Lower Bunker Costs Not Enough to Fund Required Investments for Box Carriers

"Carriers must invest in new and larger vessels," says report

In its latest 2015 Container Shipping Outlook publication, consultants Alix Partners says that while continuing investment in new, larger vessels is vital for the future of container lines, lower bunker prices are unlikely to boost financial positions sufficiently and financial improvements seen in recent years are not sustainable.

"Even a prolonged reduction in bunker prices will likely have limited impact on container operators' overall performance," says the Outlook report.

Shippers will use lower bunker prices to pressure carriers to reduce freight rates "siphoning off the benefits of reduced fuel prices," according to the report, while carriers will reassess slow steaming strategies, exacerbating problems of overcapacity and further driving down rates.

Meanwhile overcapacity will continue to dog the market and keep rates low for the foreseeable future, pointing to the growth in average vessel sizes of 19 percent and 32 percent in Asia-North America and Asia-Northern Europe trades respectively since 2010.

"The chase for fuel efficiency drove the introduction of increasingly large vessels, which put unprecedented pressure on the container shipping segment and which will remain the force driving industry dynamics in 2015," says Alix Partners.

Taken together the container industry has made improvements to its financial position but these are not significant and in any case unsustainable, says the report.

Interest cover, being the amount of times carriers can pay their interest expense from EBITDA, improved from 2 times in 2013 to 5 times in 2014.

Gearing, as measured by debt to EBITDA, reduced from 6.5 times to 5.2 times over the same period, again suggesting improving financial stability.

Financial Improvements Not Sustainable

But such ratio improvements come from divesting non-core assets and older vessels, reducing debt obligations and giving a one-off boost to EBITDA rather than being the product of sustainable profitability improvements.

Cash generation has improved markedly as lines have tightened terms with customers and negotiated better credit with suppliers, but carriers are still not generating enough free cashflow to invest in their fleets without borrowing significantly.

These factors combined leave the industry vulnerable, given stagnating demand for boxes and volatile freight rates, says the report.

To achieve the financial improvements seen in the last two years, carriers are neglecting capital expenditure, which will not be possible to hold at bay in the long term.

"To remain competitive and to provide a base for future growth, carriers must invest in new and larger vessels," explains the report.

However, as carriers do so, they will further put strain on their industry.

Carriers should continue turning their attention to two key areas if they are to succeed, concludes the report.

Firstly, they should focus on divesting non-core assets, in particular logistics and terminal operations.

At the same time lines "carriers can expand margins by focusing on route profitability, selective customer targeting, and smarter allocation of scarce inland dray resources."

Boston Consulting Group this week predicted that bunker demand in the container shipping industry will double between 2014 and 2030.