Special Coverage: Container shipping industry likely faces tough times ahead

DSF said it expects intra-regional trades to grow in importance at the expense of the main east-west trades.

   It appears the container-shipping industry will likely continue to face hard times for several more years because growth in capacity is expected to continue to outstrip demand for transportation.
   “Contracting of new container vessels took off in 2015, with high order activity in the third quarter especially,” said Danish Ship Finance (DSF) in the May issue of its twice-yearly Shipping Market Review.
   DSF noted orders were skewed toward larger-size vessels, with orders in the capacity range of more than 16,000 TEUs and reaching “new levels equivalent to the total capacity ordered in the whole of 2014.”
   But ordering began to fall off in the fourth quarter and by the end of July this year, orders for new containerships, measured as a percentage of the existing fleet, were 17 percent, the lowest level since 1999, according to industry information provider Alphaliner. And that number could drop to 14 percent by the end of 2016.
   Neil Dekker, head of container research at Drewry, said while ordering of new containerships has not come to a complete standstill this year, no containerships of more than 8,000 TEUs were ordered in the second quarter.
   Alphaliner said 86 percent of all new orders, by unit count, were ships with capacities of 3,500 TEUs or less.
   For container shipping, could this be the pause that refreshes the industry?
   Alphaliner’s list of the 100 largest container carriers showed that on Aug. 1 they owned ships with a combined capacity of 19.4 million TEUs and had orders for vessels with slightly more than 3 million TEUs of space collectively on order.
   “The projected supply growth in 2016, at 3.6 percent after adjusting for vessel scrapping, is also at a record low,” said H. J. Tan, an executive consultant with Alphaliner. “The problem is that demand is growing at an even slower pace and the over-supply situation is expected to persist in the near term.”

2015’s Strong Capacity. DSF said neither weak demand nor low freight rates deterred the inflow of new vessels last year. A record of nearly 1.7 million TEUs divided among 212 vessels, or 8 percent of the fleet, was delivered in 2015.
   That made the average size of a delivered containership about 7,900 TEUs, an 8 percent increase over 2014, DSF said.
   It said 94 percent of the capacity on containerships delivered last year was on vessels too large to fit through the old locks in the Panama Canal, and 27 percent was for ships with more than 16,000 TEUs of capacity.
   Despite the soft market, 86 percent of containerships scheduled for delivery last year were delivered. “Only 3 percent of orders were canceled, while 11 percent were postponed for later delivery. In the first quarter of 2016, 240,000 TEUs were delivered,” DSF said.
   DSF noted, “In the fourth quarter, contracting activity began to slow down as market fundamentals worsened and the window closed for ordering vessels exempt from the new NOX [nitrogen oxide] Tier III regulations in the International Maritime Organization’s MARPOL convention.”
   Regulation 13 in Annex VI of MARPOL set the stringent Tier III emission limit for engines installed on a ship constructed on or after Jan. 1, 2016 for operations in the North American and U.S. Caribbean Sea Emission Control Areas (ECAs).
   Dekker said some ships with less than 4,000 TEUs of capacity have been ordered this year, mostly by intra-Asia operators, including eight 2,500-TEUs ships from Taiwan’s Wan Hai and 20 ships of 2,500 TEUs or less from Chinese domestic operators.
   Alphaliner has also said that new orders this year are mostly focused on small sizes of less than 3,600 TEUs, and Tan said he does not expect an increase in new orders during the second half of the year.
   Dekker said the sharp slowdown in orders “is very good news, because there is more than enough in the system.” Drewry is forecasting fleet growth of 3.2 percent this year.
   That is partly due to an upswing in scrapping of containerships. Drewry said containerships with a combined capacity of about 194,000 TEUs went to the breakers in 2015, and that it expects ships carrying 450,000 TEUs collectively to be scrapped in 2016. Dekker said many brokers are forecasting 500,000 TEUs in containership capacity will be scrapped.
   “Shipowners really are challenged with very low charter rates and many are deciding to throw in the towel now with younger ships being scrapped and a lot more panamax [in the capacity range of 4,500-5,100 TEUs] and above,” Dekker said.
   He noted some 6,500-TEU ships that are only 15 years old have been scrapped recently, and there’s a debate within the industry about what the future holds for deployment of ships with panamax-size capacities now that wider locks have opened in the Panama Canal.
   If carriers are getting some respite this year, Dekker said they are unlikely to get the same next year, when Drewry is forecasting 6 percent fleet growth, since many of the ships ordered in 2015 will be delivered.
   “2017 is going to continue to be very challenging,” he warned, as carriers figure out how to deploy all those new ships and handle the cascading of existing ships into other trade lanes.
   It appears shipping companies can’t rely on increased trade to soak up capacity either, though Drewry does believe demand for container transport will increase 1.8 percent in 2016, compared to the 1 percent increase seen in 2015.
   Because of the increase in capacity, and limited idling of ships, Drewry sees a deteriorating supply-demand balance in 2016 and 2017.
   Even so, carriers are currently seeing headhaul load factors of 86-87 percent, which “in the grand scheme of things is a pretty good figure… the market isn’t really working logically,” Dekker said. “We shouldn’t have seen in recent months some of the ridiculously low rates that we’ve seen on some trade lanes.”
   However, idling ships can work wonders for improving freight rates.
   For example, freight rates rose after carriers took out about 30 percent of capacity in the Asia-South America east coast trade, said Philip Damas, director of Drewry Supply Chain Advisors. In contrast, rates continued to slide between Europe and Brazil, where capacity was not cut.

