There is no question that a slowdown in global trade can have far-reaching implications. Weakened demand for commodities in Asia and an economic slowdown in key emerging markets, particularly China, have caused global trade to stall. This trade slowdown, coupled with falling freight rates, has left the global shipping industry in dire straits.
Many of the industry’s largest players have been hurt financially by the considerable decline in demand in Europe and Asia and an estimated 30% overcapacity of container ships. In the fourth-quarter of 2015, the world’s largest container-ship operator, A.P. Moeller-Maersk A/S, suffered a $2.51 billion loss and a steep drop in return on capital. Many rating agencies and shipping analysts believe that similar struggles will persist in the first-half of 2016 for shipping companies, as the outlook for global trade growth is gloomy.
Overcapacity is perhaps the deepest challenge that the shipping industry faces. Typically, ship operators need around $1,000 per container to break even. In 2015, freight rates for Asia-to-Europe trade were merely $620 per container on average, and figures in early 2016 indicate that rates are continuing to fall. According to a recent report by AlixPartners, consolidation is necessary to trim excess capacity and to achieve the operational efficiencies necessary to be profitable despite lower revenues. The report suggests that executives in the container-shipping industry should look to the consolidation of the passenger airline business over the last two decades as an example to follow. Tightening control over capacity and disciplined commercial management led the recovery in the airline industry and just may be the recipe for success in the shipping industry.
Be sure to stay tuned to the globalEDGE Blog this week, as we provide additional insight into the global shipping industry!