Container Shipping - Slow demand and the absence of resumed idling of vessels has proved to be a heavy burden in the battle for rate restoration

Overview

In the past three months, time charter rates have hovered around the same levels, providing owners with a steady market despite the downward shift in spot freight rates. Summer demand should determine the next turning point, with initial indicators suggesting weaker East/West volumes, but stronger North/South trade. Moreover, increased flows on the Middle East and intra-Asia trades should drive rates for small containerships higher, as idle capacity is now removed and orderbook in this segment is low.


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Demand:
In the past three months, time charter rates have hovered around the same levels, providing owners with a steady market despite the downward shift in spot freight rates. Summer demand should determine the next turning point, with initial indicators suggesting weaker East/West volumes, but stronger North/South trade. Moreover, increased flows on the Middle East and intra-Asia trades should drive rates for small containerships higher, as idle capacity is now removed and orderbook in this segment is low.

The shipping of containers bound for Europe remains in focus, as rates have now reached USD 874 per TEU. Rates have halved over the past nine months and dropped by 38% in 2011 alone. As we are getting closer to the traditional third quarter volume peak reflecting the Christmas preparations, anything but a reversal of recent fortunes will be catastrophic for owners seeking to harvest decent earnings to offset the unmerciful market rates that have caused losses for some in the first quarter and are bound to cause losses, bigger and more widespread in the second quarter which is soon coming to an end.

More capacity is constantly added to the trading lane, causing the utilization rate to drop below 90% since February, according to Alphaliner estimates. Others sources suggest that utilization by the end of May is as low as 80% for vessels departing Shanghai.

The hesitant lift off in GDP growth is mirrored in containerized imports that are only moving slowly upwards. Volumes into EU rose 8.9% in Q1 y-o-y despite a drop of 1.8% y-o-y- in February. Meanwhile, volumes into the US continued to climb y-o-y in all three months of Q1, making the ground firmer and enabling rates to stabilize.

The other major trading lane which goes to the US West Coast bottomed out at USD 1,608 per FEU by the end of March. Since then, freight rates have improved by 8%. A similar pattern appears for containers going from Shanghai to the US East Coast.


Meanwhile, the smaller and shorter trades to Singapore, Korea and Kaohsiung have experienced higher freight rates at 25-30% above the level by early February. Shipping of containers across the East China Sea, from Shanghai to Japan, which saw a sharp increase to USD 389 per TEU in the week that followed the earthquake has settled down again, heading South towards the pre-quake level at USD 312 per TEU.

Supply:
Vessels with a combined capacity of 622,329 TEU have been delivered so far in 2011, equal to a fleet growth of 4.4%. Vessel capacity of just 14,384 TEU has been demolished, highlighting the non-existant potential to limit fleet growth by demolition, as the fleet is very young.

In 2010, “just” 32 vessels in the +10,000 TEU category were delivered – so far this year 25 have been delivered, all put into service on Far East-Europe trades. BIMCO estimates that another 19 are due for delivery in the coming seven months, putting even more supply-side pressure on the trading lane despite the slower delivery pace.


The rate of newbuilt ships delivered into the container fleet has been the fastest amongst the main segments so far in 2011. Already, 49% of the expected annual deliveries were recorded as delivered by the end of May. This compares to a rate of 42% for dry bulk vessels, 39% for crude tankers and 34% for product tankers. This may be a result of massive postponement of deliveries, particularly in the container ship segment, that was negotiated as the global economic crisis turned the financial world upside down.

As foreseen in the previous SMO&O, the game-changing reintroduced focus on economies of scale that is about to be the core issue on the Far East-Europe trade has prompted several big players to upgrade existing orders – to vessels with an even larger cargo capacity. This is done in addition to an increase in placing of new orders for ULCSs.

BIMCO forecasts inflow of new container tonnage in 2011 to be at 1.26 million TEU. Thus we are forecasting the pace of new tonnage to steam off during the second half of 2011. As demolition is expected to be insignificant, the fleet is forecast to grow by 8.4% in 2011.

The new data reveals an elevation of 2013-deliveries as new orders for ships with a total cargo capacity of more than 200,000 TEU are now expected to be delivered in 2013 on top of the previously estimated 950,000. That activity has increased the expected deliveries in 2013 by 16% in just 2 months.

Outlook:
As the peak season will soon be upon us – it is getting increasingly difficult to see how freight rates on Far East Europe is going to be massively improved. Currently the forward curve is trading at US 1,200 per TEU for Q3-2011. While the forward curve for Q4-2011 just took a beating at the end of May to return to USD 1,100 per TEU, down USD 120 per TEU from the previous week.

Should the forward curve prove right, freight rates will climb by USD 300. However, this will not be enough to reach a level of sustainable rates giving just a small profit to owners, if you adjust for the Bunker Adjustment Factor (BAF). As BIMCO cautioned two months ago, idling of vessels ought to be considered to restore rates and reverse the negative trend, but the opposite has taken place, leaving potential significant losses for Q3-operations.

In the current low-rate environment, increased focus is put on spot rates as carriers hesitate to settle longer volume deals at fixed rates, as they all hope for better days around the next quarter.

A more positive outlook is visible for the Pacific trades, where freight rates appear to have bottomed out and are now moving sideways, waiting for the US consumers to return. But as consumer confidence is on a descending trend, BIMCO expects that the forward curve could prove to be too optimistic when it is stating USD 2,100 per FEU for USWC, equal to a rise of 20% from current levels.

in Copenhagen, DK
 

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