Restructured container shipping market set for healthier year

4/26/2017

Container lines are likely to see improved profits thanks to higher demand and network optimisation during 2017, according to Peter Sand, chief shipping analyst at shipping association Bimco.

“Bimco expects 2017 to be a better financial year than 2016 for lines,” he told Lloyd’s Loading List this morning. He said carriers had seen a “solid” start to the year, both in terms of demand and efforts to limit fleet growth, and predicted further financial performance improvement through the rest of the year.

“The Q1 figures we have now are positive,” he said. “There is healthy demand; not necessarily higher rates, but lower costs, which remains key for lines.”

The positive start to 2017 has brought welcome respite after a “year of upheaval” in 2016, albeit upheaval that has left lines in a better position to prosper this year. “Most alliances were broken up to form new ones; one line went bankrupt and, in combination, ship owners managed to cut deep into the excess capacity of the fleet,” said Sand.

“Gains from a low-fleet supply are instantly reaped, whereas the benefits from new network structures take a bit more time. Bimco now expects the container shipping industry to continuously optimise networks and make them more efficient.”

Cutting costs will be essential if individual alliance members are to realise the full benefits of alliances. “As cost cutting is a huge part of this, the effect on freight rates is not the only indicator of a successful implementation,” he said.

However, he said changes to the alliance system should also be put into a global context, which includes the impact on North-South trades.

“As four alliances consisting of 16 companies, become three alliances consisting of 11 companies, change will happen,” he said. “The three alliances control 77% of global container ship capacity and as much as 96% of all east-west trades. But we should remember that 57% of all demand, as measured by TEU miles, is generated by non-east-west trades – trades that are particularly impacted by the recent years’ cascading of tonnage from the east-west trades. Another two-tier market is in the making.”

Bimco forecasts that the container ship fleet will grow by 2.9% in 2017, assuming that 450,000 TEU will be demolished and 1 million TEU will be delivered. “For that to happen, the current demolition interest must cool somewhat and the delivery pace must pick up,” said Sand. “Nonetheless, both assumptions are likely to happen in a market that is improving. In fact, it is already happening.

“Currently the fleet is getting smaller by the day, as 152,800 TEU has been delivered in 2017, offset by as much as 195,555 TEU being sold for demolition. This means the fleet is smaller today than it was at the start of the year.”

Bimco also said demand for container shipping grew by 2.7% in 2016. With the supply side growing by only 1.3%, this meant that the fundamental market balance improved for the first time since 2011. “This development is primarily due to decisive actions by ship owners who sold excess tonnage for demolition,” said Sand. “Hopefully, improved earnings will also follow soon.

“The tonne-mile demand side has grown by an average of 3.4% annually during 2012-2016. This is a new and lower growth level that has taken some time for the industry to get used to. Every year in which the supply side outstrips the demand side, the fundamental market balance worsens.