Container freight rates have dropped by an average US$150 per teu (20 ft equivalent unit) in the first half of this year, putting heavy pressure on the profitability of shipping lines, according to a Hong Kong shipping executive.
The Asia-Europe trade has been worst hit, seeing rates drop by $250 per teu, representing a 20 per cent fall compared with the same period last year, Kim Balling, Orient Overseas Container Line's (OOCL) general manager for corporate marketing, said.
He said if the situation continued due to fierce competition and excess capacity in the trade, it would be 'very difficult' for the industry and some lines might even go bankrupt.
Tung Chee-chen, chairman and chief executive officer of Orient Overseas (International), parent of OOCL, said: 'Achieving profitability in this market is an achievement in itself.' He said while OOCL's cargo rose by 19 per cent in the first half against the same period last year, the average revenue per teu fell due to keen pricing competition and an increase in capacity in the industry.
While most shipping lines faced losses, OOIL reported a lower profit of $10.2 million in the first half of the year.
'Our fleet renewal and modernisation programme substantially increases our operating efficiencies,' Mr Tung said.
Modest freight rate improvements for the Asia/Europe trade were achieved from the end of the period due to full utilisation of vessel space anticipated in the summer season, he said.
However, freight rates in the trans-Pacific and trans-Atlantic trades have continued to be pressured, Mr Tung said.
He said the effects of excess carrying capacity in the major trades would continue to adversely affect the performance of the containerised business in the second half of the year and probably into 1998.
Mr Tung said, however, this market situation had been anticipated for several years and the company had taken steps to tide over the difficult period.
The company had moved to specialised cargo, refrigerated containers and garments which continued to yield excellent revenue, he said.
These steps had enabled the company to enjoy economies of scale and other operational efficiencies.
The group's accumulation of cash reserves and expansion in China and intra-Asia networks also were part of the overall plan.
Mr Tung said that OOCL would take delivery of the final two 4,950 teu vessels of the eight-vessel series later this year, and one new 2,650 teu vessel next year.
The group also had arranged with a third party to charter a 20-year-old 1,000 teu vessel with an option to buy it later, he said.
Mr Tung said the group had continued to pursue its non-shipping investments in the mainland which accounted for 7 per cent of its total assets.
The group's net debt to equity ratio at June 30 was 0.4 compared with 0.3 at December 31, 1996.
Mr Tung said the ratio was expected to rise in the second half taking into account investments in the mainland and debt incurred for vessels due to be delivered at the end of this year.
The group would maintain its net debt to equity ratio below 1:1, he said.
