AMEXLOGISTICS > News > Uncategorized > Shipping Lines Learn to Make Money By Balancing Supply and Demand

Shipping Lines Learn to Make Money By Balancing Supply and Demand

2
Sep
Posted by Francisca Macias
Category:
5.736 comentarios

The trade downturn in the wake of the coronavirus pandemic has pushed ocean carriers to cut capacity and focus on profitability rather than market share.

When countries began locking down their economies early this year in the face of the spreading coronavirus pandemic, the world’s container lines braced for a steep decline in shipping demand. Analysts warned that massive financial losses would soon follow at seagoing companies that carry the lion’s share of global trade.

Trade flows have in fact fallen, but the red ink for shipping lines never came.

Instead, profitability across the business is growing and some operators are reporting their best earnings in years.

Shipping lines continually slashed prices in years past to compete in declining markets. Under the health crisis that has rocked the global economy, however, carrier executives have reined back capacity in a display of discipline they’d long talked about but had never undertaken.

Freight rates have often gone into tailspins that left revenues barely covering operational costs.

As demand collapsed from the city lockdowns in March and April, however, liner companies started canceling sailings and sidelining ships. At the same, falling oil prices because of pandemic-induced lockdowns sent fuel costs for carriers down sharply, a reversal from expectations that bunker costs would soar after a mandatory switch to cleaner fuels.

“All of a sudden, supply came in line with demand with huge fuel savings as a bonus,” said Jonathan Roach, container analyst at London-based Braemar ACM Shipbroking. “Doom and gloom forecasts were put aside and so far, we are looking at a highly profitable year.”

Now, 15 senior industry executives polled by The Wall Street Journal expect on average that the world’s top dozen carriers will collectively make a profit of around $11 billion this year. It’s a complete reversal of expectations of at least $5 billion in losses, when volumes collapsed in March and April from the virus-imposed shutdowns.

It’s also a far cry from the 2008 financial crisis, when liner operators kept their global networks going and cut freight rates to fill their ships. That led to heavy losses for years, forcing a consolidation wave that took the top 15 players down to six liners with a global reach.

Based on half-year results so far in 2020, however, the top dozen carriers increased their profits on average by around 150% from last year.

Denmark’s A.P. Moller-Maersk A/S, the world’s biggest liner company, tripled its second-quarter net profit on year to $427 million from $141 million a year earlier. German rival Hapag-Lloyd AG doubled its profit in the first half to $337 million, while small carriers like Korea’s HMM and Taiwan’s Yang Ming, which have depended on state support to stay afloat, cut their losses substantially in the first half.

All had reported double-digit declines in shipping volume.

“We took out 20% of capacity, which saved us costs and boosted utilization rates, mitigating the fall in volumes,” said Maersk Chief Executive Søren Skou. “We managed our network like UPS and FedEx, adjusting capacity to demand and we will continue to do so.”

The capacity cuts kept rates firm in the early weeks of the lockdowns. But the prices have been surging since then as demand has recovered. The cost to send a box across the Pacific to the U.S. West Coast reached $3,639 the week ending Aug. 28, according to the Shanghai Containerized Freight Index, an all-time high and more than twice the rate in January. The price index for shipping from Shanghai to the U.S. East Coast pushed past $4,200 a box, a five-year high and up from $2,562 in the beginning of the year,

Even rates on the Asia-to-Europe lanes, which are the world’s busiest and notorious for their depth of price cutting, hit $1,029, the highest level since early February.

The turnaround suggests a new business approach has taken hold. Long-held convictions that big fleets and dominant market share would somehow, someday lead to profits have faded. Operators now insist they’ll deploy capacity only where it will pay.

“The Covid era accelerated how fast the carriers needed to pivot with regard to survival,” said Mario Cordero, executive director of the port of Long Beach, Calif., and former head of the Federal Maritime Commission, which regulates shipping in the U.S.

“Covid made it clear that the carriers need to have sustainable rates to stay in business,” he said.

Source: wsj.com/articles/

Comments