Container Shipping - Rates are flattening out – balance sustained, but for how long?

Container Shipping - Rates are flattening out – balance sustained, but for how long?

Overview

Demand: We see that the freight rate index levels from China show that rates to Europe have been very stable around 1,800 (index value) since April with a slight negative trend over the last three weeks. Spot prices from Shanghai have been equally firm at around USD 1,900 per TEU. Meanwhile, rates for containers heading for US West Coast continue to soar. Since early April the China Containerized Freight Index for the US West Coast has gone up by 20%.

Demand:
We see that the freight rate index levels from China show that rates to Europe have been very stable around 1,800 (index value) since April with a slight negative trend over the last three weeks. Spot prices from Shanghai have been equally firm at around USD 1,900 per TEU. Meanwhile, rates for containers heading for US West Coast continue to soar. Since early April the China Containerized Freight Index for the US West Coast has gone up by 20%. High demand and high volumes continue to impact the market as they have done so far in 2010. But it remains uncertain as to whether rates will be able to hold high with supply continuing ticking upwards and demand growth possibly over the hill. The nor¬mal third quarter peak season may not be strong enough as western consumers still hesitate to go on a shopping spree at the malls.

Restocking of inventory contributed to US GDP growth in Q2-2010 by 1.05 percentage points, which indicates that stocks are close to full and not expected to drive growth by any significant strength from now on. This in turn will impact demand for container ships which has been very positively impacted by restocking of inventories since Q4-2009. More about this in the macro section.

We have to remember that the recent rates were awarded at the peak of Chinese exports (also include non-containerised exports), which hit a new all-time high in June. The volume record just topped the previous highs from mid-2008 before the crisis hit the world economy. China may not post a new export record in July, but the foreign trade data remains quite strong from a shipping point of view. Right now container ships are departing from China at utilisation levels of 95%.

The container shipping markets have recovered considerably during the first half of this year. Box rates have improved significantly and are almost back at the levels seen in the first half of 2008. Charter rates have also recovered, although more moderately than box rates. Still a long way to go for charter rates – only half way back to the levels of H1-2008.



The record high peak season surcharges that were announced for Q3-2010 are having a hard time trying to materialise. The steep increase of the active fleet, due to new deliveries and reactivations, has resulted in surcharges being dropped, reduced or delayed.


Container ships are the segment with the relatively highest activity in the second-hand market in 2010. Bulkers may still be king in second-hand markets in terms of number of deals and value of the deals, but containership are on course for a new all-time high in term of number of deals and in traded TEUs. Naturally the value is bound to fall short of previous highs as we are still in reach of historically low levels for second-hand values. It is interesting to note that the average size of the sold vessels is equal to the record of 2,300 TEU from 2006, but the prices are no less than 40% lower. When comparing the same sizes with the prices of last year, values are up from the rock-bottom levels of 2009.



Supply:
New orders for container ships are beginning to reappear on a larger scale following two years almost without contracting a single new vessel. The new orders are for ships due for delivery in 2013 and 2014. Since the last BIMCO Shipping Market Overview & Outlook two months ago the tally for container ships scheduled for delivery in 2013 and 2014 has gone from 90,000 TEU to 266,000 TEU, of which Evergreen and NOL account for 132,000 TEU. Evergreen took 10 ships at 8,000 TEU at USD 103 million apiece in June from Samsung H.I. and NOL took 10 ships of 8,400 TEU at USD 97.5 million apiece in July from Daewoo. Vessels of these sizes were inked at USD 125 million back in 2007.

The container fleet has grown by 5.6% during the first seven months of 2010, caused by deliveries of 170 vessels of a total 838,891 TEU offset by just 109,411 TEU that has been demolished. It seems as if demolitions have slowed down again following a busy spring. In 2009, 197 vessels were broken up – but that number will not show again. Our initial forecast of 98,000 TEU being broken up in 2010 has been surpassed, but we don’t expect demolition to go higher than 130,000 TEU assuming current conditions remain.



There has been some shuffling going on in the container orderbook resulting in earlier deliveries than previously anticipated – primarily from 2011 to 2010. This means that supply growth in 2010 could go as high as 10% as compared to previous projection of around 9% equal to 115,000 TEU of advanced deliveries. This also results in a lower estimate for 2011 deliveries which we now expect to be around 8%.

BIMCO forecast that inflow of new container tonnage in 2010 could reach 1.4 million TEU, offset by demolition of just 0.1 million TEU. This compares to a net increase of the containership fleet in 2009 of just 750,000 TEU (5.9%).

The combination of higher volumes and maintained slow steaming has made room for reactivation of a very large number of vessels. Also, increasing time charter rates have prompted the massive reactivation of idle tonnage into active service. According to Alphaliner, the idle containership fleet has now fallen to just 150 vessels of 274,000 TEU.

The re-activation of the idle fleet has already brought 1.2 million TEU of capacity back in service since the beginning of January. In combination with the net increase brought about by new vessel deliveries, this brings the total inflow of “new” tonnage into the active fleet this year way above 2 million TEU. All this “new” tonnage is the single main reason for caution going forward.

Outlook:
Peak season is arriving and while the ships seems to be ready and enough in numbers, the lack of boxes being at the right place at the right time could cause some challenges for the liner companies as well as for the shippers. But it could also provide a floor under the freight rates if box-supply remains tight – as it has been during the last months. Lately some of the reactivated vessels have performed repositioning of boxes as their first task of re-employment. This should help in smoothing out the imbalance established over the last year.

The outlook for delivery of Ultra Large container ships (ULCS) of +10,000 TEUs has changed somewhat since BIMCO looked into the crystal ball in the middle of March. At that time 61 ULCS were due for delivery in 2010. By the end of July the status can be presented like this: 11 have been delivered, 7 have been postponed into 2011 and 4 into 2012. 16 are still on same 2010-delivery-date while another 21 have changed date but are still on target for delivery in 2010. The status of the last two vessels is unclear. This could bring the total number of ULCS-deliveries on 2010 up to 48.The year began with a fleet of 35 ULCS, so the segment is on course for a supply growth rate of 137% in 2010. To spice things up even more, 52 ULCS are on schedule for delivery in 2011...

in Copenhagen, DK

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