CONTAINER SHIPPING OUTLOOK - 2021 Carriers have a chance to break the cycle. Will they take it? - AlixPartners
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
DATE
MARCH
(TLs ONLY)
2021
2021
CONTAINER
SHIPPING
OUTLOOK
Carriers have a chance
to break the cycle.
Will they take it?
For at least three decades, the container shipping industry
has been locked in a recurring boom-and-bust loop. During
times of strong macroeconomic growth, shipping rates would
soar and container ship operators would reinvest their profits
in new, ever-larger vessels. Then the economy would slide
into a downturn, demand would plunge, rates would tumble,
and operators would find themselves burdened with heavy
debt and idle vessels. As overcapacity kept a tight lid on rates,
leverage would expand, revenues would fall, and ship operators
would tumble into bankruptcy—or stay out of court, thanks
only to amend-and-extend agreements with their creditors.
Today, however, the fundamentals
that would support a breakaway
from that cycle are in place.
The industry is enjoying a boom phase, with global alliances have helped increase pricing leverage. Fuel costs
container freight rate indexes topping $5,000 per 40-foot remain low despite strict new regulations aimed at reducing
container in February 2021 after climbing steeply and sulfur emissions as a prelude to additional measures
steadily since May 2020.1 And this time, with a few notable intended to decarbonize the industry. One effect of those
exceptions, carriers aren’t flooding the world’s shipyards new regulations has been to limit capacity growth.
with orders—yet. Instead, carriers have to date successfully
managed capacity, keeping rates stable even as demand A sustainable departure from boom-and-bust, however,
slipped by 5% during the first nine months of 2020 while requires carriers to exercise discipline over their pricing and
overall capacity increased by just 2%. Meanwhile, idle order books, as rates make their eventual and inevitable
capacity, which rose to 11% in May 2020, retreated to 3% by regression toward the mean—discipline that carriers
the third quarter of the year because the industry increased historically have been quick to abandon when profits were
blank sailings and suspended service on some routes. climbing. In a sign that such discipline may already be
Carriers also cut sailing speeds, which fell 1.8% in 2020. fraying, a number of carriers recently placed large orders
for new vessels—but further additions to fleet capacity
Merger-and-acquisition activity continues apace, furthering could severely dilute any pricing power that carriers have
the industry’s consolidation: seven global carriers now been able to establish.
each control at least a 5% share of the market, and three
1. Drewry World Container Index
AlixPartners 2021 Container Shipping Outlook 2HISTORY REPEATING
The container shipping industry has long followed a distinct pattern. Consider the industry’s actions during the recession
years of 2001 to 2003 and the subsequent economic recovery. A recession brought on by the bursting of the first dot-com
bubble led to a sudden drop-off in demand, followed by a lengthy spell of low shipping rates. Ships ordered when times
were good—starting in 1999 and through the early months of 2001, before the bubble burst—were delivered just as demand
and rates were starting to fall off the table. The new builds drove up vessel overcapacity, which got further aggravated
because shippers kept their inventories low relative to sales. The industry had become highly fragmented, with no alliances
of liner operators forming to boost supply-side pricing power. Fuel prices were low but offered only limited relief to carriers,
whose greater problems were the familiar ones of too much capacity and too little demand.
HISTORY REPEATED ITSELF IN SOME RESPECTS IN THE PERIOD FROM 2009 TO 2015.
In 2009, after several years of rising rates, profits, and capacity, the Great Recession struck and demand cratered. Rates
plunged by more than 50% in 2009 and then, following a brief rebound, dropped again by 50% when a recovery failed to
take hold in 2010. Although operators idled 10% of their fleets and reduced sailing speeds, those moves came too late to
counter the record-setting capacity buildup of 2004 to 2008. Several lines went under or got acquired in the aftermath—
part of a consolidation wave launched in 2013 that left the top four carriers in control of 46% of global 20-foot-equivalent
units (TEUs) and in the longer term, offered the promise of greater capacity control.
