Peak Shipping Season Runs Aground As Ocean Lines Pull Capacity
Bloated inventory levels and low import expectations have container lines canceling sailings when carriers and retailers are usually bulking up for the fall. Peak Shipping Season Runs Aground As Ocean Lines Pull Capacity
Ocean container lines are bracing for muted demand during the usual peak shipping season heading into the fall, with supply chains still rattled by the coronavirus pandemic and retailers in the U.S. and Europe reining in restocking plans.
Shipping lines that move the vast majority of the world’s manufactured goods have canceled more than a quarter of all sailings on Asia-to-Europe and trans-Pacific lanes, the world’s biggest trade routes, since the beginning of March, according to maritime data providers.
Copenhagen-based research group SeaIntelligence Consulting says the cancellations equate to the withdrawal of more than 4 million containers of capacity and that carriers have continued to drop departures scheduled for the third quarter, signaling expectations of continued weak demand by major Western importers.
“Fears of a virus resurgence means retailers will bring in only what they know they can sell,” said Lars Jensen, ” chief executive of SeaIntelligence. “There is a muted run-up to Black Friday in the U.S. that kicks off the holiday shopping and we expect container volumes to be down 10% overall this year. There is no peak season, just fleet management to cut costs.”
The summer months are typically when shipping activity picks up steam as retailers begin to bulk up inventories for an expected pickup in consumer demand later in the year, starting with back-to-school sales and leading into the year-end holidays.
But widespread store closings under coronavirus lockdowns have battered demand and crashed traditional planning for the fall. The 17.7% month-to-month increase in retail sales in the U.S. in May still left overall sales below pre-pandemic levels, and the retail inventories-to-sales ratio in April soared to 1.68, the highest level since 1996 and an indication that warehouses across the country were bursting with merchandise.
In the European Union, retail trade fell 11.1% in April from March, according to official statistics agency Eurostat.
As well as weak demand, retailers are dealing with supply chains that have been scrambled by the coronavirus. Some deliveries have been delayed by up to two months because factories in China and elsewhere were mostly closed in March and April.
“We’ve just opened after three months and we are getting deliveries of spring apparel,” said Varvara Petridi, who owns two high-end fashion shops in Athens, Greece. “We’ve got lots of unsold light suits and dresses, but no bathing suits, sandals and towels. They’ll come in August, if we are still in business. It’s a disaster.”
Seaborne import figures since the lockdowns began suggest retailers are hunkering down.
Major U.S. ports handled 1.61 million container imports in April, according to the Global Port Tracker report prepared by the National Retail Federation and Hackett Associates, down 7.8% from a year ago. The retail group forecasts annual declines for May, June and July of 14.6%, 12.9% and 17.4%, respectively, with volumes remaining well below last year’s levels for the rest of 2020.
The falling demand has pushed ocean shipping lines to sharply retrench their operations, a departure from previous downturns that have seen carriers fight for diminishing container volumes by offering lower prices, sending ships out with freight rates that barely covered operational costs.
Now, carriers are holding back ship orders as well as dropping services as they focus on managing capacity. New liner orders are at multiyear lows, according to London-based Braemar ACM Shipbroking.
“There are about 300 container ships on order, which is the lowest in at least 20 years,” Braemar’s container analyst Jonathan Roach said.
Ocean Carrier MOL to Cut Fleet on Shrinking Trade
Japan’s biggest ship owner expects a ‘significant decline’ in global cargo will persist over the next three years.
Mitsui OSK Lines, Japan’s largest ship owner, is cutting its fleet by 5% over the next three years on expectations of a deep decline in trade volumes as a result of the coronavirus pandemic.
The cuts will involve 40 vessels, including container ships, dry-bulk carriers, tankers and car carriers. MOL, as the carrier is known, currently operates 800 ships and is one of the world’s biggest seaborne operators.
“As a result of our forecasts we concluded that a significant decline in ocean transport volume and a restrained stance on customers’ investments will be unavoidable in the foreseeable future,” MOL said in a statement. “Based on the idea that we need defensive measures, we will immediately reduce our market exposure and review investment plans.”
