Container Industry Stuck in Vicious Cycle
The industry is stuck in a vicious cycle – although new ships may give carriers lower slot costs, the supply/demand dynamics are out of kilter and freight rates remain very volatile
Drewry’s 1Q14 Container Forecaster report highlights that the industry remains in an extended down cycle. This is being accentuated and extended by the constant delivery of new ships. The global cascade is now hurting the balance of the north/south trades.
Some of these trade routes have also not lived up to expectations in terms of cargo flows and the sharp influx of many new ships of at least 8,000 teu has resulted in significant declines in spot freight rates, particularly on the Asia to East Coast South America trade.
On the one hand, bigger ships may be delivering carriers the lower unit costs carriers seek, but the supply/demand imbalance coupled with the desire by most operators to protect their market share is a toxic mix for overall profitability. This is why all focus is now on reducing costs and Maersk Line remains the “best in class.”
Drewry Maritime Research is forecasting 5.7% global supply growth for 2014, followed by 6.7% next year, with the emphasis on the delivery of 115 more ULCVs and a large number of ships in the 8,000-10,000 teu category. The orderbook’s momentum has not stopped and outside equity is fueling this. We know NYK will confirm an order soon and Cosco has now re-entered the fray. CMA CGM’s decision to upgrade some of its ships to the 18,000 teu level may also instigate another injection of capacity.
For this year we are forecasting global demand growth of just over 4%, but we do not see any real opportunity for the industry to recover and draw breath until 2016, and this is still dependent on what happens with the orderbook.
Although scrapping rates are at record levels, the delivery profile in the next 24 months will continue to cause damage and carriers will have little if any long-term success with their constant general rate increase initiatives. On the contracting side, we also hear anecdotally that many contracts in the core east-west trades have been signed at the same level as in 2013 or in many cases, significantly lower.
Multiple levers are being used by carriers to address the over-supply to varying degrees of success – void sailings, scrapping, idling vessels, slow steaming and new operational alliances and mergers. These alone are not enough since freight rates are increasingly being dictated by carrier behavior and psychology, rather than the fundamentals.
Neil Dekker, Drewry’s head of container research, stated: “Two major fights will continue for the carriers this year – to win contract and spot business. The larger battle will be waged in the spot market arena, which suggests that rate volatility will continue for the time being.”