Warning To Shippers. Speaking during a webinar in late July, Damas emphasized the freight rates being offered by carriers over the past year were not sustainable, and shippers should be wary of a rebound.
   “That is the warning we would like to share with you, and it could be an important message for your senior management—if you are a shipper, the contract rates will go up,” he said.
   However, Damas noted surplus capacity in the container-shipping industry “will contain the speed and quantum of future rate increases… They will not double or triple, but they will certainly go up.”
   Drewry said at the end of July that carriers were beginning to lay up more ships.
   “We found that over 300 containerships (with a combined capacity of over 800,000 TEUs) were idle in early July, supposedly the start of the Asian export peak season,” the company reported in its Container Insight Weekly publication. “In July of the two previous years, less than a quarter of this capacity was idled.”
   The firm added that “It is likely that some of the newly idled ships will be sold for demolition, particularly the older panamax vessels.”
   Even carriers that are perennially some of the strongest performers in the container-shipping industry are being affected by low rates.
   Orient Overseas (International) Ltd., parent company of Orient Overseas Container Line (OOCL), said it lost $57 million in the first half of 2016, compared to a profit of $239 million in the first half of 2015.
   “Weak economic growth in many key economies has constrained consumer demand, and global uncertainty seems to have given rise to some level of slowdown in corporate and government investment. Consumer demand and investment are the key drivers of demand in our industry, and in this context it is no great surprise that cargo volume growth has been uninspiring,” said OOIL Chairman C.C. Tung.
   “Notwithstanding the fact that there have been some tonnage withdrawals and pockets of volume growth in selected trade lanes, if deployed capacity continues to be substantially in excess of demand, the second half of 2016 will be challenging and difficult,” he said.
   The container-shipping industry has seen some consolidation in the past year through the merger of COSCO and China Shipping, CMA CGM’s purchase of APL, and the planned merger of Hapag-Lloyd and United Arab Shipping Co.
   Rolf Habben Jansen, Hapag-Lloyd’s chief executive officer, said he believes consolidation in the shipping industry will benefit the container carriers by rebalancing the power between shippers and carriers.
   That view is shared by Gerry Wang, CEO of Seaspan, the world’s largest containership charterer. He said the mergers “all point to a more coordinated industry environment.
   “Over time, we believe the combination of elevated scrapping and a limited newbuilding ordering should help improve the industry’s supply and demand factors. However, we expect the industry to remain challenging during 2016 and do not expect the material change in time-charter rates in the near term, which will remain at historical low levels,” he explained.
   While there has been a general slowdown in orders, the amount of tonnage that various leading carriers have on order varies widely. COSCO China Shipping, Evergreen, NYK, and PIL have orderbooks that amount to about 25-40 percent of their owned and chartered fleets, while neither of the two major South Korean carriers—Hanjin Shipping and Hyundai Merchant Marine (HMM)—nor ZIM have any ships on order.
   Hapag-Lloyd has a relatively small orderbook, just 5.7 percent of its owned and chartered fleet, and UASC’s is also small—just 5.5 percent of its fleet.
   But Habben Jansen said the merger of the two companies will effectively delay Hapag-Lloyd’s need for future capital spending on new ships.
   Hapag-Lloyd’s fleet is notably deficient of large containerships, with only 10 vessels with capacities over 13,000 TEUs and five at 10,500 TEUs due for delivery in the second half of this year and first half of 2017.
    UASC, on the other hand, has six 18,800-TEU vessels, and will have 11 15,500-TEU ships by the end of this year.
   After the merger, Habben Jansen said ships in the combined fleet will have an average age of 6.6 years, one of the youngest in the industry, and 77 percent of the fleet will be 10 years old or less. Hapag-Lloyd will also own 62 percent of its fleet, as opposed to chartering ships.
   “We will not need to do any significant investments in vessels over the upcoming years,” Habben Jansen said. “It will all be about making sure we make the best out of the combined entity and that we adjust capacity where needed to demand.”