MOL’s move is the latest in a series of cuts taken by ocean carriers in recent months to deal with a steep decline in shipping demand because of the lockdowns aimed at stemming the spread of the coronavirus.
Container sailings from Asia to Europe and across the Pacific are down at least 25% so far this year, according to Copenhagen-based research group SeaIntelligence Consulting, and several carriers are lined up for government bailouts or preferential loans.
MOL expects “a lower-mobility society” with less movement of people and products and a world-wide review of corporate supply chains that will rein in sprawling global supply chains.
The company is also looking to sell other assets, including real estate, as it goes through what it calls one of the most challenging periods in the company’s 130-year history.
Global trade is expected to plunge around 18.5% in the second quarter from a year ago, according to a new forecast by the World Trade Organization.
MOL expects car-carrier volumes, which have declined significantly since automotive factories largely shut down in March, to return to last year’s levels only in 2023. Many vehicle makers and parts suppliers in North America and Europe have reopened plants in recent weeks but face difficulties in ramping up output.
Shipping executives expect volumes to bottom out in the third quarter this year but to remain below 2019 levels until 2022. Tanker volumes will also take two years to recover, but commodities moved by dry bulkers are faring better as China’s economy expands and factory owners push for more raw materials.
People with knowledge of MOL’s plans said the company will initially return chartered ships back to its owners but it is also looking to offload older ships that it owns.
Shipyards’ Rebound Hopes Are Coming Up Empty
Vessel owners are putting off new orders amid faltering trade demand and uncertainty over future ship-power technology.
Shipbuilding demand is sinking, and there’s no rescue on the horizon.
Orders for new oceangoing ships are at record lows as carriers sit on the sidelines amid clouds of uncertainty. The blow to the global trading economy from the coronavirus pandemic has left cargo carriers’ demand forecasts in tatters. Perhaps more important, there’s no consensus on what kind of fuels a new generation of environmentally friendly ships would use in the coming years.
Operators need to order new ships to comply with an industry target to cut greenhouse-gas emissions by half by 2050, compared with 2008 levels. Ships contribute around 3% of the world’s greenhouse-gas emissions, according to the United Nations Conference on Trade and Development.
Research on whether carbon-free fuels like ammonia, hydrogen, batteries or biofuels can propel giant commercial vessels is still under way, and it may take a decade for the maritime sector to settle on a single fuel type.
“Ships last for 25 years, so we have to start thinking about gradually replacing our fleet, but there is nothing out there,” said a Greek owner of two dozen vessels who asked not to be named.
Making choices now is all but impossible, this owner said. “We can’t even fly to China to check on two retrofits that were to be delivered in February because of the pandemic. You can’t run a business like this,” he said.
Shipyard executives in China, South Korea and Japan are now in high-stakes competition to attract the limited prospects for orders. Much of that attention is focused on the tanker and bulk-commodities business, while interest in vessel types like big container ships that have long been seen as fundamental to growing global trade is close to zero.
Earlier plans by big operators like Germany’s Hapag-Lloyd AG and Singapore-based Ocean Network Express to invest hundreds of millions of dollars in giant container ships that can move up to 20,000 containers now are shelved.
“For the past five months we had only two inquiries about boxships, but there were no orders. The business is in steep decline,” said an executive at the state-run China State Shipbuilding Corp. who asked not to be named because he isn’t permitted to speak to the press.
Some owners are looking to order large tankers as demand to move crude and petroleum products has shot up since a nosedive in oil prices early this spring. But many remain cautious until the industry narrows its search for the new fuels that could require radically new hull designs.
Hopes for new orders were pinned before the pandemic to demand to move natural gas.
At $175 million each, liquefied natural gas carriers are more expensive than other ship types. But many shipowners believe over the long term the gas market could create the most profitable new trade in shipping since the 1960s, when crude-oil tankers began powering global maritime fortunes.
LNG demand has withered as industrial demand has waned under the pandemic, however. Energy giant Saudi Aramco put on hold an order of a dozen ships worth around $2.5 billion to next year, and a massive, 40-ship order by Qatar, the world’s largest LNG exporter, that was expected to be signed this year, is no longer certain.
