Container Shipping - Going slow across the board has brought back black bottom lines

Overview

Forecast: BIMCO expects the fourth quarter to be a difficult one, with volumes going down from recent highs. This may also mean idling vessels becomes more normal again as they are removed from stings or simply temporarily abundant as volumes tighten. During the first half of 2010 the container trade has made a remarkable comeback. Rates have doubled on many routes and volumes have returned from the abyss to the benefit of many owners who have switched from red ink to black as a result of this.

Demand:

During the first half of 2010 the container trade has made a remarkable comeback. Rates have doubled on many routes and volumes have returned from the abyss to the benefit of many owners who have switched from red ink to black as a result of this. The upswing is also due to hard work from the liner companies, who have mixed a cocktail of slow steaming, idling, postponements of deliveries and cost cutting initiatives across the board to get back in black. Add to that the lack of equipment, especially the shortage of boxes in key loading areas in the Far East during the first half of 2010, and this has been a strong driver behind recovering rates, but a driver that is now fading as we enter the last quarter of the year.

The comeback has been driven by heavy restocking of inventories but also surprisingly strong imports of Chinese goods – especially into the EU. With high unemployment figures in both the EU and the US which should intuitively dampen the demand from consumers, the upside volume potential for container shipping is considerable.

In terms of container shipping, EU imports have been particularly strong with volumes getting close to 2008-levels for the first 7 months. In terms of values, 2010 has surpassed 2008, meaning that more valuable goods are being imported. This in turn does not necessarily mean better freight rates for the industry, but it proves money is there to be spent, which is a critical factor for the sustenance of the ongoing recovery.

Two months ago BIMCO suggested that the third quarter would not appear as strong as a usual peak-season and as it has turned out, reality has supported this view. Spot rates from Shanghai to the US West Coast fell from USD 2,833 per FEU at the spike at early July to USD 2,493 per FEU by mid September (no later quotes available due to Chinese holiday). Anecdotal evidence has talked about rates sliding further. The same goes for Europe and the Mediterranean.

Charter rates on tonnage continue to rise, but levels are still not impressive and this gives reason for time charters to remain around 4-6 months as non-cash-strapped tonnage providers hesitate to lock in a bad charter rates.

Charterers are currently focusing on the 1,700-2,500 TEU segment which see stronger rates increases as compared to other segments. Also, the 3,500 TEU ships are in demand as supply is short in this segment going forward.

Supply:

The active fleet has grown by 7.9% so far in 2010 driven by the 1.1 million TEU that has been delivered year-to-date. New tonnage delivered in 2010 has already surpassed the 2009-level. BIMCO estimates that postponements will remain high at 40%, thus impacting the picture developed one year ago when 2011 was expected to see 1.5 million TEU delivered and 2012 a bit above 800,000 TEU.

Demolition remains unattractive, as less than 70 vessels have been sent to the breakers in 2010. The potential for demolition in the container segment is almost non-existent as the fleet is so young, but the BIMCO forecast of 128,000 TEU could – somewhat surprisingly – turn out to be too optimistic.

Not only dry bulk owners have been signing contracts for new vessels to the tune of “big is beautiful”. 45% of the new 2010-contracts are for vessels with a capacity of 8,000 TEU or more. Likewise, in dry bulk shipping, the large ships are already feeling the heat from oversupply.

The development of the fleet in service is remarkable and does not only comprise newbuildings but also reactivated vessels. Alphaliner reports that growth in the effective supply of TEU-capacity has reached 19% so far this year when you add the newbuild deliveries to the idle tonnage that has been reactivated during the first three quarters of the year. BIMCO forecast 1.3 million TEU newbuilds to enter the fleet excluding demolitions of 0.1 million TEU. Should this materialize and the idle fleet remain steady at current levels until the end of the year, it would bring the full year growth of capacity in service above 20%, equally distributed between newbuilds and re-entries. Note that 1.5 million TEU were idle at the beginning of 2010.

The idle fleet remains low, with just 228,000 TEU reported of which three-quarters of the vessels are below 2,000 TEU.

On top of this, there are reports of 20 ships with an average capacity of 9,000 TEU – all fully finished vessels – lying at shipyards waiting to be delivered. Whether this is a steady or current issue is not known but it tells you that owners still hesitate to take delivery, still struggle to get financing in place for last instalment and still play the waiting game, hoping for good times to come closer before entering the ships into their fleets and balance sheets.

So far no specific ship sizes have been squeezed out as a result of cascading, but what has happened is that services now consist of less homogenous vessels than before, where a string typically employed identical ships.

Outlook:

BIMCO expects the fourth quarter to be a difficult one, with volumes going down from recent highs. This may also mean idling vessels becomes more normal again as they are removed from stings or simply temporarily abundant as volumes tighten.

When the economic conditions in the Western hemisphere improve it will encourage consumers to request containerized goods and thus provide for volumes to go further up. The key question in this case remains whether slow steaming will prevail or not.

BIMCO would, like a number of the largest carriers, argue that slow steaming is here to stay. If it was not for slow steaming, the fundamental market balance between supply and demand would be negative. Slow steaming has created employment for much more tonnage and saved millions of dollars on bunker fuel. However, demand and special requirements from shippers may play a part as well.

Huge cost savings is the strongest case for the new speed norm of container shipping – a move away from high speed services on most trades. The high speed norm – which was still the situation three years ago – took place in an environment of low bunker prices that had not surpassed USD 200 per tonne, and the perception that high speed was king and facilitated fast turn-around, more voyages per year and thus a better return on capital. High speed lasted until the crisis broke, as high rates and bunker surcharges had matched the bunkers as they sky-rocketed up to USD 700 per tonne. Today bunkers are still as high as USD 450 per tonne and not supportive for high speed services.

It is much more economically viable to charter one more ship to provide for some extra capacity on your string than to increase speed, as fuel consumption increases progressively with the speed. Note that a 10,000 container ship sailing at 25 knots is burning 280 tonnes a day, amounting to USD 126,000 per day.

Will fuel prices come down? No, they are not likely to come down. At the bottom of the crisis around the turn of year 2008/2009, bunker prices briefly went below the USD 200 per tonne mark, only to return above USD 300 per tonne five months later.

One more argument for slow steaming is the general expectations medium and long term for higher oil prices than today and this will even be combined with a new huge Emission Control Area (ECA) in the US and Canada and requirements for more expensive low sulphur fuel from 2015 in all ECA’s.

The high-speed era was prompted by customer demand and the just-in-time principles in respect of production and inventories, reducing customers’ capital tied up in inventories. Customers will have to accept the new order of the day, or pay a premium for faster transit and deliveries.

in Copenhagen, DK

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