Ocean freight rates to face extra downward pressure from March

1/13/2018

Further downward pressure on freight rates is likely this quarter as record deliveries of new ultra-large container ships (ULCS) enter the container fleet.

As reported in Lloyd’s Loading List yesterday, despite the recent pre-Chinese New Year gains in East-West spot rates, the imbalance between container slot demand and supply growth in the coming years is forecast to put a ceiling on upward movements of freight rates over the next two to three years.

But the more immediate challenge facing lines is the latest round of containership deliveries. According to analyst Alphaliner, January will be a record month for containership deliveries, with no fewer than seven megamax newbuildings of 19,000-21,000 teu due to join the fleet.

“The month will set the stage for the rest of 2018, with a record number of ULCS in the size range from 14,000 to 21,000 teu planned for delivery this year,” said the analyst.

As noted by shipping trade body Bimco, with so much capacity due for delivery, container lines will need to rely on cost cutting and slow-steaming to remain in the black. But carriers are now also taking additional steps to prevent an avalanche of new vessels blowing a cold wind through box carrier finances.

“Several carriers have already taken action to reduce the − adverse − market impact from all the additional tonnage, by deferring deliveries of some new ULCS from this calendar year to the next,” said Alphaliner. “Among them is Cosco, which is believed to have deferred ten of the 28 ULCS that the carrier was originally to receive in 2018. Further to this, Yang Ming has also delayed three 14,000 teu ships in its vessel pipeline to 2019.

“Even with these deferrals, the total new containership capacity due to be delivered in 2018 is still expected to reach 1.5 million teu.”

More than 50% of the newbuilding deliveries are expected to be made up of ULCS from 14,000 teu to 21,000 teu, and most of this capacity is scheduled for delivery in the first half of the year, with over 1.2m teu due before the end of June.

“These capacity additions, together with a slower rate of container ship scrapping, will put further capacity pressure on the market,” added Alphaliner.  

Further capacity additions are expected to come from vessel ‘jumbo-isations’ planned by several carriers, including MSC, CMA CGM and Evergreen, which Alphaliner estimates could add a further 33,000 teu in incremental capacity to the existing fleet this year.

“The global containership fleet is expected to grow by 5.6% this year, after taking into account projected vessel deliveries, deferrals and scrapping, to reach 22.28 million teu by the end of 2018,” said the analyst, which noted the pace of container fleet growth was accelerating from the 1.8% recorded in 2016, and 3.7% in 2017.

“The January surge in vessel deliveries of 250,000 teu will be followed in the next four months by additional new ships with a total capacity of some 790,000 teu, all expected to join the world fleet between February and May,” it added.

“The ships will arrive in time for upgrades planned on various services of the 2M, Ocean and THE Alliance. These changes are to be implemented in the coming months, with a focus on the Asia-Europe and transpacific trade lanes, as well as the Far East-Middle East routes.”

The additions will trigger a cascade of vessels into secondary trade lanes, putting further pressure on fragile markets, with South American, Indian sub-continent, and intra-Asian routes expected to take in most of the additional capacity.

“Although cargo demand has remained strong in the first two weeks of January, with capacity utilisation reported in the high 90% levels across all main trade lanes due mainly to the seasonally strong pre-Lunar New Year rush, both the freight and charter markets are expected to be severely tested in March when demand dips after the Lunar New Year and utilisation levels are expected to fall,” added Alphaliner.