Supply influx points to challenging 2018 for liner operators

1/9/2018

Overcapacity is likely to remain the Achilles’ heel of the container shipping sector in 2018, according to Standard & Poor’s Global Ratings

Freight rates will come under renewed pressure if demand growth fails to tame vessel supply, especially on primary routes, the New York-listed ratings agency said in its latest monthly outlook report.

Alphaliner expects an excess of 1m teu – representing around 4% of the existing boxship fleet – to enter the market in 2018. 

Trade growth is forecast to outstrip supply next year, rising nearly 5% over 2017.

However, the issue confronting the market is that the lion’s share of new capacity will be in the 12,000 teu-plus size bracket.

While accelerated scrapping will help to balance the fundamentals to some degree, the majority of ships heading to breakers will be made up of smaller vessels plying the secondary trades – thus doing little to mitigate the influx of larger ships on the major routes, explained S&P.

For shippers, this will mean more rate volatility on these primary trades, including the Asia-Europe and transpacific, as carriers and alliances compete to ensure utilisation levels are sustained at 90% and above.

However, there is at least some encouragement for carriers in terms of annual contract prices and spot box rates that hold the key as to whether 2018 will be remembered as a profitable year or one to forget, said S&P.

The ratings agency noted how the first tranche of annual contract negotiations for 2018 are well under way for the North Asia to Europe container routes. 

Rates for beneficial cargo owners, typically large importers with an in-house logistics department, are currently between $1,100 and $1,200 per feu, while rates for smaller companies are slightly higher, at $1,300-$1,400 per loaded 40 ft unit, according to S&P.

“These prices are typically $50-$100 higher than last year, as customers did not experience as reliable carrier service as they felt they could have in 2017,” said the agency. 

“This has encouraged them to pay a premium to the carriers for this improved service in lifting scheduled cargoes.”

In terms of spot rates, S&P said it expects the peaks and troughs to be smoother in 2018 compared to the price rally of the first half of 2017, with the absence of industry bankruptcies this time round.

“Secondly, the carrier consolidation that took place during 2017 may provide reassurance to the supply chain that the carriers are able to deliver a reliable service,” it said. 

“Of course, the potentially improved reliability and spot price structure for 2018 still has to tackle the traditional caveats of vessel oversupply, underachieving trade demand growth and bunker price increases.”

S&P says it will be the carriers that provide performance reliability and do not rely on unscheduled void sailings that could get a “bigger pot of gold”.