The 2015 has started off as a pretty challenging year for the container shipping industry. With volatile spot rates coupled with oversupply and ordering of ever bigger ships, ship owners across the board seem to have a lot on their plates.
World Maritime News wanted to know more about the direction the market may take in following period, so we consulted with Mr Peter Sand, Chief Analyst at the Baltic and International Maritime Council (BIMCO). Peter Sand joined BIMCO in 2009 and as Chief Shipping Analyst he is responsible for analysing the commercial markets for dry bulkers, tankers and containerships.
BIMCO is the largest international shipping association representing shipowners. It has 2,300 members in around 130 countries.
Sand: “Speaking about the high volume East-West trades (into Europe and Med), the sensitive match-up between supply and demand that delivered a fairly steady freight rate level during H1-2014 broke down when the peak season started. BIMCO then forecast that it would take some time for market conditions to re-establish stability, especially in a declining market. Since then high volatility has haunted those trades. As the demand from Europe/Med is only growing slowly, the supply side is key to stability. Right now stability doesn’t look to arrive around the next corner.”
WMN: What trades are expected to rebound and which ones are under the most pressure at the moment in terms of freight rate levels?
Sand: “Most trades out of China are under pressure for the moment, with export growth being very weak and overseas demand not growing particularly fast. The demand has also come down from the larger oil producing countries as they see revenue erode and thus import fewer containerized goods. On all trades (except for Shanghai-Korea) we see the lowest level in six years for this time of the year. African trades into Nigeria and Angola is hit by lower oil prices affecting demand, same goes for Russia and Brazil.”
WMN: TSA members are trying to balance out the freight rates as US congestion eases out. Can we expect their efforts to bear fruit?
Sand: “Freight rates on the Pacific from China (currently at USD 1,519 per FEU) have been on a downward trend since February, following more or less normal seasonality. The current level is not satisfactory for liners with ships calling USWC, as we have seen volumes drop in 2015 as compared to last year (-3.8% in Q1).
US EC seems to have taken some of the cargo as volumes are very upbeat as compared to 2014 (+18.6% in Q1). So will freight rates go higher on Transpacific? Well, it’s a fairly stable rate for that trade looking over the years, so I wouldn’t expect to see them much lower than what we see today – this includes no large increase either.”
WMN: We have seen a container volume surge in US ports, breaking all records, is this trend likely to resume?
Sand: “The US economy is to a large extent based on consumer demand. The US economy has been growing briskly in recent years, and the QE (expansionary monetary policy) is no longer needed. Unemployment is rather low too. All of this means more consumers that spend more, also on imported containerized goods.
Especially the US EC ports have seen a very strong growth in inbound cargo. For the coming years BIMCO expects US EC ports that are ready to host Post-Panamax container ships to grow their business significantly. As the new locks of the Panama canal open up, even more and larger ships will be able to call US EC ports from the Far East. The US WC ports are also likely to see higher import levels but growth rates are smaller as compared to the ones in US EC.”
WMN: Freight rates on Europe – China routes have been steadily dropping throughout the year due to China’s decline in both exports and imports. Do you see the trend continuing, and how will the carriers respond if it does?
Sand: “Shipping is a derived demand of global economics and freight rates on Europe–China or the front-haul China-Europe will only get stronger if demand goes up, primarily. Firstly on Europe-China, the backhaul leg, has seen volumes increase in past years – making the trade less biased. But as China is also slowing down economically, imports slow down too and the local consumers tend to prefer domestically produced goods to the largest extent – so far. The re-balancing of the Chinese economy is felt all over the World.
On the front-haul from China to Europe, the very slow recovery in Europe means the demand side is growing too slowly. This also causes cascading to a higher extent than would have been the case, if demand was stronger.
How will carriers respond: they will aim at matching supply to demand – trying to get in front of the curve instead of being stuck behind as it have appeared they have been for some time now – with freight rate erosion in the wake.”
WMN: According to your report, April saw a change in fortunes on the US-China routes, with the rates increasing after seven weeks of decline. What are the reasons for this rise?
Sand: “That uptick in rates on US EC bound cargo was a one-off, as rates have dropped ever since. Five weeks running now. Freight rates were flying high in first four months of 2015 on the USEC-bound route from Shanghai – now they are back into a normal level. The congestion on US WC surely contributed to more cargo going to the Atlantic US ports, this pushed up rates. But the US EC trades are now also seeing more Post-Panamaxes deployed on that trade meaning that supply is growing quite rapidly. In a market with a solid demand side this is natural. Heading towards the peak season, freight rates should stabilize and improve from here unless supply significantly outstrips demand.”
WMN: The formation of shipping mega-alliances has caused numerous challenges for operators on how to handle their mega-ships calling on multiple-origin ports. How will this affect liner reliability and what could be the best approach for port operators to meet these challenges? Do we need a revolution in container handling?
Sand: “The seaside of container shipping has seen another revolution in terms of sizes in the past years. This naturally put pressure too on the shore-side of the business. Port operators across the globe have been in a hurry to scale up their operations too. We have seen congestion in several ports in Europe as well as US WC where Post-Panamax and ULSC have been calling. The hinterland infrastructure needs to adapt to this reality. Liner reliability have so far not been affected by the challenges ashore.”
WMN: What needs to be done for the market rates to recover?
Sand: “For the overall market to recover we need the demand side to remain steady around (at least) 6% (which is BIMCO’s estimated “New normal” demand side growth level for the global container shipping industry. As the supply side on an annualized basis grows at more or less 6% too, we need one of the two to start moving in positive direction in order to alter the current stalemate in the market as such.
The key to this is likely to be the supply side, as this is where owners and operators can improve the fundamental market conditions. Making sure slow-steaming in all forms continue, limiting orderings and taking less efficient tonnage out of the market.”
WMN: The newbuilding market, especially for ultra large containerships, has been very active over the recent period? What will this mean for supply-demand balance in the following period?
Sand: “BIMCO sees the introduction over the past years of many ULCS as an “overhaul” of the high volume trades, in order to improve efficiency and profitability. Firstly, Far East to Europe, secondly Far East to US EC and US WC. The trend has been very clear in recent years. You need to increase the capacity on each ship on each trade AND UTILISE that fully in order to run a profitable business.”
WMN: Overall, based on the current developments, what direction is the container shipping market expected to take? Are we heading for 24,000 TEU ships, more mega–alliances or is there a new emerging trend?
Sand: “It doesn’t seem as if we have seen the biggest container ship built yet – as we have seen it in the tanker industry. But it appears as if we are getting closer to a size where the benefits of economies of scale are not that big anymore, when comparing a 20,000 teu to a 24,000 teu. But the new trend will be on filling up these ships to their maximum, because it is only when you manage do that, that you reap the full potential of the cost savings.
The current structure of the market with alliances and other legal forms of cooperation are all approved by authorities across the globe, and it seems to be a tool the industry likes to apply. Container shipping is a high volume-small margins business so you need scale all over the place.”
World Maritime News Staff