The clouds over that market go beyond the impact of the new coronavirus.
Warm winters in recent years in a world coping with climate change raise questions over potentially diminishing demand for the fuel as a heating source. And renewed tensions between the U.S. and China have led to uncertainty about the direction of trade flows.
The order drought is far more serious than what the industry went through in the wake of the 2008-09 financial crisis.
London-based maritime data provider Clarksons said new ship orders were down 53% from a year ago in the first half of the year. In terms of tonnage, orders over the six-month period were down 66% compared with the post-2009 average.
Activity at yards this year is extremely limited, Clarksons said in a report this month. It said the pandemic had seriously hurt sentiment among investors and amplified concerns over new fuels and ship designs and that around 30% of new ship deliveries this year may be pushed into 2021.
Danish Ship Finance said in a May report that more than 200 yards may close down in the coming months and years. It said half of all active yards haven’t seen any new orders since 2018.
Shipbuilding is a major source of industrial manufacturing employment in several countries. But without answers to major questions over ship power and trade demand, the sector will provide a drag rather than a boost for several national economies.
Growth In Container Port Capacity To Contract As Trade Declines
A new report says port operators are reviewing investment plans as shipping volumes wane during the coronavirus pandemic.
Container capacity growth at ports from channel-deepening projects to cargo terminal construction is expected to shrink at least 40% over the next five years as port operators reconsider expansion amid the pandemic-driven slump in global trade.
Drewry Shipping Consultants Ltd. said in a new report issued Tuesday that it expects boxship terminal capacity to grow by an average 25 million containers a year, well below the annual average increase of more than 40 million containers that was added over the past decade.
The forecast could be cut even further if there is a resurgence of coronavirus infections and forces another round of lockdowns around the world, the London-based maritime consultancy said.
“Our five-year forecast for global container port handling has been cut back drastically due to the Covid-19 pandemic, and the risks remain heavily weighted to the downside,“ said Eleanor Hadland, Drewry’s senior analyst for ports and terminals.
She said port operators are actively reviewing scheduled projects as a result of falling global economic growth and uncertainty over the short to medium term.
While big port works commissioned for this and next year may be delayed, Ms. Hadland said “projects which are currently at an earlier stage of planning, particularly where construction contracts and equipment orders have not yet been tendered, suspension or cancellation is more likely if market conditions remain poor.”
The report comes after container operators have cut sailings by around 30% over the past five months as demand for consumer goods like clothing, automobiles, electronic goods and home appliances has fallen back.
London-based maritime data provider Clarksons PLC said new orders for all varieties of ocean-going vessels, including container ships, were down 53% from a year ago in the first half of the year.
Global trade is expected to fall by between 13% and 32% in 2020 as the pandemic continues to disrupt normal economic activity, according to the World Trade Organization, which estimates that global merchandise trade volume declined 18.5% from a year ago in the second quarter.
As Inventories Swell, Companies Turn To Novel Strategies To Get Through Coronavirus Crisis
Logistics specialists that buy and hold goods for clients are increasingly in-demand as companies look to reduce costs.
Companies that have stockpiled more goods during the coronavirus pandemic are turning to creative strategies to put inventory to work and generate cash.
The tactics include tapping firms that specialize in buying and holding inventory for other businesses, as well as more traditional measures such as borrowing against inventory to stay afloat.
Companies “want to get as much liquidity as they can to get through this period and beyond,” said Steve Box, a senior adviser to Channel Capital Advisors LLP.
Inventories for retailers, manufacturers and distributors ballooned as factories and stores shut down and consumers stayed home during the extensive lockdowns in the early weeks of the pandemic. Adding to inventories, companies stocked up on goods and raw materials to ward against shortages caused by snarled transportation routes and other supply-chain difficulties.
Some stockpiles have thinned out, but many companies say they expect to keep more goods on hand as they navigate an uncertain economic recovery. A second-quarter survey of supply-chain executives by consulting firm McKinsey & Co. found that nearly half of respondents said they would increase their inventory of critical products owing to weaknesses laid bare by the pandemic.
