Container Shipping - Looking brighter but still too many ships ahead

Overview

The current spot price level from Shanghai to the US West coast indicates that tonnage supply is tight - Freight rates have hiked 23% in 5 weeks

Demand:
The current spot price level from Shanghai to the US West coast indicates that tonnage supply is tight - Freight rates have hiked 23% in 5 weeks from USD 2,106 per FEU in mid-April to USD 2,587 per FEU by end-May. Meanwhile, the spot rates for freight bound for Europe have moved sideways.

 



The front-haul container market with exports from Shanghai to Europe has moved sideways in the last 7 weeks, as can be seen in the graph. This proves that despite more tonnage getting reactivated from lay-ups, the market balance is somewhat maintained even though rates have come down 15% from the February/March highs.


Volumes on the Far East to Europe trading lane are up 21.2% in first quarter of 2010 as compared to same period last year. This is positive; however it has to be put into perspective with the volume level of Q1-2008 of 3,325,509 TEU which it still trails by 5.5%.


Meanwhile volumes going in the other direction from Europe into the Far East firmed at 23% in Q1-2010 year-on-year. The crisis established a new 2:1 front-/backhaul ratio breaking away from the old-“normal” ratio of 3:1 Going forward the ratio may be dragged towards the previous disequilibrium again but is likely not to go all the way due to higher levels of Asian imports and struggling European demand.


A mini-survey from Danske Bank on the key trans-Pacific trade lane indicates that carriers were getting significantly higher rates from the annual volume contracts talks with shippers held during May. The new rate level for contract volumes going to US West coast is indicated to be around USD 1,800-1,900 per FEU, up by almost 100%. Contract levels for US East coast is indicated to be around USD 2,800-2,900 per FEU, up by at least 50%.


When looking at PMI data, the Asian export boom shows signs of peaking. Manufacturing exports recovered fairly swiftly and started to expand again during first quarter of 2009 and the rate of growth of Asia ex-Japan exports reached a new record by some margin in February 2010. Since then the growth rate in new export orders has decreased. Export growth in China has slowed sharply since the start of the year, with the increase in foreign sales easing for the third month running in May to the weakest in ten months.


A part of the slowdown may be linked to a peaking in the inventory cycle. The global trade surges that followed the recession were boosted by the rebuilding of inventories by manufacturers globally, a growth that has now stopped. However the global manufacturing new-orders-to-inventory ratio is hovering around 1.2 and remains well above its long-term average of 1. This suggest that, while the growth rate of worldwide manufacturing output, and therefore exports from Asia, may have peaked, an ongoing expansion should be supported as we move into the second half of 2010, unless growth is being derailed by a contagious debt crisis.

 



Supply:
The container fleet has grown by 3.2% during the first five months of 2010, caused by deliveries of 520,248 TEU of newbuildings offset by as much as 95,429 TEU that have been demolished. Demolition is on a par with the same period last year. An average demolished vessel in year-to-date 2010 has a capacity of 1,767 TEU, is 28 years old and broken up in India or China who has been taking 70% of the tonnage.


BIMCO forecast inflow of new container tonnage in 2010 could reach 1.3 million TEU offset by demolition of just 0.1 million TEU. This could make the fleet grow by 9% in 2010 as compared to 6.2% in 2009.

 



Still, the container segment remains the one to avoid new contracting adding to the already large orderbook; just 5 vessels of a total capacity of 3,000 TEU have been reported ordered in 2010. With an average size of a delivered newbuild vessel so far in 2010 of 4,773 TEU, cascading of tonnage will potentially mean squeezing out tonnage somewhere. That could potentially have serious consequences for smaller vessels used as feeder vessels. The 2010-deliveries capacity average is 17% larger than the 2009-deliveries capacity average.


According to Alphaliner, extra slow steaming (ESS) has created employment for almost 100 ships with a total capacity of 554,000 TEU as at end of May. It has grown from just 5 ships equal to 46,000 one year ago. Slower sailing speeds have become the norm on 80% Far East-Europe strings and 50% on the trans-Pacific routes. This means ESS have absorbed the oversupply of container tonnage by 4.4% of the total fleet. If you add the 4.1% (549,000 TEU) of the fleet currently being idle – it gives a hint to the present state of oversupply in the container shipping market. This means that the market balance today is depending on volumes picking up by at least the same pace as new tonnage is delivered into the service strings, if present freight rates are to be maintained.


The idle containership fleet has fallen to 549,000 TEU as at 24 May 2010 according to Alphaliner’s fortnightly survey, down from a peak of 1,522,000 TEU at the beginning of December 2009. This reactivation of almost 1 million TEU of idled tonnage over the last six months has come faster than expected, and may pick up again should rates come under extreme pressure again.


Outlook:
By the end of January, time charter rates began to move following a long stay at the bottom of the ocean where literally every vessel, despite capacity, was for hire at rates around USD 5,000 per day - a clearly unsustainable freight rate level that resulted in a lot of owner opting for lay-up of the ships instead of having them out on charter and still losing money every day.

 



Increasing time charter rates have prompted a massive reactivation of idle tonnage re-entering into active service, and as long as rates are on the rise more ships will be reactivated. Thus time charter rates will again become a barometer and the pointer of where the fundamental balance in the market is heading.


Increasing volumes are the only thing that can make a sustainable industry going forward. With a lot of unknown factors in play, most of them potentially affecting demand negatively - the outlook and subsequently the return to “normal” market conditions remain fragile.


Current news:
Indicative for the level of reduced speed is the newly introduced FAL 5 string from Maersk and CMA CGM. 10 vessels of 13,000 TEU each are being deployed on the new Asia-Europe string that under old-“normal” conditions would deploy only 7-8 vessels. This service will be introduced in June prior to the peak season and is bound to affect the utilisation on other FE/Europe string, as it satisfies an annual front-haul demand of 676,000 TEU. This compares to the total front-haul demand of 11.5 million TEU in 2009 and equal a surge in volumes of 5.4% alone to meet the capacity of this string.

 

in Copenhagen, DK

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