Container Lines Can Expect Bigger Profits, More Investment

2017 is shaping up to be container shipping’s best year in nearly a decade. With freight rates on the rise and operating costs on the decline, container lines can expect a boost in shipping profits now and in the future. This outlook is inspiring more interest and investment in the industry.

There was a time when the cost to transport a container was so low that container lines were losing money with each voyage. This resulted in losses for a majority of container shipping leaders in 2016. Maersk Line, the industry’s leader, reported an annual loss of $376 million for 2016. In contrast, the company has forecast a shipping profit of one billion dollars for 2017.

In late June of 2017, the Shanghai Containerized Freight Index (SCFI) experienced a growth spurt, nearly doubling the SCFI rate from a year earlier (2016). Influenced by a new round of FAK (freight all kinds) rate hikes, and a disciplined intended implementation of peak season surcharges (PSS), spot rates from Asia to North Europe gained 15.1 percent; rising to $1,015 per TEU. The SCFI component for the United States’ West coast saw rates soar 26.2 percent to $1,378 per container. This has meant a return to profit for most container shippers.

The last couple of years (2016, 2017) have seen a flurry of mergers, alliances and partnerships between container shipping leaders. In the interest of survival, one time rivals have found common ground and reached partnership agreements. This has helped them to lower operating costs on major trade routes and reduce competition throughout the industry.

With volatility in the shipping sector seeming to be a thing of the past, institutional and private investment is returning to the industry. For one, there is an urgency to invest in containers to meet the rising demand for shipping services. In late July 2017, COSCO announced that it will invest more than two-hundred million dollars to purchase used shipping containers to add to its fleet. They are not the only ones, other shipping leaders are investing in containers too

Over the last decade, the container shipping sector has undergone a positive transformation. In doing so it has emerged as a stronger, more profitable industry and a better investment opportunity for private investors.

Who is Driving Global Economic Growth?

Trade growth has slowed since 2012, relative to both its strong historical performance and to overall economic growth. According to data provided by the IMF, the overall weakness in economic activity – in particular in investment – has been the primary restraint on trade growth. Also contributing to the slowdown has been the waning pace of trade liberalization and the recent uptick in protectionism. Average annual global output growth through 2021 is estimated to be 3.0 percent.

The global economy remains sluggish moving into 2017, but the growth outlook is nevertheless somewhat stronger than in recent years. After slow momentum in 2016, global growth is projected to recover to 3.4 percent in 2017. This forecast reflects a more subdued outlook following the June 2016 U.K. vote in favor of leaving the European Union (better known as Brexit), as well as weaker-than-expected growth in the United States. Financial market sentiment toward emerging market economies will continue to improve in 2017, with emerging Asia in general and China and India in particular seeing the highest levels of dynamism over the next five years.

emerging markets performance

After years of increasing global economic integration, politicians are facing significant political pressure to limit imports. In June 2016, the WTO reported that the application of new trade restrictions by G20 economies reached its highest level since the organization began monitoring them in 2009. This increased protectionism is one reason why global trade remains below its pre-crisis peak, and continues to suffer from slow growth. The WTO estimated that trade expanded by a mere 1.7 percent in 2016, the slowest pace since the global financial crisis

Geopolitical tensions have been rising, leading to territorial disputes and international sanctions. At the same time, domestic politics is becoming more unpredictable in many countries around the world. Because of this, progress on multilateral free trade agreements such as the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (T-TIP) are increasingly unlikely to be ratified in the short to medium term.

Addressing the general weakness in economic activity, especially in investment, will stimulate international trade. This could in turn help strengthen productivity and growth. In addition, further reforms that lower trade barriers would boost the international exchange of goods and services, and in doing so it will revive trade and encourage growth.