Mei Yee Pang, who leads the global supply-chain practice at DHL Consulting, said transportation constraints have helped push companies to add more inventory. Companies are moving more goods by ocean as flight capacity has shrunk, adding to transport costs. Because it takes longer for goods to arrive by sea, companies need to order more per batch and store more products, she said.
The cost concerns have businesses looking at a variety of techniques aimed at turning the carrying cost of goods into cash until demand is more certain, stoking interest in firms that buy and hold inventory on behalf of their clients.
One such outfit, Falcon Group, says it is signing up more clients for that service this year as companies adopt “just-in-case” supply-chain strategies that require more buffer stock and move away from lean, just-in-time principles aimed at paring inventory costs.
Executive Chairman Kamel Alzarka said companies showing interest recently include telecommunications and technology firms that tend to use high-value parts.
Falcon, which has its main office in London, places the inventory on its own balance sheet, taking on the cost—as well as the risk that clients may abandon the goods. In 2013, for example, Falcon was left holding 749 cars that it had to offload to second-tier auto-dealers.
Companies like Falcon typically buy the inventory at one price and then sell it to clients, adding a charge that includes storage and transportation costs, supply-chain experts say, as well as a fee meant to offset the risk they take on with the inventory.
Oliver Chapman, chief executive of OCI Ltd., said the British trading company has seen a 42% increase in inventory requests from six months ago.
In one instance, Mr. Chapman said, a private-health firm approached OCI in April, in the early days of the pandemic, looking to store personal protective equipment without knowing when or where it would need the gear. OCI bought £100 million ($126 million) worth of PPE, predominantly masks and gloves and mostly from China, and stored the supplies in the U.K.
Some inventory holdings are being turned into investment mechanisms. U.K.-based Supply@ME Capital PLC said it sets up a special-purpose vehicle that buys goods and raw materials from a client, using money from outside investors who receive bondlike securities in return.
The company’s client roster swelled in the second quarter to 100 from 60. Some were doing business in Italy and were seeking new sources of cash, fearing the country’s coronavirus outbreak could trigger a credit crunch in its rickety banking system, said Chief Executive Alessandro Zamboni.
Another method companies are turning to is asset-based lending, in which firms use inventory as collateral to secure loans. It shows up as debt on the balance sheet, but allows access to immediate funding.
Asset-based lending is a longstanding tool, with volumes totaling around $95 billion in the U.S. last year, according to Refinitiv LPC. Large banks including Wells Fargo & Co. and Bank of America Corp. are active players in the market.
Macy’s Inc., which closed its stores from mid-March to early May, in June set up a $3.15 billion asset-based borrowing facility for which it posted almost all its inventory as collateral. Douglas Sesler, who led the retailer’s refinancing, said the use of inventory was essential to making lenders comfortable with a larger facility.
The pandemic raised a challenge: Banks couldn’t make sure all the inventory they were lending against was in place. They applied a small discount to the stock Macy’s has on paper, which will be reduced when the lenders are able to check stores and warehouses.
One New York-based lawyer said he is fielding more requests for asset-based lending from investment-grade companies that ordinarily would tap bank loans or the bond market but now can’t get those deals done.
Shipping Stocks Weather the Pandemic Storm
Quick capacity adjustments and surprisingly robust demand have sent freight rates surging.
Investors in container-shipping companies are having an unexpectedly good year as freight rates surge despite the pandemic, thanks to quick capacity adjustments and surprisingly robust demand.
Shares in several major operators have rebounded sharply. A.P. Moeller-Maersk A/S’s nonvoting stock, which at its low point in March was down by almost half for the year, is now roughly flat. The Danish company owns Maersk Line, the world’s biggest ocean carrier.
Hong Kong-listed Cosco Shipping Holdings Co., which controls the world’s third-largest container carrier by capacity, and Taiwan’s Evergreen Marine Corp. are up about 23% and 32% for the year, respectively, after also recovering from steep selloffs.
“Ocean carriers got out ahead of the pandemic,” said Simon Heaney, senior manager for container research at Drewry Shipping Consultants Ltd. “It’s a good year for carriers in terms of profits.”
