Volatility risk for ocean freight rates as capacity surges

2/17/2018

Container shipping line expectations of a pre-Chinese New Year surge in demand prompted a major increase in global capacity that prevented any rise in average spot rates, according to industry analyst Alphaliner.

Although, as reported in Lloyd’s Loading List, the highly anticipated build-up in demand in the lead-up to Chinese New Year in recent weeks ultimately proved disappointing to carriers in terms of freight rates, the analyst said the number of container ships idled dropped significantly in the build-up to holiday factory closures.

“The idle containership fleet has dropped sharply within the past fortnight as carriers rushed to add capacity to take advantage of the high pre-Lunar New Year holiday demand in the Far East,” said Alphaliner Weekly. The idle fleet of ‘above 500 TEU’ ships stood at only 65 vessels − or 191,441 TEU − on 5 February, accounting for just 0.9% of the total containership fleet.

“A rapid increase in the active fleet, due to the twin effects of the reactivation of the idle fleet and a record number of new ships delivered so far this year, has pushed up the overall active fleet by 760,000 TEU since November last year,” said Alphaliner. That is equivalent to around 3.5% of the total containership fleet.

“This very high rate of capacity growth has already had an impact on freight rates, with the SCFI spot rates losing some ground. As per 9 February, the composite index had fallen from 884 to 872 points, as shippers faced no capacity shortage during the run-up to the Lunar New Year holidays.”

The analyst predicted the idle fleet would rise in the next three weeks as carriers implemented void sailings in the Far East during the post-holiday period. 

“However, with a flurry of new service launches and capacity upgrades already announced to take effect from March and April, immediately after the holidays in the Far East, the market is poised to see further capacity injections,” it added.

“The uncertainty over the demand outlook in the face of the large increase in vessel supply could see further freight rate turbulence during this period.”

Lines have also been placing heavy newbuilding orders, despite warnings from industry analysts that this would make it difficult for them to address the fundamental imbalance between slot supply and demand.

Evergreen, for example, has ordered eight 12,000 TEU vessels to be delivered in 2020 and 2021 − the carrier also has 11 ’Megamax’ ULCS of 20,150 TEU and 17 units of 2,800-2,900 TEU scheduled for delivery in 2018 and 2019 – while on 13 February, Yang Ming announced it would build 20 new vessels. Maersk has also confirmed it has exercised options to build an additional two 15,282 TEU vessels which are scheduled for delivery in the first quarter of 2019, and Hyundai Merchant Marine is expected to soon announce orders for up to 20 new ships of 14,000 and 23,000 TEU.

The recent orders add to the fleet expansion programmes of MSC and CMA CGM, which in late in 2018 committed to eleven and nine, respectively, next-generation ‘Megamax’ ULCS of 22,000-23,000 TEU. 

“This recent activity has brought the total containership orderbook to over 2.8m TEU, or 13.2% of the existing fleet in slot capacity terms,” said Alphaliner.

“Additional vessel orders, ranging from for feeder-sized tonnage to ships of 14,000 and even 22,000 TEU, are still being finalised. These could eventually push the orderbook-to-fleet ratio to above 15%.”

As reported last month in Lloyd’s Loading List various industry analysts have noted that new containership orders will make it difficult for lines to address the fundamental imbalance between slot supply and demand in the next two to three years, limiting freight rate rises and forcing lines to seek out cost savings.

Newbuild deliveries in 2017 represented a 26.6% jump on the previous year, when approximately 944,000 teu hit the water, according to Alphaliner. And host of carriers also returned to the yards in 2017 as the orderbook surged nearly 140%, year on year. Most striking was the 20 ships ordered in the 18,000 teu and above size range compared with none in 2016, as carriers, including MSC and CMA CGM, agreed contracts for 22,000 teu units.

Shipping organisation Bimco said last year’s deliveries and the ordering spree in the latter part of 2017 would keep a lid on freight rates for shippers in the coming years and force lines to seek out cost savings.

Peter Sand, chief shipping analyst at Bimco, commented: “Nominal fleet growth level for the container shipping industry over the next few years is set for around 4%, which leaves little room for fundamental market balance improvements. As a result, increased earnings must come from continued cost-cutting exercises and permanent slow-steaming to keep fuel costs on a tight leash.”