Despite signs that a different dynamic now prevails across the industry, carriers could cast aside pricing and capacity
discipline at any time they believe doing so would serve their interests. It has happened before. In 2014, for example, the
industry appeared on the verge of entering a period of sustained capacity control and consolidation, but after a few carriers
opted to place orders for new vessels, the rest of the industry soon followed suit, perpetuating the boom-and-bust cycle.
WILL CARRIERS SEIZE THE OPPORTUNITY?
For the moment, most carriers are exercising restraint in the face of improving market fundamentals. Some of the most-
compelling evidence of a change in the industry dynamic can be found in the latest data on shipping capacity: whereas in
the past, demand shocks hit just as orders for new vessels were increasing or already at elevated levels, in the latest cycle
a sudden drop in demand occurred while both capacity and orders for new vessels were relatively low (figure 1).
FIGURE 1: CAPACITY IS UNDER CONTROL—FOR A CHANGE
Wor l d C ont ai ne r Trade (T E U )
70
60
50
40
30
20
10
0
-10
-20
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
TEU trade growth year over year % Orderbook TEU as a percent of total fleet
TEU = 20-foot-equivalent unit
AlixPartners 2021 Container Shipping Outlook 3Unlike during previous demand disruptions, rates have held up, although current levels are certainly unsustainable. Rates
dropped significantly during the 2001 to 2003 recession before rebounding steadily during the recovery. The period
following the Great Recession was marked by chronically low rates, interrupted only by two, relatively shallow, spikes. The
current cycle is marked by a strong increase that began in the first quarter of 2020 and has continued into the first quarter
after 2021 (figure 2).
FIGURE 2: RATES INCREASED SHARPLY AS 2020 UNFOLDED
S h a n g h a i S h i p p i n g E xch a n g e: S h a n g h a i ( exp ort ) C on t a i n eri z ed Frei g h t In d ex (S C F I)
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$0
2020
2010
2014
2018
2013
2016
2017
2012
2019
2015
2011
Restrained growth in vessel supply goes a long way toward explaining the favorable rate environment. In previous cycles,
the industry was aggressively adding to capacity when demand dried up, thereby creating a supply glut that took years
to work off. In the current cycle, by contrast, the industry was slashing capacity when the COVID-19 global pandemic
slammed the brakes on the world economy, having initiated a period of intensive ship demolitions in 2009 that persisted
through 2018 (figure 3).
FIGURE 3: GROWTH IN TEU CAPACITY HAS TURNED NEGATIVE
Fleet Growth: YoY change in TEU capacity (%) Vessel scrapping: Demolitions in TEU capacity (000s)
18 700
16 600
14
500
12
10 400
8 300
6
200
4
2 100
0 0
1996
1997
1996
1997
2020
1998
1999
1998
2000
1999
2001
2000
2002
2001
2003
2002
2005
2003
2006
2005
2007
2006
2008
2007
2009
2008
2010
2009
2010
2004
2011
2012
2013
2004
2011
2012
2015
2013
2016
2015
2017
2016
2018
2017
2019
2018
2020
2019
2014
2021
2022
2014
YoY growth Demolitions (TEU)
TEU = 20-foot-equivalent unit, YoY = year over year
SUPPLY
• Growth in TEUs has dropped to record lows
• Both of the historical downturns in rates were proceeded by periods of high TEU growth, leading to a glut
of supply just as demand dropped
• In 2009 to 2015, demolitions increased to try to take supply out of the market, and the effort was completed by 2018
AlixPartners 2021 Container Shipping Outlook 4AT PRESENT, ORDERS FOR NEW VESSELS
STAND AT HISTORICAL LOWS (FIGURE 4). SUPPLY
Although, as noted, several carriers placed • The order book as a percentage of the global fleet is
large orders for new vessels recently, it will take currently at historical lows
several years to replace the tonnage that was
demolished. Capacity management has improved • Even with the recent uptick, it will take time to build in
because carriers have increased blank sailings, the medium term
reduced sailing speeds, and suspended service • Leading up to the over supply period of 2009 to 2015
on some routes. there were record-setting orders
• Leading up to 2001 to 2003, orders were up
significantly compared with previous years
FIGURE 4: CARRIERS ARE SHUNNING THE SHIPYARDS
70
60
50
40
30
20
10
0
Q1-1996
Q4-1996
Q3-1997
Q2-1998
Q1-1999
Q4-1999
Q3-2000
Q2-2001
Q1-2002
Q4-2002
Q3-2003
