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The Container Shipping Sector on Track to Lose $5B

The container shipping market may be reaching new lows, but a recovery is on the horizon.

Container carriers are expected to amass a collective operating loss of $5 billion this year, according to shipping consultancy Drewry’s latest annual “Container Forecaster and Review 2016/17” report. But by next year, industry profit should recover and shippers will record a $2.5 billion operating profit in 2017.

The anticipated recovery won’t be all warm and fuzzy, however.

“While average freight rates are expected to improve next year, this will follow several years of negative returns and will still leave pricing well below the average for 2015,” Drewry said, adding, “Hanjin’s demise may mark a watershed in this regard, but liner complacency on the risks of insolvency may challenge this notion.”

Overcapacity and too-low freight rates contributed to the takedown of Hanjin Shipping, and the South Korean shipper filed for bankruptcy in August. There had been hopes of a bailout but financers said no and now competitor Hyundai Merchant Marine says it may submit a bid to buy Hanjins assets for Asia to U.S. routes.

“Hanjin’s failure is the culmination of several years of poor commercial decisions and mismanagement, not just by Hanjin, but the industry as a whole. But it did not necessarily signal a major tipping point for the industry,” Drewry director of container research Neil Dekker said. “It was more of a side-show as freight rates had crucially already turned a corner at the mid-year point.”

Rising fuel prices and carriers wary of the very unpredictable market could contribute to higher freight rates under the bunker surcharge mechanism going forward, but this could also contribute to an increase in operational costs.

The next two years will be “very challenging” on the supply side, according to Drewry, as annual fleet growth expected to be between 5 percent and 6 percent and more ultra large container vessels will join the rotation.

Many carriers have not focused on revenue, and in the face of Hanjin’s failure, rising debt could prove an issue for the industry. Revenues may reach $143 billion for 2016, according to Drewry estimates, but that’s compared to $218 billion in 2012.

“More consolidation is like, but is not necessarily the route to the promised land,” Dekker said. “The answer lies with fully addressing the revenue side of the equation and thankfully there are signs that the spot market is being addressed to some degree. The acid test for 2017 will be how the lines approach BCO [beneficial cargo owners] contract negotiations.”