Drewry now expects the global industry to earn around $9 billion before interest and taxes this year, up 41% from 2019. It had earlier forecast a $3.7 billion loss. If shipping rates stay high, Mr. Heaney said, he might lift his forecast further.
Container-shipping companies play a vital role in global trade by moving clothes, food, furniture, electronics and much else around the world.
As the coronavirus pandemic unfolded, investors and analysts say, shippers were quick to idle vessels and cancel sailings, buoying freight rates and lifting profits. When demand proved more resilient than expected, they were equally quick to add back capacity—without crossing the line into oversupply.
The overall picture for trade is tough, but improving. The Geneva-based World Trade Organization now forecasts global volumes will fall 13% this year, after previously warning they could crash by a third.
Many shipping companies and their corporate clients expected a much steeper drop-off in demand than actually occurred, said Dave Perrett, co-head of Asian investment at M&G Investments: “They thought it would be absolutely catastrophic, and it wasn’t.” M&G funds hold stakes in shipping companies including A.P. Moeller-Maersk, FactSet data shows.
In the U.S., retail sales topped prepandemic levels in July. Andrian Dacy, head of the global transportation group at J.P. Morgan Asset Management, said retail spending in the U.S. and Europe had been buoyed by government financial assistance to households.
Plus there is the e-commerce boom, he said: Many people stayed home and spent money they would otherwise have used on movies, travel or meals. “They’re online, they’re ordering things, and those things are being delivered and moved to the supply chain,” he said. Trade in medical supplies also surged, Mr. Dacy added.
In the week ending Aug. 28, the spot rate to ship a 40-foot container from Shanghai to the U.S. West Coast hit $3,639, the highest in over a decade, according to the Shanghai Shipping Exchange. A Drewry composite index of rates for eight east-west routes hit $2,251 in the week to Aug. 27, up 60% from a year earlier.
Not all shippers’ share prices have benefited. Germany’s Hapag-Lloyd AG, the world’s fifth-largest container shipper by capacity, spiked to a record in May but is now down 35% for the year. Japan’s Mitsui O.S.K. Lines 9104 1.19% is down by a similar amount.
The industry is partly reaping the benefit of its distress over the past decade, when low profits spurred takeovers, partnerships and investment in bigger, more-efficient ships.
Five players control 64% of the global fleet now, versus 47% in 2008, according to Parash Jain, global head of shipping and ports equity research at HSBC. Greater concentration makes cutting capacity easier, investors and analysts said.
And there is little risk that new ships will flood the market, pressuring freight rates. Outstanding orders stand at about 9% of existing fleet capacity, versus more than 50% during the global financial crisis, Mr. Jain said.
M&G’s Mr. Perrett said tighter environmental regulations would also damp demand for new vessels. Overall, he said, the industry would avoid a return to its earlier, damaging focus on growth.
“There’s no need for one player to be disruptive,” he said. “The focus here would be more about profitability as opposed to market share.”
Maersk Prepares Job Cuts As It Extends Reorganization
The Danish shipping giant is preparing a shake-up that could eliminate scores of jobs.
AP Moller-Maersk A/S is undertaking a shake-up that could cut scores of jobs as the Danish shipping giant moves to control costs and simplify its business.
A Maersk spokesman said up to 27,000 jobs, or nearly a third of its global workforce, could be affected but didn’t say how many of its 80,000 staffers world-wide could be laid off. People with knowledge of the matter said the job reductions could involve employees at Damco and Safmarine, operating units the company said earlier this month would be integrated into the wider group.
“The reorganization is in process and we want to make sure that our employees are informed first,” the Maersk spokesman said.
Damco, which specializes in freight forwarding and logistics, employs around 2,000 people and Safmarine, a container operator that mostly serves Africa, employs about 1,000. The people said there may also be redundancies at Hamburg Süd, the German container line that Maersk bought in 2017 for $4 billion and that employs 4,500 people.
“Some will experience big changes, others small. Some are moving to new jobs, and a smaller number will unfortunately become redundant, which we take very seriously,” Vincent Clerc, head of Maersk’s main ocean and logistics business, said in a statement.
