Excess capacity drove container freight rates down to near-record lows last year, but Drewry estimates 57 ultra-large containerships with at least 18,000 TEUs of capacity will be delivered to the global fleet in the next two to three years alone.
Despite the container shipping industry being bogged down by persistent overcapacity, carriers do not seem to want to let up when it comes to deploying more and bigger ultra-large containerships.
An excess of capacity—i.e. supply—is in large part what drove container freight rates down to near-record lows last year, spurring a spate of consolidation among carriers that saw several of the top 20 lines gobbled up by larger competitors, or in the case of Hanjin Shipping, exit the industry entirely. And yet, over the next two to three years, 57 ultra-large containerships (UCLs) with at least 18,000 TEUs of capacity will be delivered to the global container fleet, according Martin Dixon, director, head of research products at London-based shipping research and consulting firm Drewry.
Consequently, a large number of ships ranging from 13,500 TEUs to 16,000 TEUs will become too small for the Asia-Europe trade—the only trade capable of handling true ultra-large containerships due to restrictions in port and inland infrastructure elsewhere in the world—and will therefore be cascaded to the transpacific, Asia-Mediterranean and Asia-Middle East trades. Drewry projects that around 68 ships of this size will be moved from the Asia-Europe trade to one of the other three mentioned above during the next two to three years.
The chart below, constructed using data from ocean carrier schedule and capacity database BlueWater Reporting’s Capacity Report, compares the current average deployed vessel capacity in each of the four trade that are likely to see increased capacity with the delivery and deployment of these UCLs. In the Asia-North Europe trade, a total of 217 vessels are currently deployed with an average capacity of 13,772 TEUs, 54 of which are 18,000 TEUs or above. Average vessel size on services between Asia and the Mediterranean stands at 12,175 TEUs, while the Asia-North America and Asia-Middle East trades sport much smaller vessels, averaging 7,726 TEUs and 8,526 TEUs, respectively.
So, just for the sake of argument, if 57 more ships with an average capacity of roughly 20,000 TEUs—the UCLs on order range between 18,000 TEUs and 22,000 TEUs—are delivered and deployed between Asia and North Europe, and 68 ships with an average capacity of 14,750 TEUs are removed, average vessel capacity on the trade jumps to 15,172 TEUs. That’s a 4.6 percent increase in total capacity and a 10.2 percent leap in average vessel size in just a few years.
And if those vessels currently serving the Asia-North Europe trade cascade into the Asia-Mediterranean, transpacific and Asia-Middle East trades, similar increases can be expected there as well.
Chasing Records. The largest containership currently sailing the world’s seas is the 21,413-TEU OOCL Hong Kong. Christened in May at Samsung Heavy Industries’ shipyard in Geoje Island, South Korea, the vessel serves on the OCEAN Alliance’s— composed of CMA CGM, APL, COSCO, OOCL and Evergreen Line—LL1 string between Asia and North Europe.
The OOCL Germany, the second vessel in a series of six of that size ordered from Samsung Heavy, was delivered Aug. 22 and is scheduled to join the LL1 in early September, according to the Hong Kong-based carrier’s online service schedules.
Dixon said in a July webinar that Drewry was not expecting vessel ordering to take off again as it has previously, given the continuing oversupply in the market, the limits of economies of scale and ship size, and the overall weak level of demand relative to the last decade.
However, he did point out that the orderbook currently stands at over 3 million TEUs, a great deal of which is scheduled for delivery before 2019. The OCEAN Alliance in particular has a very large orderbook due for delivery in 2017 and even more so in 2018.
Just this week, OCEAN Alliance member CMA CGM finalized an order for nine, 22,000-TEU vessels from Chinese shipyards Shanghai Waigaoqiao Shipbuilding Co. and Hudong Zhonghua Shipbuilding (Group) Co. that would once again reset the bar for the world’s largest containership.
Even without the new orders, the OCEAN Alliance carriers are poised to increase their combined fleet capacity by 18 percent, according to Lars Jensen, chief executive officer and partner at SeaIntelligence Consulting.
“Almost all of this capacity will have been delivered by the end of 2018—only 17 months from now,” Jensen said in an Aug. 3 LinkedIn post. “The majority of this is ultra-large tonnage, which will most likely fall under the scope of OCEAN Alliance deployment.
“The new orders, if confirmed, will increase this growth to more than 21 percent, although the delivery time for the new batch of vessels is not yet known,” he added. “By contrast, 2M stands to grow capacity by less than 7 percent, and ‘THE’ Alliance by less than 10 percent.”
Much like back in 2011, when industry leader Maersk Line ordered the first set of 18,000-TEU containerships, these new vessels being delivered—and rumored to be ordered—are causing analysts to question whether carriers are really as interested in operating at a profit as they are in operating the biggest ship on the block.
Source: BlueWater Reporting
Turning Tide? Although the deployment of more and potentially even larger ultra-large containerships could backfire for carriers, certain tailwinds appear to be helping them gain some ground.
Philip Damas, director, head supply chain advisors at Drewry, said during the webinar that the recent consolidation of ocean carriers gives them much more control over capacity and—in theory—rates than they had in the past.
Summing up east-west and global freight rates (both spot and contract), Damas pointed out how after several years of deep rate decreases, the tide is turning for freight rates this year, and Drewry forecasts rates will rise 16 percent overall in 2017, with further increases expected in 2018.
The firm also projects carrier operating profits this year will total around $5 billion, compared to a combined loss of over $4 billion last year.
Signs point to demand picking up on the trade between Asia and the U.S. West Coast in particular. Hyundai Merchant Marine (HMM), South Korea’s largest carrier following the collapse of Hanjin, reported in June that its Asia-U.S. West Coast volumes had grown 77 percent year-over-year, from 7,953 TEUs per week to 14,055 TEUs per week, according to PIERS Data. Some of this can likely be attributed to shipments that might have previously been carried by Hanjin, but it’s encouraging nonetheless.
And in early August, all three of the largest U.S. West Coast ports reported record container throughput for July, capping off a seven-month stretch in which the ports of Los Angeles, Long Beach and Oakland saw inbound loaded container volumes grow 9.5 percent, 6.4 percent and 3.7 percent, respectively, compared with the same 2016 period.
Drewry projects global container demand growth will advance to around 4 percent for the year, before falling back to around 3.5 percent in 2018, Dixon said. The firm upgraded its forecast for global container trade for 2017 from prior projections because of the improvement in worldwide economic growth, which has supported trade growth; restocking in Europe and North America, which has boosted imports in these regions; and Chinese imports accelerating faster than expected.
Dixon said Drewry also expects vessel supply to rise by 3 percent for 2017, before increasing to a 5 percent growth rate in 2018.
In regard to further mergers and acquisitions, Damas said Drewry believes there are only a few companies left that could be potential targets—specifically mentioning PIL, Wan Hai, SITC and Emirates—but that the firm essentially sees the major M&A cycle as having come to a close.
But all this begs the question: will the projected increases in container demand be enough to sustain profitable rates if capacity growth continues to keep pace?
