2016 Year in Review: Container Shipping Industry’s Annus Horribilis

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The corporate wreck of Hanjin Shipping Co. validated the 2016 storm warnings for global container shipping lines, but there were some sunny breaks for B.C. terminals.

Hanjin1

Overcapacity

Too many ships and not enough containers equalled record-low container rates on major cargo routes in an industry that has lost more than US$50 billion in sales since 2014. Adding larger container ships to fleets without scrapping enough older vessels worsened the sector’s overcapacity crisis.  Financial health ratings for the sector’s major players took on a lot of water in 2016, especially in the wake of Hanjin’s receivership filing at the end of August.  The financial stress index compiled by Drewry, a U.K.-based shipping consultancy, hit a record low following the first half of 2016.  Container rates also dropped to historical lows in the year’s second quarter.  Transpacific rates to North America’s West Coast were less than half the US$1,700 to US$2,000 per 40-foot equivalent unit charged in 2014-15, according to Alphaliner, a global shipping industry data company.  Citing “challenging market conditions,” Maersk Line, the world’s largest container shipping carrier, reported a third-quarter loss of US$116 million compared with a profit of US$264 million in 2015’s third quarter.

US$5.4 billion route canal

The June 26 opening of the Panama Canal’s new set of locks also opened the international shipping link to larger ships and provided incentive for transpacific ocean carriers to increase their use of container ports on North America’s east and gulf coasts.  Both areas have consequently become stiffer competition for West Coast U.S. and Canadian ports.

Cutthroat competition

An expanded Panama Canal, larger ships and more carrier alliances, coupled with lingering anger over the protracted labour contract negotiations that stalled container cargo movement through West Coast U.S. from mid-2014 through early 2015, accelerated the migration of container cargo away from North America’s West Coast to facilities closer to the rich U.S. eastern seaboard market.

Development of inland ports on the U.S. East Coast increased the appeal of eastern cargo shipping options.

Carrier consolidation

Financial challenges amidst a sputtering global economy prompted China Shipping Container Lines (SHA:601866), Cosco Container Lines (SHA:600428), CMA CGM Group,Hapag-Lloyd (ETR:HLAG) and other major freight carriers to pursue service alliances to maximize vessel efficiency on major trade routes.  But alliance initiatives raised alarm from freight forwarders and other cargo customers over reduced carrier competition and choice.

Trade doldrums

In late 2015, Drewry cut its projected 2016 global container traffic growth to 3.3% from 4.9%. 2015’s addition of record container ship capacity to an already oversupplied pool coupled with low scrappage of older ships worsened an already depressed marketplace for major cargo carriers.  Vancouver’s Seaspan Corp. (NYSE:SSW), the world’s largest independent container ship lease company, was among the B.C. marine cargo companies suffering collateral damage from container shipping challenges.  The company’s first-quarter 2016 financial results showed net earnings down 67% to US$7.1 million compared with the same quarter in 2015.

Cheap oil

Downbound oil cut freighter bunker fuel prices, which reduced carrier operating costs and the cost advantage of larger ships.  Global container shipping capacity reduction was consequently stalled again as smaller, easier-to-fill ships were kept in service rather than being scrapped.

Hanjin sinks

The company’s August 31 filing for receivership underscored the tenuous financial position of major global carriers.  The financial collapse of the world’s seventh-largest container shipping company stranded an estimated US$14 billion in cargo on more than 80 ships, including two initially prevented from unloading cargo at B.C. container terminals.

Infrastructure overhaul

The looming arrival of more 18,000 to 20,000 20-foot-equivalent mega-container vessels at West Coast U.S. ports accelerated container cargo handling investment in major ports like Los Angeles-Long Beach, which opened its US$1.3 billion Middle Harbour terminal.

In December, DP World, the owner of two B.C. container shipping terminals, announced that it was joining with Caisse de dépôt et placement du Québec (CDPQ), Canada’s second-largest pension fund manager, to create a $5 billion funding pool to invest in container terminals.  DP World’s Fairview terminal in Prince Rupert and its Centerm terminal in Vancouver will be the fund’s first beneficiaries.

The Port of Vancouver, meanwhile, is awaiting the results of a federal environmental assessment of its proposed Terminal 2 container port expansion at Roberts Bank.

The $2 billion project is part of the port’s strategy to handle larger container ships and the annual 4.8% growth in container cargo that Ocean Shipping Consultants projects for the Pacific Gateway region through 2025.

However, the Port of Vancouver’s first-half 2016 container cargo was 6.5% lower than the same period a year earlier.

Other transportation issues that mattered in 2016

Rail merger mothballed

In April, Canadian Pacific Railway Ltd. (TSX:CP) and its CEO, Hunter Harrison, abandoned the pursuit of a mega-merger with one of America’s Big Four railway companies after repeated rejection from Norfolk Southern Corp.’s (NYSE:NSC) board of directors.  The merger, according to Harrison, would have achieved $1.8 billion in operating efficiencies and synergies and provided shippers in Canada and the United states with better access to tidewater shipping facilities and major metropolises east of the Mississippi via one major efficient rail network that would allow freight to reroute around such major bottlenecks as Chicago.

Mobi moves in

Three months after launching in the summer in downtown Vancouver, bike-sharing service Mobi reached 100,000 rides, far exceeding company expectations.  The program now has around 5,000 full-time members, who pay $129 for an annual membership.  It recently announced a strategic partnership with telecommunications giant Shaw Communications Inc. that will expand Mobi’s reach in the city while supplying members with free wireless Internet at more than 100 Mobi stations in downtown Vancouver.

Evergreen finally a go

Opened December 9, more than five months behind schedule, the 11-kilometre, six-station Evergreen Extension runs between Burnaby and Coquitlam via Port Moody.  The line was initially projected to start operating in 2014; however, a number of construction issues delayed opening.  TransLink estimates the $1.4 billion upgrade will carry approximately 70,000 passengers daily by 2021.

Air Canada adds routes

Air Canada (TSX:AC) extended its service substantially in 2016.  Canada’s largest airline added more than 10 trans-border routes, making it one of the most intense international expansion periods in the airline’s history.  Air Canada also announced third-quarter earnings of $1.25 billion, a record quarterly high.

G3 Terminal Vancouver

A $500 million grain terminal proposal from a joint venture partnership between G3 Global Holdings and Western Stevedoring Co. Ltd. has been granted a project permit by the Vancouver Fraser Port Authority.  The G3 Terminal Vancouver will be designed to optimize receiving, storage and shipping of grain on Canada’s west coast.  Residents of the North Shore are concerned about the impact of the project on views and the local environment, but permit conditions imposed by port authority ensure strict operational requirements.  A final investment decision is expected to be made in 2017.

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Source: Business in Vancouver

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