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Profit erosion by rising fuel costs worries Container Line Executives

Business and profit are inseparable twins; business without profit is an empty exercise and profit without business is an utter impossibility. And when profit declines, to the extent the sustainability of a business is facing a threat and a challenge. Profit erosion turns out to be a major worry for the executives.

Container spot rates from Asia to Europe and from Asia to the US west coast are around 30% lower than 12 months ago, while fuel costs have jumped over 20%.

Most carriers claim it is “too early to say” at what level rates will settle, or begin to recover, but worried frowns have begun appearing on the faces of liner executives concerned that the cumulative $7bn industry profit in 2017 could have been a one-off.

Friday’s Shanghai Containerized Freight Index (SCFI) recorded a further 10.1% decline in spot rates to North Europe to $633 per teu – this compares with $838 per teu a year ago.

For Mediterranean ports, the SCFI saw spot rates drop by a less dramatic 5.4% on the previous week to $615 per teu, but this is still 36% below that of the same week of 2017.

Indeed, carriers on the route seem to have given up on any immediate recovery, setting their FAK rates for April at the same, or in some cases lower, levels than the previous month.

Speaking during Hapag Lloyd’s 2017 results presentation last week, chief executive Rolf Habben-Jansen said new contracts on the route had been agreed at a level “on average somewhat better than a year ago”, although it was not clear whether this took into account the higher cost of bunker fuel.

However, spot business makes up around 50% of the total liftings on the trade and carriers cannot afford any further rate erosion.

The pressure is building from investors and shareholders, who these days follow the spot indices closely, after witnessing years of net value destroying returns from the sector.

Hapag Lloyd’s surprise decision to declare a first-time dividend of €0.57 per share, despite the carrier’s debt ballooning to $6.8bn after the takeover of UASC, was seen by many as an encouragement to its investors.
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