Container Shipping - demolition activity shows that market conditions are tough

Container Shipping - demolition activity shows that market conditions are tough

Overview

Overall Asian exports look weak for the moment, as consumers hold back across the board.
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Hard evidence of devastating market conditions is found in the demolition data, as the ultimate tool to cut capacity is applied to the final frontier.

Demand:
Overall Asian exports look weak for the moment, as consumers hold back across the board. Strength is shown instead in the region of Australasia & Oceania that holds up well in the turmoil.

The demand situation for containerised goods in Europe is still critically low, and this is felt mostly on the Far East to Europe trading lane. In the search for a new market balance, operators took a deep cut into deployed capacity in October and by doing so, they attained the vital market balance – but only for a while, evidenced by rising freight rates that have dropped rapidly even since. It is still too early to call it a price war because it’s merely a matter of demand in the southern parts of Europe that evaporates in spectacular style, rather than a fight for volume.

On the US West Coast, the number of inbound containers bounced back to year-high figures in September and October after having been unusually low in July and August. This has led to an accumulated year-over-year increase in the number of containers of 1.9%, up from 1.4% last month. The ports of Los Angeles and Tacoma were the main drivers in the growth, each receiving more than 100,000 TEU extra in the first ten months of this year as compared to the same period in 2011. The consistent growth since March has paved the way for relatively healthy trans-Pacific box rates throughout the year.

The volume of loaded containers leaving the USWC experienced a tremendous rise in 2011, with an overall growth-rate for the year of 6.7%. The development this year reveals that the upswing was not a one-time affair, as the accumulated y-o-y growth rate confirms that the accumulated outbound volume is currently on a par with that of last year. Traditionally, the number of loaded outbound containers is roughly half the number of inbound containers. The current development makes the imbalance smaller and thus also affects the logistics in the repositioning of empty boxes.

The poor state of the demand side has prompted owners and carriers to idling and recycling tonnage on a large scale. It improves the supply side of the market balance greatly that 272,000 TEU has been demolished already this year, with more to come. Dry bulk and crude oil tanker owners have prescribed the same medicine to cure their pain, as all options are explored in the quest for retaining a healthy market balance. Regrettably, it is also the kind of medicine that hurts the most.

Tanker owners complete the circle by scrapping tonnage that would not have been sold for demolition had the markets been in a more healthy state.

When BIMCO analysed the demolition potential of each of the major shipping segments earlier this year, we identified a normal, a mild stress, and a high stressed scenario. As per now, the container ship and crude oil tanker segments have been demolishing tonnage beyond the high stress scenario, whereas dry bulk vessels and oil product tanker are found in the mild stress scenario

Supply:
The container ship fleet has grown by 5.9% until now and remains on course for a full year fleet expansion of 7.2%.

Container ship demolition has stayed very strong throughout the year, up from the very low level at 77,000 TEU in 2011 to touch 300,000 TEU this year. It is equally important that the demolition of larger sizes has started, with 27% of the recycled tonnage having a capacity exceeding 3,000 TEU.

The elevated recycling activity, as compared to the steady pace of new deliveries, has meant that the number of vessels in the fleet has actually gone down during the past two months. Meanwhile, 15 new contracts for +9,000 TEU vessels and 7 for medium sized vessels were done. This made the orderbook stand still at 3.5 million TEU (22% of active fleet).

On 20 January 2012, Ventura I, a 534 TEU fully cellular container ship built in 1995, became the first ever vessel built after 1992 to be demolished. Prior to that, only vessels built in 1992 or before had been demolished as a consequence of the present downturn. If you count today, 37 vessels of 72,902 TEU in total, all built in the years from 1993-2000, have fallen victim to the cascading pressure, iron-hard market conditions, and sub-optimal trading specifications. Two thirds of the vessels went to India for recycling. Two thirds were under German KG ownership.

Outlook:
Looking forward, the next round of announced freight rate adjustments on the Far East to Europe trading lane are due by mid-December. Will rates go up and will they stick around? The demand erosion suggests that deployed capacity must firmly and continuously be adjusted to achieve some kind of market balance that forms the foundation for rates to go higher rather than lower. If judged by the circumstances that surrounded the 1 November changes in freight rates, this round of adjustments may prove to be a carbon copy.

If the bad development in unemployment across Europe is not reversed, consumer confidence will not improve and imports may slide further before things get better. With the anticipated stronger GDP growth filtering down through the European economies catching a stronger tail-wind during the second half of 2013 only, the near-term outlook does not look too positive – despite the light at the end of tunnel. However, we are likely to see positive growth in EU and the US trades during 2013 that will accelerate coming into 2014. If tonnage is being idled or recycled to bring balance to the market, one may see a much faster recovery and more sustainable box rates.

At the end of November, 274 ships of 768,000 TEU were recorded as idle by Alphaliner. At the same time last year, the number of idle ships was 180. But it was about this time last year that operators began to extend the idling that topped at 300 vessels and paved the way for the rate turnaround that we saw in the last week of 2011 and the first two months of 2012. So each carrier knows what to do.

As regards the overall supply of new tonnage in 2013, it continues to grow faster than world trade and as such, it holds the industry on the griddle.

in Copenhagen, DK

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