Container Shipping: Spot rates in a sink hole, while charter rates for smaller containerships soar

Container Shipping: Spot rates in a sink hole, while charter rates for smaller containerships soar

Overview

The demand situation is developing a tad slower than what the market had anticipated. After the expected dip around Chinese New Year (February), volumes have failed to pick up markedly.
Demand: 
The demand situation is developing a tad slower than what the market had anticipated. After the expected dip around Chinese New Year (February), volumes have failed to pick up markedly. Global volume growth in Q1 was just 1.8%. Nevertheless, things are moving in the right direction and volume growth across the board is seen reflecting the overall positive macroeconomic development. 

On the major as well as minor trading lanes out of Shanghai specifically and China in general, spot freight rates are found at a six-year low, for this time of the year; with Shanghai-Korea being the only exception. 

The very slow growing demand side combined with a growing supply side has made it extremely difficult for carriers to strike a balance in order to avoid a freight rate meltdown. On the US East Coast a peak seen a couple of months ago when the US West Coast imports were jammed, has disappeared now. On the main lane from Shanghai to Europe, a new all-time low freight rate was recorded on the first Friday of June, where a TEU could be sent halfway around the world for just USD 284. A brief jump in rates was seen mid-May, only to be an illusion.



Where spot rates certainly fail to impress, the increase seen in charter rates for smaller to medium sized container ships have done just that. The 6-12 months’ charter rates currently seen are almost double that of last year’s.

Since 2009 the size of the fleets of container ships between 1,000 TEU and 3,000 TEU of capacity, have all experienced a falling trend. Since early 2013 the decline has increased. Today those fleets are on average 6% smaller than just 2½ years ago, and the trend is set to continue. Containership demolition is taking place only amongst these sizes and contracting is scarce. The demand growth finally seems to have erased the overcapacity for these feeder segments as the supply seems to provide the best explanation behind this radical increase in charter rates.



Supply:

602,000 TEU of newbuilt capacity have been added to the supply side of the container shipping market since January 1st. As demolition activity has only removed 72,000 TEU of containership capacity, the fleet is now 2.9% bigger as compared to the start of the year. 

The fact that demolition activity until now has not been particularly strong and the average scrapping age has remained unchanged from previous years. It gives us reason to expect it could pick up later in the year if the freight market continues to be challenging. However, the low activity is also a sign of better time charter rates for the ship sizes that are primarily prone to being sold for demolition.

As if the trend is not clear enough, the sizes of the ships being ordered in 2015 sure spells this out. 30 ships with a capacity of 18,000 TEU or more, 12 in the 10,000-11,000 TEU range and 13 in the range of 1,400-4,000 TEU. In 2014 no ships in the range of 5,000-9,000 were ordered. 

The fleet growth is so biased towards larger ships that the question remains: will there eventually be a gap in the market? Recently, we have only seen a positive effect from this. Perhaps, there is room for these size of ships in the market place after the fleet size has been adjusted downwards to due to demolition and no new ships, of that size, being ordered.

The overall fleet growth remains on target for the full year at 6.6%. Included to this number BIMCO expects slippage in deliveries to increase for the rest of the year. This is because the market is well supplied with tonnage similar to that being ordered, and the demand side is not performing very well. However, the extent of postponements are possible to achieve for shipowners limited by contractual obligations when they enter into discussions with shipyards.



Outlook:
Until now the rise in charter rates for the small to medium sized container ships has not caused a flurry on newbuilding contracts. Just six ships in the size between 1,000 and 3,000 TEU have been ordered in 2015. During 2014, 72 ships of this size were ordered. If the rates remain high, more orders could easily surface. 

The stronger US dollar against the euro is expected to grow westbound volume on the transatlantic trades. A positive effect is already seen with more to come if this new balance between the currencies becomes a permanent phenomenon. 

It remains a source of worry that the European import demand for containerized goods is not becoming stronger at a faster pace. The market needs growth in the high volume trades in order to get the market evolution going and create an effective deployment of ultra large containerships.

Traditionally the idle fleet has consisted of small to medium sized ships, but right now, the idle fleet has almost disappeared. From that, we learn that the fundamental balance of the smaller sizes has progressed over the past five years and finally brought around improved charter rates. Now it can be argued that it is time for idle larger ships as the overcapacity is clear and present amongst them. Moreover, while idling some of those units we may see the fundamental balance amongst the larger units improve by a scale that higher spot freight rates would be developed too.


in Copenhagen, DK

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