   Alphaliner’s Tan said he does not expect further merger and acquisition activity in 2006 by the large container carriers, and believes the Hapag-Lloyd/UASC merger is only possible because there are “shareholders who are willing to keep pouring money in even though the company has not paid any dividends since 2009.”
   Hapag-Lloyd said some controlling shareholders at both Hapag-Lloyd and UASC have agreed to “backstop a cash capital increase in the amount of $400 million planned by way of a rights issue within six months after the closing of the transaction.” They include CSAV, Kühne Maritime, holding company of the City of Hamburg, Qatar’s holding company and a public investment fund for Saudi Arabia.
   Carriers are changing the makeup of the vessel-sharing alliances to which they belong, switching partners to turn four major alliances into three by next spring. The 2M alliance of Maersk and Mediterranean Shipping Co. is adding HMM as a third partner; CMA CGM, COSCO China Shipping, Evergreen and OOCL are forming the OCEAN Alliance; and Japan’s three largest carriers—NYK, MOL, and “K” Line—are joining with Hapag-Lloyd, Yang Ming and Hanjin to form THE Alliance.
   All will have substantial numbers of ultra-large containerships (ULCS), though THE Alliance lags at the moment.
   Dirk Visser, senior shipping consultant at Dynamar, calculated that as of late July if both existing and ships on order are included:
     • The Ocean Alliance will have 195 ULCS (125 existing and 70 on order) with an aggregate capacity of 2.78 million TEUs on ships too big to pass through the old locks of the Panama Canal—93 “neopanamax” ships that will be able to pass through the canal’s new locks (up to around 13,500-14,000 TEUs); 60 “neo post-panamax” that won’t pass through the bigger locks with capacities up to 18,000 TEUs; and 42 with capacities of 18,000 TEUs or more.
     • 2M, plus HMM, will have 186 ULCS (140 that exist and 46 on order) with 2.71 million TEUs of capacity—86 that will be able to use the new locks, 49 neo post-panamax, and 51 with capacities of plus-18,000 TEUs.
     • THE Alliance will have 142 ULCS (89 that exist and 53 on order) with 1.93 million TEUs of capacity—55 that will be able to use the new locks, 77 of the neo post-panamax, and 10 with capacities of 18,000 TEUs.
   “Whether they set up the alliance because of the ships, or the other way around, I find difficult to say,” Visser said, noting that any orders of ships larger than 10,000 TEUs this year already appeared to be in place last year, even if they were not reported.
   Tan, however, believes “individual carriers will have their own growth strategies, independent from their alliance affiliations.”
   Visser said forecasting is becoming more difficult because of uncertainty on what trade growth will be going forward, in part because of the possible impact of trends such as nearshoring, 3-D printing, and increased robotization of production in the United States and Europe.
   “I have a feeling that the Far East trades connecting with the Americas and Europe will certainly not be growing as fast as they have in the first decade of this millennium,” he said.

“Fourth Industrial Revolution.” DSF said “investments in very large vessels are long-term bets on the geographical location of manufacturing. However, manufacturing and consumer preferences are gradually changing and we do not expect the demand patterns of previous decades to be repeated.
   “As the fourth industrial revolution evolves, manufacturing could become increasingly regionalized, which could redefine trading routes and shorten traveling distances. Moreover, the emergence of a new, younger generation of consumers is changing the patterns of consumption, which, enabled by new technologies, could reduce the need for physical goods to be transported in the medium term—at least, we argue, on long-haul overseas trades,” the firm said.

   DSF added that “It seems that the world is undergoing a transformation that could end up redefining the container industry. The trade patterns of today will persist to some extent, but we expect intra-regional trades to grow in importance at the expense of the main east-west trades. This could leave some shipowners with large inflexible fleets unsuited to the future needs of customers, but liners still have the upper hand over tonnage providers.”

Big Ships: What’s The Limit? Classification society DNV GL said the size of ULCSs are “expected to grow further, but maybe at a more moderate rate than in the last decade.”
   Changes such as increasing the beam of a ULCS to 24 containers across, or increasing draft or lengthening a ship from 24 to 26 bays could increase intake to 23,300 TEU, and reduce fuel costs per TEU.
   “Increasing the beam to 25 rows and length to 26 bays, the capacity of a ULCS could reach 26,300 TEU,” said DNV GL, but it said such a ship “would be restricted from entering a number of ports and would not be able to pass through the Suez Canal with its current restrictions in a fully laden state. This would also require a new structural design concept.”
   “It is not likely that such a size of vessel will be ordered in the near future.”

  Chris Dupin is Maritime and Intermodal Editor of American Shipper. He can be reached by email at cdupin@shippers.com.