BIG is beautiful in the container shipping sector. At least that's what many industry insiders today are saying.
Regardless of where one stands on the issue of whether size matters in the shipping industry or not, the results are hard to ignore. If we look at operating profits alone, it would appear that bigger is better...
Maersk Line, the world's largest shipping line, and CMA CGM, the world's third largest, topped all carriers in their financial performance for the first quarter of the year....
MSC, which is currently ranked number two in terms of fleet size, is privately owned and has released no details of its financial performance to date.
Marseilles-based CMA CGM posted a first quarter operating profit of US$196 million, according to Alphaliner, which was good enough to give it an operating margin of 5.1 per cent, which is impressive for a shipping line.
Maersk came in at a close second with a profit of $189 million and a margin of three per cent.
Drewry Maritime Research, in its Container Insight publication, said that the "big three"—Maersk, MSC and CMA CGM—all boast strong economies of scale, which on the transpacific trade currently translates into deploying ships that are 32 per cent larger than the average vessels sailed by other carriers on the route.
The average active vessel size of the top three liners reaches 8,550 TEU, while the overall average ship size in the industry is only 6,490 TEU, according to Drewry's figures.
Drewry believes this explains why CMA CGM and Maersk were able to earn more than other major carriers at EBIT (earnings before interest and tax) level in 2012, and continued to surpass other smaller rivals in terms of profitability in the first quarter of this year.
"It also explains why carriers, such as APL and Hanjin, whose transpacific cargo accounts for a large proportion of their total liftings (29 per cent and 41 per cent respectively in the first quarter of 2013), yet operate vessels well below the average size, were amongst the poorest," said the Drewry's report.
Alphaliner's figures show that Singapore's APL was the worst performer among the 18 carriers. It suffered an operating loss of $101 million and had a negative margin of -5.1 per cent in the first quarter.
Korea's Hanjin also lost $65 million in the first three months of the year with a negative margin of -3.4 per cent.
Alphaliner said that among the 18 carriers that posted their first quarter results, only four – CMA CGM, Maersk, "K" Line and CCNI – were able to operate in the black.
The operating losses for the rest of the 14 carriers totaled $762 million. The aggregate losses, while large, did show a significant improvement as the same 18 carriers surveyed had totally lost $1.89 million in the first quarter of 2012.
Another upside is that there is little risk of any carrier being forced out of the market in the near terms as all have reportedly been able to secure financial backing during this difficult operating period.However, Alphaliner is not optimistic about the prospects for the industry for the remainder of this year. It anticipates that carriers' operating performance in the second quarter will deteriorate because volumes are weaker than expected in the transpacific and Asia-Europe trades, the two largest trade lanes in the world.
As a result, freight rates have fallen to a new low for the year.
Alphaliner believes that the difficult operating environment has triggered a rate war on several key routes.
According to Drewry's new Global Freight Rate Index (GFRI), the average global freight rate fell to a 15-month low in April. The GFRI is a weighted average of freight rates across 600 trade lanes excluding intra-Asia.
And rates of more than one third of global trade routes are currently below the levels of 2012.
Drewry said that as the freight rates for more than half of the 600 trade routes decreased in April, the global freight rates dropped 12 per cent to reach its lowest level since February 2012, and fell 18 per cent since the outset of the year to $2,065 per FEU.
The fragility of rates has been seen in both Asia-Europe and transpacific trades since March.
In April, the average rates on both trades continued to plummet 12 per cent each, due to the declining rates on headhaul trades from Asia to Europe and North America, said Drewry.
Entering June, the decline of rates has shown no signs of faltering. The Shanghai Containerised Freight Index (SCFI) spot rates on Asia-Europe trade dropped to $558 per TEU on June 7, falling $40 per TEU from $598 per TEU recorded a week ago. This is a new low since December 2011. The SCFI Asia-Europe rates hit the rock-bottom rate of $490 per TEU on December 9, 2011.
Meanwhile, the SCFI Shanghai-US west and east coasts rates have also shown their softness. The SCFI Shanghai-US west coast rates declined $59 per FEU to $1,949 per FEU on June 7, and the Shanghai-US east coast rates also shrank $74 per FEU to $3,102 per FEU.
As the global economy remains sluggish, especially in the European market, carriers are expected to face another harsh year in 2013 beset with low margins, overcapacity and weak demands.
Operating in the black is only for a handful of top carriers now. This is definitely not a healthy situation for the industry.
Rates on the major trades are now well below breakeven. Given that the lines with bigger vessels are able to reduce their unit costs, they are more likely to fare better than their smaller counterparts, in terms of overall losses.
