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Destructive freight rate environment here to stay

The container shipping industry is expected to continue to struggle with overcapacity and an inability to deliver value to shareholders, warns consultancy McKinsey & Company in its latest report.

The report, entitled 'Container shipping: More mergers, better mergers', suggested that while container shipping brings significant value to the world, it delivers little to its investors, producing low rates of return.

"We estimate it has destroyed over USD100 billion in shareholder value over the last 20 years," said the report. "Its profitability was particularly poor between 2011 and 2016, when the industry average return on invested capital (ROIC) was consistently lower than the weighted average cost of capital (WACC)."

McKinsey cites overcapacity as the key reason for the poor performance, exacerbated by slowing growth.

The report says that, unfortunately, overcapacity is here to stay and its projections of supply and demand show a continued large gap for several years, which will close by the early 2020s.

"With overcapacity, container lines often accept any cargo, even if it barely covers marginal cost; after all, carrying something extra on today's ship is usually better than carrying air," said the report.

"Many industry watchers are predicting the end of the destructive freight rate environment. Unfortunately, we are not so optimistic."

While the industry is experiencing unprecedented consolidation, McKinsey warns that it is not yet enough to turn the industry around.

 

www.mckinsey.com 

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