NOL struggles to stay afloat as freight rates fall
Low bunker fuel costs aren't helping much.
Neptune Orient Lines reported yet another quarter of loss in the first three months of 2015. Although the group managed to narrow its losses last quarter, market watchers remain downbeat on the group’s profitability prospects this year.
Analysts warn that the company will struggle to stay afloat this year amid extremely low freight rates and overcapacity issues plaguing the liner industry.
“The near term outlook does not look very bright for NOL with the SCFI spot rate index falling to 5-year lows as liners now seem to be passing most of the fuel cost savings to shippers in a quest for market share. Even Maersk Line has recently come out strongly in favour of making up for market share loss, which does not bode well for the market,” said Suvro Sarkar, analyst at DBS Vickers Securities.
Sarkar added that the company’s results were all the more disappointing because other liners appeared to be enjoying a considerable positive impact from low bunker prices.
“We reckon we were earlier too optimistic to believe that liners would take a rational stance and benefit from low oil prices, but recent freight rate trends belie that. Thus, we now expect NOL to post a small core loss in FY15 and a modest profit in FY16 at best,” he stated.
OCBC Investment Research analyst Eugene Chua warned that freight rates will remain depressed as world trade volume is likely to be soft while capacity is expected to expand by around 8%.
“With 41% exposure to transpacific routes, the catalyst for NOL will be increases in transpacific freight rates driven by recovery in U.S. economy leading to higher trade volume. While there are efforts to push for such increases, we remain unsure of whether these efforts will hold," Chua noted.
Chua also said that while labour disputes at the US West Coast appear to have been resolved, the backlog will take time to work through and may continue to impact NOL in the second quarter.
"We expect the large backlog of containers built up from USWC congestion to take at least six to eight weeks to work through, and we expect some spill over into early 2Q15,” he noted.