Container Shipping - Striking the balance is tough when everyone wants to get “back into the black”

Container Shipping - Striking the balance is tough when everyone wants to get “back into the black”

Overview

The labour conflict that caused a widespread and highly disruptive strike and subsequent congestion in most US West Coast ports, especially for the container shipping industry ended toward the end of February.
Demand: 
The labour conflict that caused a widespread and highly disruptive strike and subsequent congestion in most US West Coast ports, especially for the container shipping industry, ended towards the end of February. In spite of the conflict, US West Coast ports handled an increasing number of loaded inbound containers in 2014 (+3.8%). The trade in 2014 was much stronger though on the US East Coast (+10.6%), with strong numbers seen throughout the year. The West Coast congestion did not relocate volumes from West to East much – if at all.

The stable freight rate trend in the first part of 2014 on the Far East to Europe trading lane collapsed when the peak season got underway. Following that, BIMCO anticipated that volatility would again reign for an extended time on that route, as has been the case. Declining volumes prompt carriers to adjust supply quickly in order to stop freight rates from entering a free-fall drop. As we have now passed the annual low point in volumes around the Chinese New Year in February, we enter a window of opportunity that could result in a more steady freight market.

One of the most significant container trade regions, the intra-Asian market is normally riding high on the back of demand growth on the all-important east-west trades and a buoyant local manufacturing market. Recently the cascading of more and larger ships onto secondary routes has resulted in an oversupplied intra-Asian market and thus declining freight rates in a very competitive business. As an example of this, average freight rates from Shanghai to East and West Japan went down by 22% in 2014 as compared to the previous year.

The trade from Shanghai to Santos in Brazil is also under pressure from cascading with extreme volatility following along. Average freight rates on that trade dropped 19.9% in 2014 as compared to the earlier year.

The quest to move earnings “back into the black” depends on improved freight rates and fleet utilisation for all individual owners and operators in the market. Earnings on Far East (FE) to US East Coast and FE to Mediterranean were the stars of 2014, improving by 13.3% and 19.1% respectively. The former gained strength throughout the year, with Q4-2014 being outstanding as rates went higher while volumes followed the seasonal trend down.

Supply:
The supply side is doing whatever it can to improve the fundamental balance of the container shipping market. During the past three months, the fleet has only grown by ten ships net of ships being removed. During 2015, 31 ships with a combined capacity of 224,139 TEU have been launched. That included the MSC Oscar that currently holds the title as being the world’s largest container ship with a nominal capacity of 19,224 TEU. With 79% of the newly introduced capacity being ships with a capacity larger than 8,500 TEU, the trend simply continues as in past years. Fewer but larger ships influence the supply side.

Size is not everything – it is the only thing, but the benefits can only be reaped if the ships can be utilised at a substantial level. The only orders worth mentioning that have been placed so far in 2015 are 11 units of 18,000-TEU ships to be built in Japan, who seem committed to make a comeback on the scene for Ultra-Large Container Ships. A 9,300-TEU ship is the biggest so far built in Japan.

The demolition activity has been low in the first couple of months: 30,864 TEU with an average age of 22, equal to that of the past two years.

Additionally, the order book keeps improving too. It is now down to just 426 units, a number not seen since 2003 – the difference, however, is that this time the order book stands at 3.27 million TEU, 50% bigger than 12 years ago. The total fleet currently stands at 18.4 million TEU. 

The current container fleet is biased in many ways. Out of 5,121 ships, 45% ships have a capacity of less than 2,000 TEU. However, those 45% in number only represent 13% in capacity. The Ultra-Large Container Ships with a capacity of 10,000 TEU or more account only for 5% in numbers but 19% in capacity and 90% of publicity.

BIMCO estimates a total delivery during 2015 just short of 1.5 million TEU and a demolition activity below the bullish level of 2014; the fleet growth rate is on course for 6.5%.

Outlook:
Gloves are now off in the fight for future business between the Suez and Panama Canals. Whereas the Panama Canal is offering quantum discounts for the biggest customers, the Suez Canal is aiming at lowering transit times with its ongoing expansion project. Adding icing on top of the cake, the Suez Canal announced in February 2015 a non-hike of transit prices for 2015. A closer look into the active fleet shows that 182 ships are already in the fleet and 103 ships are on order at the larger end of the scale, the over-13,000-TEU ships that the Suez Canal exclusively can cater for once the expansion of the Panama Canal opens up to business.

Even though the contracts in the order book stretch all the way into 2019, 53% of the sub-7,000-TEU ships will be delivered within the coming 12 months. Have we finally reached the point where the fleet is big enough? No, not at all, if you ask individual investors with their minds set on shipping, be it in container ships, tankers or bulkers. Shipping remains a game of “prisoner’s dilemma”. Everyone knows what is right for the industry, but a lot of investors defect from the optimal industry strategy as they seek to be better off individually than the rest. The game has been played and lost a long time ago, but the conclusion still haunts the industry as a glut of supply is making the sustainable business case difficult.

1 January 2015 marked the start of the stricter sulphur emission regulation in the Emission Control Areas (ECAs). So far, the implementation has been “manageable”, as customers may hardly have noticed the change in cost and prices. Fact is that Marine Gas Oil (MGO) today is priced at the same price as High-Sulphur Fuel Oil (HSFO) was half a year ago. Good or bad? That depends. When this changes at some point in time, owners and operators face a serious challenge in passing on the extra cost to their customers in order to protect their margins.

in Copenhagen, DK

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