Q1-2005
Q4-2005
Q3-2006
Q2-2007
Q1-2008
Q4-2008
Q2-2004
Q3-2009
Q2-2010
Q1-2011
Q4-2011
Q3-2012
Q2-2013
Q3-2015
Q2-2016
Q1-2017
Q4-2017
Q3-2018
Q1-2014
Q2-2019
Q4-2014
Q1-2020
Q4-2020
Containership order book % fleet
Inventory-to-sales ratios, meanwhile, have fallen to below-average levels after ballooning when economic activity plunged
at the outset of the pandemic. Typically, sharp drops in the inventory-to-sales ratio signal that a restocking phase is
imminent, lifting demand for shipping services. In the current case, recent container ship activity at US ports suggests
the restocking is already under way. US imports from Asia in December 2020 were up 30% from their year-earlier level, to
a record 1.6 million TEU, according to IHS Markit. The volume of imports was headed for continued growth in the early
months of 2021, as retailers ship more goods ahead of the Chinese Lunar New Year. Favorable conditions for global
carriers could persist over the longer term as well if, as many forecasters predict, a strong, demand-driven recovery
materializes as more and more of the population gets vaccinated and the pandemic fades.
AlixPartners 2021 Container Shipping Outlook 5TWO CAUTIONARY THOUGHTS, HOWEVER:
US consumers with disposable incomes shifted much of their Carriers that charge record
spending to goods from services in 2020. Typically, US consumers
rates fall down on customer
spend about 33% of their disposable incomes on services and
67% on goods, according to FreightWaves2; in 2020, the split was service risk, thereby doing
closer to 40% goods and 60% services. As more and more people themselves long-term
get vaccinated and more and more service establishments reopen, damage after the market
consumer spending could swing back to services, eventually
depressing container demand.
returns to something like
equilibrium.
Moreover, carriers will have to address their recent, abysmal reliability
record. Global container vessel reliability slid to a record-low 35%
in January 2021—a staggering 34% below the year-earlier reading,
accordinto IHS Markit. Although late deliveries are attributable in
part to port delays brought on by pandemic-related labor shortages,
carriers bear ultimate responsibility for container shortages and
overdue deliveries.
IN THE SWEET SPOT
Before the outbreak of the COVID-19 pandemic in the first quarter of 2020, fuel costs and new International Maritime
Organization (IMO) regulations that mandate drastically lower sulfur emissions made by far the biggest story in the
container shipping industry. But those costs and regulations have become more of an afterthought. Contrary to predictions
that fuel prices would soar in the wake of the implementation of IMO 2020, as the new regulations are known, fuel
prices have remained low after bouncing off the bottom they hit shortly after the pandemic struck. During the recession
of 2001 to 2003, for comparison, low fuel prices prevailed throughout the downturn, whereas the recessionary and
postrecessionary period from 2010 through 2015 was notable for high fuel costs that carriers were unable to recover
entirely. Taken together, the data across the three recessionary periods since 2001 suggest strongly that although carriers
are able—within limits—to pass along higher fuel costs to shippers, fuel prices have little correlation with rates, which react
more immediately to other drivers—in particular, demand and capacity.
Nonetheless, IMO 2020—together with the broader drive to slash the global container shipping fleet’s carbon dioxide
emissions—has reinforced the industry’s efforts to control capacity. With more-stringent fuel and emissions regulations
possibly in the offing, shipowners are hesitant to commit to acquiring additional assets. They don’t want to risk buying
either obsolescent vessels unsuited to burning low-sulfur fuel or, on the other hand, vessels that are cleaner—and thus
more costly—than regulations require. Until the regulatory picture clarifies, many carriers will likely slow their ships to
reduce emissions, which effectively further limits capacity.
A final and perhaps decisive factor in the capacity-control equation is the industry’s continued consolidation (figure 5).
2. Andrew Cox, “Consumer Economy to Be ‘A Tale of Two Halves.’” FreightWaves, January 8, 2021; https://www.freightwaves.com/news/consumer-economy-to-
be-a-tale-of-two-halves.
