Oversupply Remains - Drewry

The withdrawal of Hanjin tonnage has not been enough to rectify the trade’s supply-demand imbalance and headhaul ship utilisation is lower compared to other major East-West markets.

Westbound volumes rose by 1.8% in the third quarter and the growth rate for the year to date is now registering 2.9% (see Figure 1). Asian exports shipped to the West Mediterranean (including North Africa) grew by 2.8% between July and September, while traffic to the eastern sector of the trade only expanded by 0.8%.
 
By the end of September, the 12-month rolling average growth factor for westbound flows was touching 3.4% (see Figure 2) which is a distinct improvement on the minus 1.9% recorded a year earlier, and represents the highest point it has reached since March 2015. Third quarter liftings were a fraction below those of the second quarter but a clearly defined Q3 peak season is not so much a characteristic of the Med trade as it is in the North Europe market. In nine out of the last thirteen years, Mediterranean westbound cargo flows have been stronger between April and June.

Figure 1: Westbound Asia to Mediterranean container traffic ('000 teu) (See alongside)

Despite a steady rise in consumer confidence in France, Asian goods bound for the country fell back in Q3 by just over 1% after an encouraging first half (+6.1%). On the other hand, Italian households seem a lot more relaxed with imports from Asia climbing by 4.7% in the third quarter despite the fact that they will shortly be casting their vote in a crucial referendum on constitutional reforms which could make or break the country’s economic recovery, and its political stability.
 
In the more subdued East Med market, the number of loaded containers destined to Turkey dropped by 7.1% in the third quarter, after retreating by 2.1% in the first six months of 2016. Egyptian imports decreased by almost one fifth between July and September and further contraction is likely in the wake of the government’s decision to allow the national currency to float freely, resulting in the pound losing almost half its value to the dollar in early November. Only a strong rebound in imports entering Ukraine (+36% in Q3) and Greece (+25%) and the stabilisation of the Russian economy compared to a year ago prevented volumes to the East Mediterranean area as a whole from receding back into negative growth territory.

Figure 2: 12-month rolling average of westbound Asia to Mediterranean container

Fig 2 Source Drewry Maritime Research, derived from Container Trade Statistics

Westbound slot supply, which by August was starting to grow at a rate of over 12%, has in the last two months returned to levels that existed a year ago (see Figure 3), due largely to the suspension of the CKYHE’s MD3/HPM pendulum service to which only Hanjin vessels had been assigned. That enforced reduction of provision was not enough as ship utilisation throughout the whole of the third quarter barely rose above 80% (see Table 1). The temporary merging at the end of October of Ocean Three’s Adriatic (PHOEX) and Black Sea (BEX) loops as part of its Winter Programme will no doubt improve load factors, but focus is now turning to what the new alliance structures will be offering come next April.

Figure 3: Westbound Asia to Mediterranean capacity ('000 teu)
   Fig 3 Source Drewry Maritime Research

The Ocean Alliance has unveiled five end-to-end services (coded MED) with two of its North Europe loaders featuring wayport calls at Piraeus and Tangier. Two of the services will focus on the niche Black Sea and Adriatic markets, while MED1 and MED2 will essentially serve the West Med leaving MED4 to concentrate on the East Med ports. Piraeus and Marsaxlokk are selected as the Alliance’s core transhipment centres in the Mediterranean - not surprisingly given Cosco Shipping's and CMA CGM’s respective interests in those ports. No fewer than nine Chinese ports (including Hong Kong) are covered in the Far East but each of the five loops are given a call at either Busan or one of the Taiwanese ports, Kaohsiung or Taipei.
 
THE Alliance will offer three end-to-end weekly sailings (coded MD) with one of its North Europe shuttlers making a call at an unspecified West Med hub. The first two loops will primarily focus on the West Med sector while MD 3 will confine itself to the East Med, including no less than three calls at Turkish ports – Ambarli, Izmir and Mersin. In the Far East, the alliance is covering only four Chinese ports at this stage, and apart from an unnamed SEA hub, the only other load ports will be Busan and Kaohsiung. Similar to the members’ North Europe product range, it would appear the emphasis will be on fast transit times. Three Mediterranean end-to-end services do represent a major step-up for the new group’s partners: the G6 alliance - from which only three members will survive in THE Alliance - today essentially only has one dedicated Asia-Med loop, and K Line and Yang Ming are the smaller partners in the existing CKYHE union. The marketing arms of THE Alliance’s membership will therefore face a challenge.

Figure 4: Westbound Asia to Mediterranean utilisation v rates


Fig 4 Sources Drewry Maritime Research; World Container Index assessed by Drewry

If 2M does not increase the number of sailings it offers the Asia-Mediterranean market next year (currently four end-to-end loops) and Zim retains its two services then the number of dedicated connections will next April total 14, which is identical to what is provided today.

Figure 5: World Container Index Shanghai to Genoa (US$/40ft)

Fig 5  Source World Container Index assessed by Drewry

The westbound spot rate market has become appreciably weaker in the Med than in the North Europe trade. During 2015, Med rates outstripped North Europe prices by an average of some $203 per 40ft and a not dissimilar average differential prevailed between January and June of this year. In the third quarter however, Med headhaul going rates started to lag behind those of the northern trade by an average of $274.
 
Towards the end of August, spot prices were drifting back to $1,000 per 40ft and, during the following month, whatever boost was generated by Hanjin’s collapse was short-lived as prices once more returned to $1,000 (and below) in October. In November, those rates had been restored to $1,300 in order to provide some support to the 2017 annual contract negotiations which the carriers are presently engaging in, but any permanent upward trend in prices remains unconvincing.

Table 1: Asia-Mediterranean - estimated monthly supply/demand position

Notes: *Based on effective capacity after deductions are made for deadweight and high-cube limitations and then again for out-of-scope cargoes, i.e. those relayed to areas outside the range. Where relevant, operational capacities have also been adjusted for slots allocated to wayport cargoes. Data is subject to change

Source: Drewry Maritime Research

Our view
 
The Asia-Mediterranean trade remains overtonnaged and the new alliance schedules for next year do nothing to address this issue.