The outlook for global container carriers remains grim at the outset of 2017, says analyst AlixPartners in their latest industry report.
The industry continues to be plagued by the same challenges since the onset of the 2008 financial crisis. Events like Brexit and the new U.S. administration’s policies threaten to add insult to injury as they inject even more uncertainty into the future of global trade. Spreading protectionist stances could reverse the past several decades’ steadily easing trade barriers that have supported the growth of containerization since the 1950s.
Yet hope remains for the shipping industry, says the report. Rate levels on major East-West trades improved—dramatically in some cases—in the fourth quarter of 2016.
At the tail end of peak season, Hanjin Shipping filed for bankruptcy, sending shock waves through spot rate markets and exposing the flaws of the alliance system in the process. The bankruptcy helped create a rare seller’s market that lasted through the close of 2016.
Carriers managed to sustain those higher rate levels because of an unusually early Chinese New Year, which should buoy financial results for the fourth quarter.
Although carriers will struggle to improve their financial performance this year, they can take clear steps to shore up balance sheets in this difficult environment. They should remain laser-focused on eliminating costs from their core shipping business. For those involved in the wave of consolidation sweeping the industry, which is just about everyone at this point, it is imperative to consider taking advantage of every opportunity to save costs through effective post-merger integration and seize this unique opportunity to rationalize the global fleet, says AlixPartners.
Carriers have slimmed down operating expenses (OPEX) and reduced their capital expenditures (CAPEX), especially by delaying mega-vessel orders. The industry has slashed CAPEX by more than half in the past five years, bringing it down from $25.2 billion in 2011 to $12.4 billion in 2016.
But those efforts may not go far enough. Nearly every key financial indicator worsened from the previous year. Operational cash flow as a percentage of revenue slowed to an anemic six percent through the last 12-month period ended September 30, 2016. CAPEX still outstripped those cash flows despite the strides the industry has made.
Meanwhile, the industry’s total debt levels, driven by borrowing from mergers-and acquisitions (M&A) activity, have edged back up. What’s more, earnings before interest, taxes, and depreciation (EBIT) margins turned negative in the third quarter of 2016 for the first time in the analyst’s sample period. Those losses are not concentrated in just a few carriers. In fact, about half of the study base reported negative margin the last-12-month period.
The fact that third quarter 2016 results were especially discouraging does not bode well for the 2017 calendar year, because the industry usually sees peak volumes during that period. Those results, however, largely predate the anticipated impact of the Hanjin bankruptcy. Financial indicators had foretold a bankruptcy on the horizon. Now it’s finally happened, and it’s a big one—in fact, the biggest one since the United States Lines bankruptcy in 1986.
As a whole, the industry’s average Altman Z-score has fallen back to a feeble 0.9, the lowest level to date. The Z-score, a formula for predicting the likelihood of bankruptcy based on a number of metrics from a company’s public statements, of less than 1.81 suggests financial distress. For further context, AlixPartners has not seen a score higher than 2.99, which is considered in the safe zone, since 2007.
The full AlixPartners report is available here.
The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.