AlixPartners 2021 Container Shipping Outlook 6Since 2016, Hanjin Shipping has filed for bankruptcy and undergone liquidation, and some of the stronger carriers have
made opportunistic acquisitions that today leave the top four lines in control of 58% of TEU capacity. Leading carriers have
joined forces in three alliances in the forms of the 2M Alliance, the Ocean Alliance, and THE Alliance, further concentrating
the market and facilitating continued pricing and order-book discipline. The biggest risk the alliances now face involves
becoming victims of their own success: should their leverage over the issue of pricing become too strong, regulators might
take notice and investigate whether they are stifling competition.
FIGURE 5: MARKET SHARE BY ALLIANCE
Average total TEU
21.9M
Average total TEU
17% THE Alliance
18.5M
Average total TEU
15% O3 Alliance
15.9M
12% CKHYE Alliance 29% OA Alliance
29% 2M Alliance
18% G6 Alliance
17% CKHYE Alliance
29% 2M Alliance
70% 18% G6 Alliance
21% 20%
2012-13 2014-16 2017-21
Independents Hapag-Lloyd HMM OOCL NYK Line MOL
APL COSCO Group Yang Ming K Line Hanjin Shg Evergreen Line
APM-Maersk MSC COSCO Group CMA CGM Group Evergreen Line OOCL
CMA CGM Group UASC CSCL Hapag-Lloyd ONE Yang Ming
K Line NYK Line MOL UASC
Long the sick man of the transportation ecosystem, the container shipping industry stands
on the brink of a new era of sustainable profitability. But just as a lot of things had to
break exactly right for container shipping to arrive at its current advantageous situation,
so a lot of things have to break right for container ship operators before they can step off
the boom-and-bust treadmill. Much of what has to break right is within carriers’ control.
For instance, it is within their power to balance capacity against demand, hold the line on
pricing, and opportunistically pursue industry consolidation through mergers, acquisitions,
and liquidations. If they can manage to execute along those dimensions—and that’s a very
big if—they’ll have an opportunity to reshape container shipping into an industry built to
withstand all manner of demand shocks—whatever their origin and duration.
AlixPartners 2021 Container Shipping Outlook 7NEXT STEPS
The reshaping of the container shipping market that began in 2020 and continues
in 2021 bears implications for every industry stakeholder, as follows.
1
CARRIERS will be challenged to maintain their newfound discipline and hold the line
on rates, to refrain from ordering new vessels, and to firm up their balance sheets so
as to move quickly when and if acquisition opportunities arise. But they should be
alert to any preemptive moves by rivals to acquire new vessels.
In addition, in recent months, on-time reliability has emerged as a key topic for
shippers, which points to an opportunity for carriers to differentiate themselves. As
noted, the industry has struggled to fulfill shipping schedules during the pandemic—
in part because of container shortages and congestions at major port facilities. But
shippers have long memories, and carriers that can offer shippers greater reliability
and better overall service can create valuable, enduring relationships with shippers
and forwarders.
2
FORWARDERS, enjoying a run of strong profitability, have a chance to form new
long-term relationships with shippers by strengthening their value propositions—for
example, by committing their own capital in the form of warehouse space to help
shippers ride out market dislocations caused by limited port operations.
3
SHIPPERS have to adapt to a new normal of shipping rates that are higher than
those that have prevailed through most of this century—though not as high as they
stand today. Successful adaptation requires shippers to actively deal with the key
drivers of transportation costs: urgency, dimensions, lead time, and distance, as
detailed in the linked article. By improving container use, by extending delivery times
to some customers, by stretching lead times for carrier bookings, and by reducing
shipping distances, shippers can mitigate the effects of stratospheric freight costs.
4 INVESTORS, including private-equity sponsors, have an opportunity to ride the
$
container shipping industry’s rising tide, which is lifting virtually every player in the
container shipping ecosystem—except shippers. Investors should be mindful, though,
that competition for the industry’s profit pool will likely strengthen, and they should
avoid overpaying for what are, ultimately, highly contingent earnings streams.
