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The poor freight rate performance on the main trading lanes took us by surprise – even with our modestly positive outlook, the peak season was set to be
The poor freight rate performance on the main trading lanes took us by surprise – even with our modestly positive outlook, the peak season was set to be the poorest ever period when you adjust for fuel surcharges. But the rising freight rates didn’t last long, and the USD 1,000 per TEU is still far away at USD 754 per TEU on Far East – Europe. To put the situation into perspective, the “real” spot rates (ex-fuel surcharges) on Far East – Europe are now below the 2009 trough. Currently, the bunker surcharge on this trade is USD 800 per TEU, going down to 790 in October. This illustrates the extreme situation created by intense competition and a large inflow of tonnage in particular on this trading lane – famous for its almost exclusive use of +10,000 TEU vessels. As demand is about to grow by 5% it’s not just a supply problem but also a demand problem. The economic situation in Europe has not improved during the past months, on the contrary actually – leaving little upside potential for stronger demand in forthcoming quarters. Since the end of April rates have been down by more than 50% on last years’ level.
The delivery of 35 new +10,000 TEU vessels in 2011 so far has added huge capacity to the existing 66 vessels with a +10,000 TEU capacity. This equals a segment fleet growth of 53%, all of which has been put into service on the Far East to Europe trade lanes.
In the trans-Pacific, earnings are slightly better. Current Bunker Adjustment Factor (BAF) on the trans-Pacific is USD 700 per FEU in September/October for US West Coast and 1,090 per FEU on US East Coast. This is comparable to the current spot rate level of USD 1,589 per FEU on USWC and USD 3,124 per FEU on US EC. With the prospect of a potential flat/slightly negative demand growth as compared to 2010, a decline in freight rates of 36% hints that liner companies will be getting into rougher waters. The implementation of peak season surcharges has not been successful, even though July and August provided increasing freight rates on all major trading lanes, as September has rolled back the gains with a vengeance.
As a response to the poor trans-Pacific demand situation, Alphaliner reports that another four services will be withdrawn during October-December, adding to the 7 services already withdrawn during April-September. The new withdrawals comprise to as much as 6% of current capacity on the Far East-USWC trade. Will this be enough? Hardly.
The trend in activity on the trans-Pacific trading lane as illustrated by the total inbound containers at the Ports of Los Angeles and Long Beach leaves little room for enthusiasm. The ports represent 2/3 of the total volume at US West Coast container ports. Starting the year on a very positive note, the accumulated year-on-year growth hit 1.5% for the first 8 months in August.
129 vessels of 270,000 TEU have been identified as idle by Alphaliner at mid-September, representing 1.8% of the containership fleet. Several services have been suspended since June, prompting idle vessels owned by non-operating owners, in particular, to rise significantly. Until recently, owners have hesitated to make vessels idle going into the peak season with anticipated higher volumes, despite the fact that freight rates on main trading lanes have leaked throughout the year. This idling development is very welcome, but the level is still far below the 1.5 million TEU that were idle by the turn of year 2009/2010.
The active container ship fleet has grown by 6.5% so far in 2011, as 966,000 TEU were delivered, offset by only 30,517 TEU being demolished (25 vessels – 1,221 TEU on average). 429,440 TEU out of the total represent the +10,000 TEU segment, which is almost exclusively deployed on the Far East – Europe trade lanes.
The latest deliveries have brought the total container ship fleet beyond the 15 million TEU mark. Just 11 months ago, the fleet crossed the 14 million TEU mark. After a few volatile years in 2009 and 2010, container ship supply growth seems back on familiar roads from before the crisis of 2006-2008 at an inflow level of 1.3-1.4 million TEU per year during 2011-2013. By means of massive postponements of scheduled 2010 (and 2011) deliveries and the 1½ years of absence from orderings during the financial crisis, ship owners and yards in co-operation managed to smooth out the planned deliveries and avoid the horror scenario of a massive delivery of 2 million TEU by the start of that year.
Without being superstitious, the number of vessels in the orderbook is now “The Number of the Beast”, 666 vessels are due for delivery. The curse of previous massive deliveries is clear to everyone staring at the freight rates and south-bound development on earnings for most carriers.
The size of vessels generally is getting larger and larger, but in particular in the containerships segment.
BIMCO forecasts inflow of new container tonnage in 2011 to be at 1.3 million TEU. This is in line with a steam off during the second half of 2011. As the young fleet holds a very limited demolition potential, the fleet is forecast to grow by 8.7% in 2011 – equal to and outweighing demand growth by close to 2%-points.
The amount of tonnage being idle has finally picked up, but as demand has been struggling hard to take off, the amount of tonnage that needs to be laid up to bring balance is a good way beyond the current level. Should the further leaking of revenue be stopped in the current environment where slow-steaming is already the name of the game, extensive idling or lay-up of tonnage, perhaps even beyond 1 million TEU, may still not be unrealistic. Closing down redundant services is a start, but not the full solution to the task at hand. You have to bear in mind that the fleet has grown by 2 million TEU since the turn of the year 2009/2010, resulting in the “active fleet” growing by 3½ million TEU in 20 months (real growth rate of 30%).
Liner carriers are seen to redeliver chartered-in tonnage at the earliest convenience and non-operating owner are likely to carry the lion’s share of the idle fleet.
By extrapolating the trend in inbound loaded container volume on the US West Coast, bearing in mind the disappointing back-to-school season and non-existent peak season, the outlook is unpleasant. Volume growth trans-Pacific could be could become negative. The outlook for the Far East – Europe trading lanes is still not as dire, with an accumulated growth rate of 7.2% for the first 8 months and a stable accumulated growth rate of 7-8% for the months February to August.