Container shipping: Good prospects for market improvement if focus is kept on the supply side

Overview

As the lowest level of newbuild containership deliveries since 2004 was combined with record breaking scrapping levels, net inflow of capacity amounted to just 246,000 TEU – a growth rate of 1.2% - probably the lowest ever.

Demand

The demand for container shipping grew steadily in 2016. It grew enough to improve the fundamental balance in the market in the second half of the year, though that was primarily due to decisive actions by shipowners selling excessive tonnage for demolition.

An early assessment of the overall market demand growth rate for 2016 is 2.5%. 2016 saw increased demand on all trades. Most importantly, trade grew on the Far East to Europe route that had experienced a decreased level of demand in 2015. The gap is still not closed, as nominal import volumes in 2016 failed to surpass those of 2014.

The demand for containership capacity, on the other hand, as evidenced by the very low charter rate levels, showed a total mismatch between demand for and supply of ships for charter. Charter rate levels since mid-November for ships with a capacity between 700 - 8,500 TEU have been between USD 4,700 - 8,000 per day, according to Harper Petersen & Co. Owners only seek short term charters (3-9 months) when market conditions are bad to avoid being locked into low rates for a longer term.

Poor market conditions hit the panamax ships especially and they now stand completely isolated as the segment that got squeezed out of the market place between the feeder ships and the ultra large containerships. Rates for charters with a duration of 6-12 months dropped by 50% on average in 2016 from the levels seen in 2015. Asset values on the same ships dropped like a stone in September – all down to demolition value – where they remain.

26 panamax ship sales for ongoing trading took place in 2016 (VesselsValue).

Half of them sold in one month from mid-November and all deals had a bank as the direct seller. Most of the 26 sales involved struggling or bankrupt German KG entities or the bankrupt South Korean owner and operator, Hanjin Shipping.

In terms of spot freight rates out of China, as measured by the Shanghai Containerized Freight Index (SCFI), the first half of 2016 was particularly miserable. For some of the minor trades, 2016 was a year to be forgotten quickly. Freight rates from Shanghai to neighbouring Korea, Hong Kong, Taiwan and Singapore all fell further from the already poor levels in 2015.

On the trades going to both the West and East Coasts of the US, spot freight rates improved during the second half of the year, surpassing the levels of 2015. But this was only because 2015 saw such a poor run during the final quarter of that year.

Inbound loaded containers to the US West coast grew by 2.7% in the first 11 months of 2016 compared to the year before. The US East Coast saw similar growth of 2.5%. The US-bound trades saw falling freight rates because of poor supply side management by the individual operators, not outright lack of demand growth.

On the trades from the Far East to Europe and specifically the Mediterranean countries, the month of May was the turning point after horrifically low figures in the first four months. At its worst level, a TEU container could transport a quarter of the way around the world for just USD 200.

Overall, the ‘peak’ season in 2016 was longer than normal: from August, right through to November. This caused some downward pressure at first, as tonnage was employed in anticipation of a regular season. Fortunately, the market imbalance in Q3 was not as severe as in January through to April, if judged by the spot freight rates.

The minor container trades (the graph just above) is also available in the online version.

Supply

2016 will stand out as the year the container shipping fleet surpassed the 20 million TEU mark, only to go straight ahead and demolish excess capacity – starting with panamax ships. At the end of 2016, the fleet accounted for 19.98m TEU, up from 19.74m TEU at the start of the year, down from 20.04m TEU in early August.

660,000 TEU of container ship capacity was sold for scrapping, 60% of that during the final six months. Container shipowners acted in the opposite way to the dry bulk shipowners, who, during the first half of the year, broke the previous year’s scrapping record level only to shy away completely from scrapping ships in the second half.

As the lowest level of newbuild containership deliveries since 2004 was combined with record breaking scrapping levels, net inflow of capacity amounted to just 246,000 TEU – a growth rate of 1.2% - probably the lowest ever. As the year passed, it also became clear that the opening of the new locks in the Panama Canal was embraced by the liner operators. While the full capacity of the locks won’t be available until later in 2017, there are already clear changes to the shipping routes with bigger ships from each operator’s network transiting the canal.

Patiently awaiting the opening of the new locks, the industry was more than ready to deploy neo-panamax (beam < 49m and capacity of 8,000-12,000 TEU) ships into the Panama Canal transit trades. In 2016 alone, 34 new neo-panamax ships were delivered, adding to the 75 that went into service in 2015, increasing that fleet segment by 25% in the past 24 months – now comprising a quarter of the total fleet.

While being at opposite end in terms of demolition activity, both dry bulk and container shipowners/investors were in the same corner when looking at signing new orders. Only once in the past 20 years has the contracting of new capacity been so low. Leaving the extraordinary Japanese 5 x 14,026 TEU orders aside for now, 71 ships of an average 1,700 TEU - and not one larger than 3,300 TEU – were all that entered the shipyards’ orderbooks during an eventful 2016.

Outlook

The level of idled capacity has been high since the end of 2015, reaching a new all-time high in Q4-2016. In the final weeks of 2016, some idled ships were reactivated while others were sold for demolition. By 9 January 2017, the total idle fleet was 351 ships with a combined capacity of 1.4m TEU (source: Alphaliner), equal to 7.0% of the fleet.

As BIMCO forecasts a container shipping market where the nominal (excl. reactivated ships) TEU-inflow of supply matches demand growth; keeping 1.4m TEU out of the active fleet going forward will be a minimum requirement to keep the pressure off freight rates.

For the charter market and charter rates, it is a bad omen to have idled capacity at all since it illustrates that there is more than enough capacity in the market already. In terms of demand for charter-in tonnage terms, BIMCO expects 2017 to be another tough year on pure tonnage providers. This will be the shipowners who lack attractive options when seeking to put re-delivered tonnage back on a charter in a market offering only much lower rates.

While protectionism currently dominates the headlines as more trade restrictive measures are taken than trade facilitating, the CETA-agreement between EU and Canada stands out. But was CETA the final big multilateral trade agreement before the closing hour? Or will the “Free Trade Agreement EU-Japan” make it to the finish line too? 

Even more uncertainty surrounds the intended agreement between the EU and US, known as the Transatlantic Trade and Investment Partnership (TTIP). As the new US Presidency settles in, we will hopefully become more informed about the future for trade agreements as seen in the eyes of Mr Trump. All the above has huge implications for globalisation - and on shipping of containers globally.

BIMCO expects US-bound exports out of Asia to grow slowly, as the economic growth weakens in the US. For the other main lane, European imports are expected to pick up pace, growing slightly faster than in 2016, as consumer demand is still on the rise. On the shorter-haul trade lanes we expect the “ever rising” intra-Asian trades to become even busier while deploying larger ships yet again. Cascading is still an issue as higher demand does not bring much higher freight rates. Handling the supply-side with care is the most important thing for the future.

Looking further, towards late 2017 and early 2018, the benefits of the mergers and newly established alliances in 2016 should become visible. Hopefully, by way of better profits and fleet utilisation, rather than just lower costs and cheaper offers to the shippers. It takes time to merge two companies into one, and make it work in a way that takes advantage of the economies of scale and broader offering into specific trade lanes.

Despite radical changes to the scenery of liner companies and shipping alliances in the past year, there is no entity large enough to dominate or even impact the global market. You must look at the individual trades to find any apparent impact from consolidation.

The recovery is slow but if patience is applied and the supply-side handled with care for the years to come, it will happen.

in Copenhagen, DK

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