Container Shipping

Container Shipping

Overview

An ”L-shaped” market in the making? Demand: The overall sluggish demand picture has resulted in slow steaming and idle capacity equal to 550 vessels comprising 10% of current trading fleet or 1.3 million TEU. 
An ”L-shaped” market in the making?

Demand:

The overall sluggish demand picture has resulted in slow steaming and idle capacity equal to 550 vessels comprising 10% of current trading fleet or 1.3 million TEU. This is hard evidence of really sour markets.

But the sentiment in the container segment has changed a bit lately. Freight rates seem to have bottomed out, and operators have so far been able to limit oversupply of vessels in the market. Rates have improved as capacity has been reduced on the main trading lanes and seasonal volume increased.

Following an unprecedented drop in global container handling in first quarter 2009 to the tune of 20%, main ports throughput has improved. From the world’s manufacturing center in Asia, a total top 10 Chinese container ports report a January-August decline in volumes of 9% as compared to same period last year (y-o-y). This compares to a drop of 16% in Shanghai in first half 2009 y-o-y.
Source: Shanghai Shipping Exchange

A review of 2009 so far tells a clear story of misery. Westbound trade volumes on Europe-Asia routes were down 22% in both 1st and 2nd quarter, in a period of price reductions of almost 50%. Eastbound trade volumes on Europe-Asia routes were down 16% in 1st quarter but just 2% in 2nd quarter coupled with price reductions of some 33%. This adds to the decoupling thesis between Asia and the rest of the world.

Inbound containers on the US West Coast reached a nine-month-high level of 0.7 million TEU in August. However, the figure equals a 15% volume contraction y-o-y.

US Private consumption is still not contributing significantly to a recovery. Data shows that spending has been set three years back to the level of Autumn 2006. And with unemployment still on the rise, the mantra is no jobs = no consumption. Positive growth in second quarter as compared to first quarter in France and Germany indicates some light at the end of the tunnel for European consumers. Even though lean inventories should provide some support from restocking, the pace and scale of this impact could end up as a slow sidekick in the overall demand picture.
Source: Danske Bank

The demand for chartered tonnage remains extremely low, with T/C rates at USD 4,000-6,000 per day regardless the size of the vessel.
Source: Clarksons Research Services Ltd.

Supply:
So far in 2009, some 190 vessels (0.8 million TEU) have been delivered, leaving close to 1 million TEU to be delivered in the remainder of the year. Yards have to increase speed of deliveries by 100% to uphold scheduled deliveries in 2009. Therefore, the scheduled orderbook will not be delivered on time. BIMCO estimates that total supply growth of 1.4 million TEU in 2009 is more likely. This will keep growth at 10%, assuming 10% cancellations and 25% delays or postponements.

While delivery postponements are a positive step for the container industry, recent demand forecasts suggests that the newbuilding orderbook (40% of the existing fleet) will still not be needed even when demand does recover. When recovery comes around, growth levels are unlikely to return to those seen between 2003-2008. In addition, serious concerns remain over the financing of the box ship orderbook, which has not seen any significant reduction by cancellation of newbuilding contracts. Existing orders for container vessels are primarily going to be built in Korea which accounts for 60% of the orderbook. This compares to 20% in China and 6% in Japan. As is the case in the other segments odds are that the ships are going to be built taking the economic and employment importance of the shipyard industry in the builder countries into account.

The sheer volume of newbuild tonnage capacity in coming years forecasts depressed rates despite any pickup in demand. Continued supply growth of 10% in 2010-2011 will just make the capacity surplus even more severe. Supply growth will not be offset by considerable scrapping as the potential demolition candidates are few, with just 0.2 million TEU aged 29 or older, 29 years being the average scrapping age for liner tonnage since 2006.

The supply outlook for
2009-2013 is estimated
under the assumption that
the scheduled deliveries
fall short by 10% owed
to vessels not being built,
due to cancellations,
finance issues, failing yard
establishment e.g. and 25%
of scheduled deliveries to
be delayed or postponed.
Scrapping of all vessels
aged 30 or above before
the end of 2013 is assumed.
Source: BIMCO


Outlook:
Total contraction of box trade in 2009 is estimated to be 8-10%. Meanwhile, the supply side is scheduled to be growing around 10%. This significant imbalance between demand and supply gives no hope for a sustainable rate recovery in 2009.

Demand is forecast to show moderate growth of some 4% in 2010 as household consumption will remain low and savings rates will most likely increase, or at least stay high.

In the current situation with lots of idle tonnage and many newbuildings being delivered, the markets could experience a situation during the next few years where liner companies will have to engage in trimming services, which in turn should result in rate improvements, as just experienced. However, this would then be followed by the re-entry of idle tonnage, placing downward pressure on rates and thus forcing liner companies to rationalize their services once again. In a situation of overcapacity to the extent experienced in the liner segment, this could be a likely future scenario.

From talking to yards themselves DnB NOR has learned that even though a yard is likely not to get paid for a ship they have under construction, the yard will still finish the construction work and instead, seek to sell the vessel on the market afterwards. Other yards are reported to have set up operating arms or to be chartering out vessels.

Current news:
A continuation of adverse business operating conditions for the remainder of the year and a “significant” full-year loss despite the cost-saving measures, is the message from many liner companies following the release of latest financial reports.

The non-operating owner (e.g. German KG) fleet of idle vessels has reached a new record at 0.7 million TEU. The owner composition of the idle fleet has turned in favour of operating owner as chartered-in tonnage is returned as fast as possible.

We are coming close to the first anniversary of the last contract for a newbuild container vessel back in October 2008. Contrary to dry and wet bulk segments, container owners have refrained from expanding the oversized orderbook even further.

This publication has been prepared by BIMCO for information purposes only. It has been prepared independently, and based solely on publicly available information. Whilst all reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability whatsoever is accepted for any loss arising from reliance on it.

in Copenhagen, DK

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