The shake-up was previously reported by Reuters.
Maersk is the world’s biggest ocean container line, with about 17% of the world’s oceangoing capacity, according to maritime research group Alphaliner. The company has been under pressure by shareholders to complete a reorganization that began in 2016 and split its shipping and logistics operations from the company’s energy business.
Maersk Line, like other container companies, sharply curtailed its shipping capacity at the onset of the coronavirus pandemic as global trade pulled back under widespread community lockdowns instituted to slow the virus’s spread.
Maersk tripled its second-quarter net profit to $427 million from $141 million a year earlier, strongly exceeding expectations.
Maersk Lifts Guidance, Will Cut 2,000 Jobs in Restructuring
Danish shipping giant will book a $100 million charge related to layoffs, but increased its full-year guidance on booming freight rates.
A.P. Moeller-Maersk A/S lifted its full-year guidance Tuesday after noting a faster-than-expected rebound in shipping volumes and freight rates, but cautioned that it will take a $100 million restructuring charge in the third quarter to cover the costs of cutting 2,000 jobs.
Maersk said full-year earnings before interest, tax, depreciation and amortization is now expected to be between $7.5 billion and $8 billion before restructuring and integration costs, from previous guidance of $6 billion to $7 billion.
The Danish shipping company prereleased third-quarter revenue of $9.9 billion and Ebitda before restructuring and integration costs of $2.4 billion. Analysts polled by FactSet had expected revenue of $9.87 billion.
Volumes in the company’s main ocean unit declined by around 3% in the third quarter compared with the previous year, which is slightly better than the mid-single-digit contraction Maersk had earlier projected.
“Volumes have rebounded faster than expected, our cost have remained well under control, freight rates have increased due to strong demand and we are growing earnings rapidly in Logistics & Services,” said Chief Executive Soren Skou.
“The outlook for [the fourth quarter] is solid for the same reasons, and we are therefore able to upgrade our expectations for the full year.”
Maersk’s shares jumped on the news, trading up 1.8% at 10,865 Danish kroner on the Copenhagen Stock Exchange.
The company is the world’s biggest ocean container line, with about 17% of the world’s capacity, according to maritime research group Alphaliner. The company has been under pressure from shareholders to complete a reorganization that began in 2016, when it split its shipping and logistics operations from its energy business.
Maersk didn’t give details about the job cuts Tuesday. It said last month that up to 27,000 staff, nearly a third of its global workforce of 80,000, could be affected by the restructuring. The Wall Street Journal reported, citing people familiar with the matter, that the job reductions could involve employees at Damco and Safmarine, operating units the company said last month would be integrated into the wider group.
Damco, which specializes in freight forwarding and logistics, employs around 2,000 people and Safmarine, a container operator that mostly serves Africa, employs about 1,000. The Journal reported that there may also be redundancies at Hamburg Süd, the German container line that Maersk bought in 2017 for $4 billion and that employs 4,500 people.
Maersk Line and other container ship operators sharply curtailed capacity at the onset of the coronavirus pandemic as widespread lockdowns aimed at slowing the spread of the virus weighed on trade.
Volumes began recovering in late May as lockdowns in many countries began easing and freight rates started surging as shipping demand began to outpace capacity. London-based Drewry Shipping Consultants Ltd. said its index of world-wide container freight rates for the week ending Oct. 8 was double the level of a year ago, and spot-market prices from Shanghai to Los Angeles had more than tripled from the same period last year.
Maersk said in August it tripled its second-quarter net profit to $427 million from $141 million a year earlier, strongly exceeding expectations.
Mr. Skou warned that prospects for next year are uncertain because of a potential resurgence in Covid-19 cases during the winter.
“The positive impact from stimulus packages may be less strong in 2021, potential new lockdowns will impact demand and the timing and the effectiveness of a potential vaccine will impact 2021,” he said.
Norway-based Fearnley Securities said in a report that Maersk’s outlook is favorable over the next two years, with current freight rates almost double what they were a year ago.
Maersk’s full third quarter results will be published Nov. 18.Go back