The owners of the world's containerships are the people responsible for making globalization a reality. Their fleets transport 90% of world trade in manufactured goods. Yet, all but seven of the biggest 30 shippers lost money in 2012, according to shipping analysts Alphaliner. Industry players and analysts say cumulative losses over the past four years run to about $7 billion.
Excess tonnage has haunted the container-shipping industry since 2007, when a record 3.1 million additional containers were added ahead of the plunge in global trade triggered by the 2008 financial crisis.
The crisis prompted a temporary lull in new shipbuilding as new vessels ordered in the boom times entered service.
Stubbornly high fuel prices that have gone up 16% on average every year since 2005 have encouraged ship owners to invest in new, more-fuel-efficient vessels even though the industry is groaning with excess capacity estimated at about 10% above current demand. Demand is also showing little or no growth on key routes such as that between Europe and Asia. Containership orders in the first quarter were up sixfold from last year, according to analysis by London-based Braemar Seascope Ltd.
The result is collapsing freight rates that make it tough for companies to cover the industry's high fixed costs and operating expenses.
Freight rates on the benchmark Asia-Europe route were down 6.5% last week alone, according to the latest Shanghai Containerized Freight Index. The price for a 20-foot equivalent container shipped from China to Northern Europe was fixed at $818, compared with more than $1,200 at the start of the year.
Significant consolidation among shipping companies and greater pricing discipline look like distant prospects despite the problem of overcapacity and the dire financial straits many owners find themselves in.
Most major players are immune to short-term losses in a secretive industry dominated by family-owned conglomerates whose owners have emotional ties to their vessels and by Asian state-backed enterprises or investment funds with long investment horizons.
Returns even for companies like market leader A.P. Moller-Maersk A/S (AMKBY, MAERSK-A.KO, MAERSK-B.KO) of Denmark are likely to prove modest at best. With a price tag of a new vessel at more than $100 million, a normal return on investment should be at least 10%. But average returns currently hover around 3%, according to industry estimates, not much better than 30-year U.S. Treasurys currently yielding 2.8%.
"Container shipping made globalization a reality, but we have reaped very limited benefits as an industry," said Jakob Stausholm, chief strategist at Maersk Line, the Danish conglomerate's shipping arm. A.P. Moller-Maersk also operates shipping terminals and has an oil-and-gas exploration and production business.
"We have to learn how to run an effective [shipping] business and make money out of it," Mr. Stausholm says, admitting that Maersk Line's return on investment is "too low."
Lars Jensen, chief executive of Danish research firm SeaIntel Maritime Analysis, said the decline in freight rates in the past six months was three times as fast as in 2011, when the previous price war broke out. "It is clearly the result of structural overcapacity."
Maersk Line Chief Executive Soren Skou warned in April that the industry is on the verge of another price war unless excess vessels are taken out of service, especially on the Europe-Asia route, which accounts for about 40% of total container trade for the shipper.
"It is a really stupid, stupid strategy to deploy more capacity," Mr. Skou told a shipping conference last month. This isn't just Maersk talk. The shipping group reduced its own capacity by 14% last year.
However, Maersk Line is planning to stay ahead of its rivals amid the glut in the sector by investing in huge new ships to ensure it has the biggest, most efficient fleet at sea.
Maersk Line has kicked off a new "arms race," ordering mega-containerships in a $3.8 billion order for 20 so-called triple-E vessels. The ships can carry 18,000 20-foot containers, 2,000 more than the world's current biggest containership, the Marco Polo, owned by France's family-owned CMA CGM. Maersk Line says the ships will consume approximately 35% less fuel per container than the standard 13,100-capacity container vessels being delivered to other shipping lines in the next few years.
Unfortunately for near-term returns at Maersk and its rivals, other shippers are following suit.
China Shipping Container Lines Co. (2866.HK, 601866.SH), the unprofitable Hong Kong-listed unit of Chinese state-owned enterprise China Shipping (Group) Co., has said it is in the market for five triple-E containerships. It is currently taking bids from South Korean shipyards.
"In three to four years, major shippers will operate Europe-Asia with ships of 14,000 and above," said SeaIntel's Mr. Jensen. "Those who don't have these ships won't be able to compete."
But "leaving the line" is easier said than done for many ship owners.
"Rich Greek and German families are a good example," Mr. Jensen said. "They've been in the industry for decades with emotional attachments to their ships."
Shrinking a shipping business, often funded with bank debt is difficult when there is a limited market for secondhand vessels, unlike the commercial-aircraft sector.
"The only option for getting out is scrapping," says a Greek ship owner, speaking on condition of anonymity. "If I scrap, I'll be ruined as I can't pay the bank back and the bank will be saddled with nonperforming loans it can ill afford. So I limp along putting money into the ships from other parts of my business and hope for better days ahead."