Container shipping is trending to close the year with operating profits of $1.5 Billion. Drewry Shipping Consultants has concluded that this boost in profit is being caused by increased demand of cargo and rising freight rates. This upswing in the market will reduce the effect of the heavy losses that major carriers incurred in 2016 and in Q1 of this year.
Effects of the Market Rebound
Drewery went on to say that higher annual contract rates and a strong uptick in demand during Q1 2017 will cause more profitable conditions. Out of the 13 carriers that published their Q1 results only five generated a profit. CMA CGM had the highest profit with a 5.5% operating margin while Hyundai Merchant Marine had the lowest at -10.1%.
Many have claimed that the industry has become commoditized, however this polarizing set of profit margins show us that there still remain large differences between carriers that affect their profitability – including their customer base, trade coverage, spot-contract ratios, and other factors. As time goes on we will see the effects of mergers and acquisitions in the industry start to take hold. Carriers were expecting better results in the first quarter of 2017, however when compared to 2016 things are off to a great start. The Q1 2016 operating loss clocked in at $500 million while Q1 2017 operating loss came in at $16 million, drastically reduced from a year before.
Old Contracts
Rates are set to rise as old contract rates from Q1 2016 lapse. There were many annual contracts that were signed at very low rates that were effective from May of 2016 to April of 2017 so many shippers attempted to ship as much cargo as possible before May.
The Leaders of the Pack
There are six carriers that provide revenue per TEU data. Of those six Zim Integrated Shipping Services and CMA CGM saw minor improvements of 1% while Maersk Line achieved a 4% YOY increase despite spot rates being 35% higher in Q1. This will change in Q2 as carriers take on higher yield contracts.
Due to several factors mentioned above, carriers will have to wait a little while longer to realize higher profits but all signs point toward a very profitable remainder of the year.
