Drewry Reports Container Sector Improvement

Wednesday, October 13, 2010

Drewry Shipping Consultants has published its Annual Container Market Review & Forecast 2010/11. This report is a forecasting tool for both global and individual trade lane supply, demand and pricing analyses.

The report says that 2010 has seen a strong improvement by the major container industry stakeholders. Now in its eleventh year, the Container Review is a yearly check-up on the health of this sector. Container volumes are a gauge of global economic well-being that can respond to market fluctuations with a degree of sensitivity.

In a nutshell, the report says container trade is recovering well on the major routes, although some doubts remain about the short to mid-term. Consumption levels and buying patterns have changed making it difficult for importers to match forward inventory to sales. This has a knock-on effect for carriers when determining deployment plans… an enormous task as they try to accommodate growing numbers of 10,000+ teu vessels within their global service portfolios.

The report says the container, like most shipping sectors has had it tough over the last couple of years. A trend of steady growth came to a crashing halt forcing carriers to implement a raft of economic and commercial disciplines almost unseen before (given the relative youthfulness of the industry). By cutting back capacity mainly through lay-ups and slow steaming- now on a global scale, all the major carriers survived the downturn. Sixteen of the world’s biggest will return to profitability this year making an estimated $5b.

The question is, will they hold the line?

Any larger carrier breaking rank could push the fragility of recovery to breaking point. Drewry’s research suggests operators are aware of the potential pitfalls as Neil Dekker, Editor, explains:

"Carriers will react decisively by taking capacity out of the system and will not return tonnage in 2011 until demand has shown the required upturn. Maintenance of the positive supply/demand equilibrium next year is dependent on the continuation of this disciplined approach. Lay ups could be a feature if there is any fear of overcapacity returning. By managing capacity at the individual trade route level, they have been able to rapidly improve freight rates and their profitability."

But while lay-ups and slow steaming have fixed some of the carrier financial problems of last year, the supply chain environment is very different and shippers have more difficult challenges ahead of them.

For example, in Drewry’s view, “The basic contract between shipper and carrier should no longer be seen as a straight rate deal. Once again, a combination of slow steaming, fewer weekly strings and increasing vessel-sharing agreements between carriers means that the traditional carrier/shipper partnership has changed forever. Shippers and carriers need to think much more creatively and need to work together constructively to provide much needed security in the supply chain. The relationship between the two parties must be repaired and carriers must now look to properly differentiate themselves once again from their competitors.”

Highlights of Drewry’s Annual Container Market Review & Forecast 2010/11:
•    Global container volumes – a strong recovery in 2010, but seasonality has been seriously skewed by exceptionally strong re-stocking of inventory during the first half of 2010. Headhaul container volumes are weakening as we approach the traditional winter slack season and consumer patterns remain uncertain. However, Drewry forecasts that mid to long-term container growth will be about 7% per annum for the next five years, representing a return to stability for the industry.

•    Freight rates – these have more than doubled in the core east-west trades and are nearly back to 2008 levels. But, what is in store in the short and medium terms is as yet unclear. Spot market freight rates on east-west routes have weakened in recent weeks, but these will not show further significant declines as carriers react by pulling out tonnage. Next year we do not see average east-west freight rates rising.

•    Individual trade routes – east-west trades have recovered well, but there is now an increasing emphasis on growing north-south trades, particularly focused on East Coast South America. Carriers have balanced capacity well against rising demand and are no longer afraid to withdraw strings and lay up vessels. Fundamentally, these strategies are having a big impact on supply chains and shippers must now seek much stronger partnerships to secure the flow of cargoes around the world. Ultimately, this resolute approach to costs means the global supply/demand balance will be much improved and we see this hitting the 100 mark by 2013. Ocean freight rates have recovered well in 2010 and are approaching the levels seen in 2008, but it is unlikely that carriers will continue to gain such revenue improvements in 2011.

•    Pricing - ocean carriers have stopped focusing on market share; profitability is their watchword. Global shippers now need to think beyond the ‘volume is king’ approach and work together with their partners on meaningful forecasts and more reward-based contracts.

•    Funding - the container industry is very different from two years ago even though no major companies failed during the worst downturn it has ever seen. Ocean carriers are more cautious and measured in their approach and are sharing costs with other operators. Funding is still difficult to acquire from banks which should mean that the newbuild orderbook never gets out of control as it did in 2007/08. Big shippers are no longer VIP customers and with an emphasis on profitability, 2011 will continue to see major differences in the contracting process with ocean carriers. The two parties must work together if they are to get the best out of their respective deals and to work towards the ultimate aim – less volatility.

In conclusion, the report says, the industry has emerged from the recession quicker than expected. Global operators are back in the black, but the operating environment is different with an emphasis on maintaining profitability rather than market share. Sentiment is much improved as more investment is being attracted to the industry from outsiders and port and infrastructure plans are being revitalized. Funding for new investment remains difficult and for the current positive sentiment to be maintained, all industry stakeholders need to be disciplined and to find ways to work together to share costs and information. Recovery seems to be gaining momentum but carriers need to manage it carefully.

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