Container shipping: Testing the strength of the market makes spot rates drop

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Demand: What have we learnt from the most recent peak season? Volumes on all trades grew at healthy levels in line with our full year forecast for global container demand growth rate being at the same level as global GDP growth. BIMCO anticipates that the global trade-to-GDP multiplier for total container shipping demand in 2017 and coming years will hover around one or slightly above, at best. Year-to-date, we have seen a multiplier of 1.39.

The overall level is one thing, but individually, we may see both higher or lower multiples for different regions. Noticeably, US and European imports have been strong in 2017. This has benefitted the utilisation of ships deployed on those long-distance trades, temporarily easing cascading pressure. Cascading pressure that for many years now has eroded profitability on ”secondary” and ”tertiary” trades. On these trades, strong demand growth has been overwhelmed by massive supply inflow, resulting in falling freight rates.

Demand growth on intra-Asian trades grew by 4.2% in the first eight months of 2017 (source: CTS). Total European imported volumes grew by 4%, to reach 21.2m TEU. Growth on the Far East to Europe trades was strong at 5.4%, accounting for little more than half of all European TEU imports.

A better economic performance recently seen in Europe, as discussed in the macroeconomics section of this “Shipping Market Overview & Outlook”, has benefited container shipping at large. Head haul transatlantic from Europe to North America, grew as much as 7.9%. Overall, the global container volumes went up by 5% year-on-year for the first eight months.

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The average spot rates for US and Europe bound routes have dropped by 22% since the end of July. In fairness, prices on so-called contract volumes have held the CCFI (China Containerized Freight Index) up quite well, while spot rates have dropped. The CCFI is down 8% since the end of July, the CCFI being the better indicator for developments in liner profitability.

With demand growing briskly, why are spot freight rates falling significantly on all those trades?
Because of the liner companies’ interest in ‘testing’ the strength of the market, they deploy tonnage into the trades until the freight rates drop! Only by doing that, can they reveal the true strength of demand.

Despite running regular service cuts around Chinese Golden week in early October, an event which brings down demand – freight rates kept falling.

During the months of May through to September, we have seen the idle fleet drop further to reach 495,000 TEU by 2 October 2017. Now that we are entering the winter season where the transported volumes always go down from Q3, the management of deployed capacity on individual trades and throughout the entire network will be essential to limit losses.

Supply: It has been a steady year in terms of newbuild deliveries into the container shipping fleet. As nine months have already passed, we have seen 898,000 TEU delivered. BIMCO expects 1.1m TEU to be delivered for the full year. This is more than the 905,000 TEU that was delivered in 2016, but it is likely to be on a par with 2018-deliveries. Perhaps most importantly, deliveries will be lower than any year since 2008.

So, what makes the difference in between years? The short answer is the level of demolished capacity which is leaving the active fleet for good. After the new all-time high of 654,000 TEU in 2016, the improved market was set to reduce demolition. For the first nine months, we have seen 356,000 TEU sold for demolition. The main differences from 2016, are that the demolished ships have become older again (up from 19 to 21 years on average) and they have become smaller in size.

2016: Average size 3,373 TEU – Average year built 1997 (19 years old)
2017: Average size 2,891 TEU – Average year built 1996 (21 years old).

In total, this brings BIMCOs fleet growth forecast for 2017 to 3.3%.

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Following two years of next to nothing being ordered, September broke the trend. Orders of nine and 11 units of 22,000 TEU were placed at South Korean and Chinese yards in September. So why are we seeing new orders in a market haunted by overcapacity? One reason could be that chartered-in ships are redelivered upon yards’ delivery of the newbuilds.

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Sale and purchase activity has been extensive in the containership sector too. The reason being the same as in the dry bulk sector. A disparity between second-hand prices and newbuild prices has made fleet expansions in the second-hand market significantly more attractive.

Outlook: We have seen profits returning (at least for a while) on several trades, but the market is still very challenging and many trades are still delivering lossmaking freight rate levels. The same goes for the charter market where the lift in the run up to 1 April- when the new alliances were launched – has only slightly reversed and still remains a far cry from past highs.

The fragile recovery needs assistance and some caretaking. Overcapacity will remain an industry challenge for years to come and keeping sailing speeds at present levels will be critical for the recovery to stay on track. In this regard, it’s worth noting that many of the existing very large containerships and those on order, seem to fit Far East to Europe strings of 9 to 11 ships, as opposed to the string size of seven-nine ships before slow steaming was widely implemented.

For the coming months, volumes will decline seasonally until February. During that period however, the fleet is expected to continue growing. Handling this will also be a recurring seasonal challenge.

Bearing in mind that freight rates are still dropping in mid-October, so striking the right balance must be a priority to stop declining profits. The rates on key trades have once again become so low that any profits have evaporated.

[BIMCO]

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