuel surcharge program.
“Shippers remain uneasy about market conditions as the whipsaw market that pinched many major shippers in 2010 is still top of mind,” AlixPartners said.
Financiers, it suggested, “should approach the industry with caution; carrier requirement for capital provides ready opportunity for investment, but such investment comes with high risk levels.”
Global fleet capacity has risen in the past decade, the firm noted, from 10.7 million TEUs to 16.9 million in September. (Another consultant, Alphaliner, said the world's fleet has continued to grow and that today, there are 5,958 ships active on liner trades, for 17,777,348 TEUs, including 4,971 fully cellular ships for 17,310,772 TEUs.
“That capacity is a long way from being totally utilized, leading in part to more alliances in the industry. This, in turn, according to the study, is likely creating an environment of haves and have-nots where smaller carriers in particular may face some hard choices going forward,” AlixPartners said.
“The container shipping industry as a whole continues to face stiff challenges, and for many companies in the industry, those challenges could be existential if not addressed,” said Lisa Donahue, managing director and global head of Turnaround & Restructuring Services at AlixPartners. “These challenges also have, and will continue to have, a big effect on shippers and investors, as well.”
"Carriers, the study suggests, should divest non-core assets, exiting unprofitable trades, adopting a laser-like focus on cost control, reassessing all value propositions, and partnering where partnering makes sense.
“For all the challenges facing all the players in the container shipping industry today, there are also a lot of opportunities, including the promise of the much greater profitability that a streamlined, resilient industry might bring, as has been the case in many other industries,” Donahue said. “But, to make the most of those opportunities will take insightful analysis and then firm, decisive action. It’s been done in other industries, and it can be done in this one, as well.”