Boston Consulting Groups sees promise for ocean cargo carriers

While executives in the container-shipping industry would probably like to forget 2011, the resiliency of industry players will prove itself once again, said analysts at the Boston Consulting Group. In a recent report, “Restoring Profitability to Container Shipping,” they recognize that even though some were close to bankruptcy, such struggles are not new.

“For years carriers have wrestled with earning back the cost of capital, and in 2009 they were confronted with a crisis caused by a significant drop in demand,” noted the report.

The report said that last year their distress resulted primarily from intense competition and price wars triggered by carriers’ reactions to a self-inflicted supply-and-demand imbalance. In 2011, the arrival of new vessels ordered years earlier boosted capacity by 1 million twenty-foot-equivalent units (TEUs) for 16 of the largest publicly-listed carriers— an increase of 8.7 percent over 2010 levels.

Carriers had placed these orders planning to increase market share, noted the report.

“Carriers didn’t simply add nominal capacity, however; this capacity came in the form of new ultralarge vessels. Carriers were continuing their pursuit of lower unit costs,” said analysts.

But when demand didn’t keep up with supply, carriers decreased freight rates to ensure maximum utilization even at the expense of profits. Price wars ensued, the most intense one occurring on the highly competitive trade lane between the Far East and Europe, Where rates fell by 60 percent.

A recent study estimates that the rate cuts cost the industry $114 billion. For the 16 largest publicly listed carriers, the cuts contributed to combined operating losses of $5 billion in 2011, with an average operating loss per carrier of $311 million.

Jon Monroe, president of Monroe Consulting, told LM that this “blood bath” had to come to a stop if carriers were to remain economically viable.

“The predatory pricing wars were threatening to decimate the industry,” he said.

But the Boston Consutling Group observed that the losses marked an abrupt turnaround from 2010, when these 16 carriers earned a record $7.1 billion. Debt-to-equity ratios for ten of the carriers rose above one.

“Rating agencies responded by lowering their ratings for several of the carriers, which raised the cost of capital,” said Boston Consulting Group analysts. “Overall, the major carriers survived the year through slow steaming (throttling engines to save fuel) and organizational and debt restructurings. Several carriers also received massive cash injections from owners and governments, however, their combined cash reserves decreased by almost 20 percent.”

Stephen Fletcher, commercial director, for the Paris-based consultancy Alphaliner, said carriers are not out of the dark yet, however.

“Without further capacity cuts, carriers will have a hard time making rate hikes stick,” he said.