Cost efficiency to determine shipping lines profitability

KARACHI: The global shipping industry continues to be characterised by overcapacity. The shipping industry has been battling overcapacity since the financial crisis because new vessels ordered before the downturn has flooded the market.
“Cost leadership is the name of the game for shipping lines to thrive,” said Farheen Mehmud, head of Legal Services at Maersk Line, which currently holds the largest export market share of 20percent in terms of volume in the container shipping industry.
Last year, world cellular container ship fleet grew by 6.3percent to reach 18.37 million TEU (Mteu) as at 01 Jan 2015. The growth in capacity was driven by the delivery of new built ships. “We expect the global demand to grow by 3-5percent and nominal supply to grow by 5-7percent,” Mehmud added.
The containership fleet is expected to grow by 7.8percent in 2015, with an estimated 1.78 Mteu of capacity to be delivered this year.
Mehmud said a number of vessel sharing agreements to extract economies of scale for operating and optimally utilising the ships have been signed between competition lines globally average freight rates were largely unchanged in 2014, only inching up by a marginal 0.4percent.
But, carriers enjoyed a significant fuel cost bonanza, with average bunker prices falling by 9.6percent last year. However, rates may come under pressure as carriers continue to grapple with numerous vessel deliveries.
With declining prices industry can experience some downward correction in their operating costs. However, the impact may diminish with continued overcapacity and delivery of new vessels in 2015.
“We expect the global demand to grow by 3-5percent and nominal supply to grow by 5-7percent,” Mehmud added.
Ocean transportation still remains the cheapest mode of transportation.
However, there has been a steady decline in market demand on the popular trade between the east coast of South America and Europe and Mediterranean. This weakening demand has led to substantial over capacity and resulted in a need to adjust our network to match the changing market forces.
Another shipping sector expert quoting from international shipping reports said that the outlook for the containership sector hinges on geopolitical uncertainties receding and global economic growth picking up, but at the same time, tonnage providers are being squeezed by liner companies that have formed themselves into alliances focused on increasing profitability and efficiency.
Mehmud said as far as Pakistan is concerned declining rates and thin profitability margin hovers every shipping line in Pakistan. “Last year was a very challenging year for Pakistan where overall containerised exports declined by 12percent compared to last year.”
She said the government needs to take concrete steps to boost our exports. There is a dire need to not only increase the quantum of exports but also to expand their range, selecting higher value added goods for exporting to the existing and new markets.
Law and order situation continues to deter importers to visit Pakistan and participate in trade exhibitions -Shifting of Pakistani Industrialists to other countries due to push and pull factors continues to remain a challenge.
It is expected that rates overall will remain under pressure as supply is expected to grow slightly faster than demand. The low oil price will not have a direct impact on the rates. Rates continue to be determined by the supply and demand balance in each trade, not the fuel price.
Experts expect a net positive impact from lower oil price on global container demand. However, certain trades will be negatively affected. In the Middle East, West Africa and Latin America, we expect lower growth than previous years due to the economies’ large exposure to the oil price.