Over-Capacity Continues Troubling Cargo

March 2nd, 2016

Despite corrective action by air and sea freight transporters, excess capacity and slackening demand continue eroding bottom lines.

​A combination of rising over-capacity, flattening demand and slowing growth in key economic regions continued driving air and sea cargo prices down in the fourth quarter of 2015, undercutting the income of sector operators.

With those trends generally expected to persist in the medium-term, activity in 2016 isn’t likely to surpass last year’s disappointing results.

The over-arching problem has been China’s slowing economy, and fears it may never recover its formerly red-hot expansion rates.  That has had a negative impact on raw material exports from Africa and South America that fed China’s growth, and sapped trade between Europe and those emerging economic zones.

Atop that was an unexpected dip in US growth to .7% in the fourth quarter following a 2.2% rise the previous period. The dramatic drop in oil prices penalizing emerging export economies like Venezuela, Argentina, Nigeria, Angola and Russia has also complicated matters.

“China has slowed, Africa and South America have gone flat, Russia isn’t recovering and the U.S. had a disappointing quarter, all of which pinched demand,” says Anne-Sophie Fribourg, sea freight middle office director for Bolloré Logistics in Paris.

But she and Bolloré Logistics air freight middle office director Claude Picciotto add that the additional problem of over-capacity is one transporters have largely brought on themselves.

“Capacity has been rising, and even though most major passenger airlines have reduced cargo space, new capacity being injected into the market by Gulf carriers and pure freight transporters is offsetting those cuts,” Claude Picciotto says. “Many companies are maintaining market share amid capacity increases by attracting business with reduced prices, which eats into revenues.”

The result was a virtually flat fourth quarter in air freight activity, and in a full-year 2015 increased of only 2.5%.

But with neither the macro-economic motors certain to kick back into gear soon, nor the over-capacity problem likely to ease for many months, most estimates foresee virtually no growth in international air freight traffic in 2016. Consequentially, competitors must innovate to succeed.

“Players outperforming the market, as we have, focused hard on satisfying current clients and winning new business – especially in China,” Claude Picciotto says. “That will provide momentum continuing through 2016.”

In addition, he notes, Bolloré Logistics is also adapting to changing market realities created by over-capacity.

“We’ll adapt our commitments on certain routes by reducing firm capacity and going to spot options,” he says.

The situation in the maritime sector was similar to air cargo -- driven by even worse capacity excess.

Stalling activity on most major routes that began in the third quarter of 2015 continued into the fourth. That cut traffic growth for the year to about 2% -- half of initial forecasts. Estimates for 2016 are only slightly better, due largely to the worsening capacity problem.

Anne-Sophie Fribourg notes that nearly 1.7 million TEUs – or 214 new container vessels -- were added to sea cargo capacity in 2015. But only one million TEUs were parked by maritime transport operators last year -- generating an 8.5% net capacity increase.

Around 60 new 18-22k TEU ultra-large vessels are slated to enter operation in 2016, plus numerous smaller ships expected to expand sector capacity by 4.6%.

As a result, research company Drewry said 2015 produced the lowest spot rates since 2009. It believes that downward trend will persist into 2016, and forecasts sector losses exceeding $5 billion.

In anticipation of that, European giant Maersk late last year announced a restructuring program cutting costs and eliminating some 4,000 jobs. In February it revealed 2015 profits 43% lower than the previous year.

Anne-Sophie Fribourg says many shipping companies anticipate the capacity/demand disparity will start balancing out in mid-2016, allowing for price increases. But she believes the current volatility and pricing pressure will force cash-strapped companies still financing new vessel purchases to consolidate for survival.

“There are already rumors of certain Asian operators nearing bankruptcy, so I expect to see considerable consolidation in the sector,” she says. “The merger of China Shipping and Cosco is already underway, and we may see similar action between Japanese and South Korean groups, too.”

Key Figures
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    of growth for Indian GDP in 2014

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    of growth for African GDP in 2016

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    of growth for East Asian GDP in 2015, the world’s fastest-growing region

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    transported by the MSC Oscar, the largest container ship in the world

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