In this case, bigger is indeed better it would seem.
Regardless of where one stands on the issue of whether size matters in the shipping industry or not, the results are hard to ignore. If we look at operating profits alone, it would appear that bigger is better...
Maersk Line, the world's largest shipping line, and CMA CGM, the world's third largest, topped all carriers in their financial performance for the first quarter of the year....
MSC, which is currently ranked number two in terms of fleet size, is privately owned and has released no details of its financial performance to date.
Marseilles-based CMA CGM posted a first quarter operating profit of US$196 million, according to Alphaliner, which was good enough to give it an operating margin of 5.1 per cent, which is impressive for a shipping line.
Maersk came in at a close second with a profit of $189 million and a margin of three per cent.
Drewry Maritime Research, in its Container Insight publication, said that the "big three"—Maersk, MSC and CMA CGM—all boast strong economies of scale, which on the transpacific trade currently translates into deploying ships that are 32 per cent larger than the average vessels sailed by other carriers on the route.
The average active vessel size of the top three liners reaches 8,550 TEU, while the overall average ship size in the industry is only 6,490 TEU, according to Drewry's figures.
Drewry believes this explains why CMA CGM and Maersk were able to earn more than other major carriers at EBIT (earnings before interest and tax) level in 2012, and continued to surpass other smaller rivals in terms of profitability in the first quarter of this year.
"It also explains why carriers, such as APL and Hanjin, whose transpacific cargo accounts for a large proportion of their total liftings (29 per cent and 41 per cent respectively in the first quarter of 2013), yet operate vessels well below the average size, were amongst the poorest," said the Drewry's report.
Alphaliner's figures show that Singapore's APL was the worst performer among the 18 carriers. It suffered an operating loss of $101 million and had a negative margin of -5.1 per cent in the first quarter.
Korea's Hanjin also lost $65 million in the first three months of the year with a negative margin of -3.4 per cent.
Alphaliner said that among the 18 carriers that posted their first quarter results, only four – CMA CGM, Maersk, "K" Line and CCNI – were able to operate in the black.
The operating losses for the rest of the 14 carriers totaled $762 million. The aggregate losses, while large, did show a significant improvement as the same 18 carriers surveyed had totally lost $1.89 million in the first quarter of 2012.
Another upside is that there is little risk of any carrier being forced out of the market in the near terms as all have reportedly been able to secure financial backing during this difficult operating period.However, Alphaliner is not optimistic about the prospects for the industry for the remainder of this year. It anticipates that carriers' operating performance in the second quarter will deteriorate because volumes are weaker than expected in the transpacific and Asia-Europe trades, the two largest trade lanes in the world.
As a result, freight rates have fallen to a new low for the year.
Alphaliner believes that the difficult operating environment has triggered a rate war on several key routes.
According to Drewry's new Global Freight Rate Index (GFRI), the average global freight rate fell to a 15-month low in April. The GFRI is a weighted average of freight rates across 600 trade lanes excluding intra-Asia.
And rates of more than one third of global trade routes are currently below the levels of 2012.
Drewry said that as the freight rates for more than half of the 600 trade routes decreased in April, the global freight rates dropped 12 per cent to reach its lowest level since February 2012, and fell 18 per cent since the outset of the year to $2,065 per FEU.
The fragility of rates has been seen in both Asia-Europe and transpacific trades since March.
In April, the average rates on both trades continued to plummet 12 per cent each, due to the declining rates on headhaul trades from Asia to Europe and North America, said Drewry.
Entering June, the decline of rates has shown no signs of faltering. The Shanghai Containerised Freight Index (SCFI) spot rates on Asia-Europe trade dropped to $558 per TEU on June 7, falling $40 per TEU from $598 per TEU recorded a week ago. This is a new low since December 2011. The SCFI Asia-Europe rates hit the rock-bottom rate of $490 per TEU on December 9, 2011.
Meanwhile, the SCFI Shanghai-US west and east coasts rates have also shown their softness. The SCFI Shanghai-US west coast rates declined $59 per FEU to $1,949 per FEU on June 7, and the Shanghai-US east coast rates also shrank $74 per FEU to $3,102 per FEU.
As the global economy remains sluggish, especially in the European market, carriers are expected to face another harsh year in 2013 beset with low margins, overcapacity and weak demands.
Operating in the black is only for a handful of top carriers now. This is definitely not a healthy situation for the industry.
Rates on the major trades are now well below breakeven. Given that the lines with bigger vessels are able to reduce their unit costs, they are more likely to fare better than their smaller counterparts, in terms of overall losses.
In this case, bigger is indeed better it would seem.