AlixPartners 2021 Container Shipping Outlook 8APPENDIX: FINANCIAL STATS
Because of the lack of information on Q4, when rates increased, the Last
Twelve Months (LTM) information may have diminished predictive value.
Shipping lines have used their earnings from Q4 to buy back debt. While some new orders have been placed as well,
the orderbook remains historically low.
TOTAL DEBT VS. GLOBAL CELLULAR FLEET CAPACITY LEVERAGE
30 10x 9.4
140
114.0 9x 8.4 8.4
120 110.2 8x 7.5
99.9 104.6 92.6
100 20
Global TEU Capacity
87.4 87.8 7x
83.1 82.8 6.2 6.2
Total Debt ($B)
76.3 74.4 6x
80 5.5 5.5 5.3
60 5x
10 4.0
4x
40
3x
2.2
20
2x
0 0 1x
2019
2010
2011
2012
2013
2015
2016
2017
2018
2014
LTM
0
2010
2011
2012
2013
2015
2016
2017
2018
2019
LTM
2014
Total Debt ($US Billion) Global TEU Capacity
Altman Z-scores remain unchanged from last year, though 4 results are missing
AVERAGE ALTMAN Z-SCORE INTEREST COVERAGE
2.0 5x
1.8 1.7 4.0
4x
1.6
1.4 1.4 1.4 3x 2.8
1.4 1.3 1.3
1.3
1.2 1.1
1.1 2x
1.1 1.1
1.0 1x 0.7 0.7
0.6
0.8
0
0.6
-0.2
0.4 -1x -0.7 -0.8
-1.1
0.2 -2x -1.7
0.0
-3x -2.6
2010
2011
2012
2013
2015
2016
2017
2018
2019
LTM
2014
2010
2011
2012
2013
2015
2016
2017
2018
2019
LTM
2014
2021 Container Shipping Outlook 9CONTACT THE AUTHORS: Esben Christensen Jeff Drake Jason Keyes Managing Director Managing Director Managing Director echristensen@alixpartners.com jdrake@alixpartners.com jkeyes@alixpartners.com Lian Hoon Lim Jim Blaeser Brian Nemeth Managing Director Director Director llim@alixpartners.com jblaeser@alixpartners.com bnemeth@alixpartners.com John Katsigeorgis Senior Vice President jkatsigeorgis@alixpartners.com ABOUT US For more than 40 years, AlixPartners has helped businesses around the world respond quickly and decisively to their most critical challenges – circumstances as diverse as urgent performance improvement, accelerated transformation, complex restructuring and risk mitigation. These are the moments when everything is on the line – a sudden shift in the market, an unexpected performance decline, a time-sensitive deal, a fork- in-the-road decision. But it’s not what we do that makes a difference, it’s how we do it. Tackling situations when time is of the essence is part of our DNA – so we adopt an action-oriented approach at all times. We work in small, highly qualified teams with specific industry and functional expertise, and we operate at pace, moving quickly from analysis to implementation. We stand shoulder to shoulder with our clients until the job is done, and only measure our success in terms of the results we deliver. Our approach enables us to help our clients confront and overcome truly future-defining challenges. We partner with you to make the right decisions and take the right actions. And we are right by your side. When it really matters. The opinions expressed are those of the authors and do not necessarily reflect the views of AlixPartners, LLP, its affiliates, or any of its or their respective professionals or clients. This article AlixPartners 2021 Container Shipping Outlook (“Article”) was prepared by AlixPartners, LLP (“AlixPartners”) for general information and distribution on a strictly confidential and non-reliance basis. No one in possession of this Article may rely on any portion of this Article. This Article may be based, in whole or in part, on projections or forecasts of future events. A forecast, by its nature, is speculative and includes estimates and assumptions which may prove to be wrong. Actual results may, and frequently do, differ from those projected or forecast. The information in this Article reflects conditions and our views as of this date, all of which are subject to change. We undertake no obligation to update or provide any revisions to the Article. This Article is the property of AlixPartners, and neither the Article nor any of its contents may be copied, used, or distributed to any third party without the prior written consent of AlixPartners. ©2021 AlixPartners, LLP
You can also read
