Container Shipping: Volumes Up, But...

 

On the US West Coast, it’s been slow all year, starting with the labour disputes that weren't resolved until mid-March. Since then year-on-year growth in the second quarter was almost on par with 2014. But for the first half year alone, inbound loaded volumes dropped by 2% according to BIMCO data. 

 

On the Asia to Europe trades, volumes were down by 4.2% in the first half of the year as 7.4 million TEU was transported. Northern European imports fell by 3.6%, while the East Med and Black Sea imports fell by 4.8%. In the first six months of the year, the euro dropped 19% compared to the yuan, and this resulted in more costly imports, which dampened importers’ interest.

 

Intra-Asia shipments remain a stronghold with ongoing positive growth around 4-5%, but the increased uncertainty surrounding the economic development in China adds doubt as to whether such a strong growth rate can be sustained for the full year.  

 

Beyond the Shanghai spot rates, a fuller picture of how container freight rates are faring for shipments out of China is the China Containerized Freight Index (CCFI), which covers ten major ports in China and includes long-term contractual rates in addition to spot freight rates.

 

The severe lack of exports from China is seen from the composite index, which dropped below 800 in early July. This is the first time on record (index started January 2009) that the index went below 800. Since then the composite hasn’t really improved despite a 25% increase in the freight rate index for European-bound cargoes as US-bound cargoes saw freight rates slip further.

 

As volumes drop and new ships are introduced on a weekly basis, it’s even more difficult to strike the balance that will see freight rate improvements. However, the Europe index rates have gone up under huge volatility in the spot market, and the trend is rising. In June, spot freight rates rebounded at USD 205 per TEU; in July the rebound happened at USD 400 per TEU and in August at USD 469 per TEU, moving on up, but still USD 500 per TEU below the level of 2014.

 

In our last report we discussed if a potential gap in the market was the reason for 6-12 months’ charter rates for ships sized 1,000-4,250 TEU to significantly increase over the first five months of 2015. Today we can see half of the gain is now gone, and the rise in time-charter rates seemed to be more of a short-term imbalance rather than a long-term improved market.

 

2015 will see a new record inflow of newbuilt tonnage. BIMCO forecasts close to 1.6 million TEU will be delivered by the end of 2015. This marks the highest inflow of new capacity ever. As the record settles, it will be done by less than 200 ships. The trend is strong, as 436 ships were needed to reach 1.502 million TEU in 2008. The container-ship fleet is going through large charges these years, as owners strive to cut down unit costs by introducing bigger and bigger ships everywhere. The average size of a newbuilt ship in 2015 is 8,400 TEU; in 2008 it was 3,435 TEU.

 

In the past three years, owners have parted with 553 ships with a combined capacity of 1.162 million TEU. 2015 marks an end to this flurry that has dented fleet growth markedly. So far, only 51 ships with a combined capacity of 94,000 TEU have been sold for demolition with the average built year being 1991, similar to that of 2013-14. Container-ship demolition activity has been weak for a full year now. The demolition potential remains scarce as only 561,000 TEU is more than 20 years old. In spite of that, November and December could see an increase if demand growth stays low. This is why 250,000 TEU remains in our forecast.

 

The fleet has grown by 5.8% until now and is expected to reach 7.3%, which is the highest in four years and largely surpassing demand growth.

 

At the halfway point through the year, container-ship capacity equal to that of the full 2014 has been ordered. At the end of August 1.4 million TEU of new contracts had entered into the orderbook. Orders hold no surprises at all, neither in size nor in numbers, as no ships with a capacity in the range of 5,300 TEU to 8,800 TEU have been ordered since 2011. Moreover, half of the new orders were in the shape of 37 ships with +18,000 TEU capacity, with another 39 ships with 10,000-14,000 TEU capacity. This leaves 175,000 TEU for the remaining 49 ships ordered between 1,400 TEU and 9,700 TEU.  

 

In our last report we signalled that the rise in charter rates for small to medium-sized container ships could see new orders surface if rates remained high. In spite of rates coming off somewhat, we have seen a flood of orders since May. January to April saw only 13 orders for ships with a capacity of 4,000 TEU or less, while May to August saw 28 new orders for ships in the same size range.

 

The lack of European demand is of concern. In the short term, this is because container shipping is a low-margin business and industry profitability requires sustainable freight rates on high-volume trades. In the long term, half of all new ships are bound for a future on the Asia to Europe trading lane, cascading the present work horses onto other trading lanes.

 

A successful cascading of ships left over on higher-volume trades should not increase supply of capacity beyond requirement on the secondary trades where it is about to be deployed. 

 

The deteriorating freight market has significantly reversed the trend seen in the first half, which saw the idle fleet go as low as back in 2011. Back in June, BIMCO mentioned that idling of larger ships because of overcapacity would be prudent. It now seems as if idling across the board has been exercised. Nine ships of 8,500-13,900 TEU were idle at the end of August according to Alphaliner. Cancelled sailings and service suspensions have been the options preferred by the operators until now.