Container shipping: Solid demand growth reduces spot rate volatility

Container Ship

As freight rates are coming back from the abyss, their actual rise seems to be magnified beyond their actual performance. Some container spot freight rates are up more than 100 per cent from the very low levels of last year, but may still be at a loss-making level now and so spot rates are not the best indicator for market profitability.

The broad-scoped China Containerised Freight Index (CCFI) offers a solid and alternative indication. The CCFI composite hit an all-time low at 632.36 on 29 April 2016. By 11 August 2017, it was back at 856.5 and now comparing year-to-date growth, the CCFI is up by 20.7 per cent versus the same period last year.

By contrast, the spot rates from Shanghai into Northern Europe are up 64 per cent year-to-date, year-on-year. The spot rates for containers bound for the US have gone up by 45 to 50 per cent over the same period.

It's not only freight rates which have risen this year. Charter rates left the doldrums and went up sharply in the first four months of 2017, only to slide back down, but during June/July most of the slide had been regained.

The extreme volatility of previous years has been reduced for spot rates on the Shanghai-Northern Europe trade lane. A sign of improving demand and better market conditions since Q4 2016.

The improved freight rates come on the back of strong demand growth during the first half of 2017. Combined with steady fleet growth of 1.8 per cent the fundamental balance has improved noticeably. Global container shipping demand grew by five per cent in H1 2017, over the same period last year (source: CTS).

On both the key long front haul trades out of the Far East into Europe and North America, demand grew rapidly by 5.2 per cent and 10.0 per cent respectively (source: CTS). BIMCO's own data on inbound loaded containers to the US West Coast went up by 5.4 per cent and to the East Coast by 10.6 per cent. The fastest growing import ports on the East Coast were Houston (+26 per cent) and Savannah (+13 per cent). While the main port – Port of New York and New Jersey (PANYNJ) – grew by only 5.5 per cent, due to very weak imports in February and March.

Growth on the head haul trades is vital, as it pushes utilisation higher where it's most needed, avoiding blank sailings and filling the ships to a larger extent than in recent years. Head haul trades deliver the higher freight rates, whereas back hauls merely reduce the costs of repositioning the ship.

Moving forward, PANYNJ, should benefit from the early completion of the Bayonne Bridge navigational clearance project. With the new air draft of65.5 metres, ships up to 18,000 TEU will now be able to reach the terminal "behind" the bridge (9,800 TEU was the maximum before the elevation). This will prompt carriers to optimise their networks once again, as most US East Coast ports have upgraded their terminals in recent years to accommodate the ultra large container ships.

2017 is following the trend seen in 2011-2012 and 2014-2015, of US importers increasingly directing cargo towards the US East Coast ports.

As of August 7, 182 ships (474,000 TEU) were idled (source: Alphaliner). As the idle fleet hasn't changed much over the previous three months, demand growth has lifted rates instead of reactivating the unemployed ships. This is one of the reasons for the improved conditions – the careful handling of supply.

Supply

The significant slowdown in demolition comes as no surprise. The magnitude, however is still striking. Remember that a lot of container shipping companies are still losing money daily. But the simple fact that rates have climbed and managed to stay up, means owners shy away from scrapping their ships.

June saw only seven small units sold for demolition (9,639 TEU in total), in comparison to the all-time high level in January where 99,899 TEU (29 units) left the fleet. This is a drop of 90 per cent.

BIMCO forecast a full year demolition of 450,000 TEU, out of which 306,824 TEU had already been demolished by mid-August. This is in line with our forecast that sees the second half of the year with continued fleet growth, low demolition activity and a slower demand growth than was seen in the first half.

The final four and a half months will see more ultra large container capacity being launched. The scheduled order book shows 31 units with a capacity higher than 10,000 TEU, out of which 11 are larger than 20,000TEU. BIMCO estimates that up to 25 of these ships will be delivered.

Fortunately, we still see almost no new orders being placed. Less than 400,000 TEU have been contracted since December 2015. This is extraordinary. In comparison, July 2015 alone, saw orders for 435,268 TEU placed (50 contracts). In the same period, the orderbook has come down from four million TEU to 2.6 million TEU. The lowest TEU level since 2003.

BIMCO expects that this low level will be difficult to maintain, as optimism in the market combined with hungry shipyards and shipping companies being eager to be top dog is a toxic cocktail.

One year ago, the container shipping fleet surpassed the 20 million TEU mark, only to increase demolition and bring it back below this figure. Now we are back above the 20 million TEU mark again, this time for good. The fleet now holds capacity of 20,356,656 TEU. Year-to-date, the fleet has grown by 1.8 per cent and BIMCO forecasts that the rate will hit 3.3 per cent for the full year.

665,850 TEU of the new capacity is now active and some 450,000 TEU will be delivered during the remainder of the year. 41 ships with an average size of 14,223 TEU constitute 88 per cent of additional tonnage, ranging from 9,400 TEU to 21,413 TEU. The latter is the OOCL Hong Kong, which will be joined by four sisters from Samsung HI later this year.

Deliveries scheduled for 2018 are equally biased toward the larger sizes, as the upscaling of network capacity and hunt for lower unit costs continues. Currently 77 ships with a capacity of 9,400 TEU and an average size of 15,578 TEU will amount to 82 per cent of the new influx. However, it is anticipated that postponements and delays are likely to impact this schedule.

Outlook

Since BIMCO's last report in mid-April, the consolidation amongst carriers has continued. First, the three Japanese conglomerates merged their container lines into ONE (Ocean Network Express), then there was COSCO's takeover of OOCL and in August we saw the formation of the Korea Shipping Partnership (KSP).

Whereas ONE is a merger of business units, at least according to the US Federal Maritime Commission, that had to give a final decision – rejection or approval – to the US Department of Justice; KSP is not. At least not yet. It remains to be seen whether KSP can reap the benefits from the partnership which is needed to counter the pressure from harsh competition on its main intra-Asian trade lanes.

BIMCO sees 2015/2016 as the real low point of the present crisis and 2017 is a step in the right direction for the industry. Demand growth will most likely outstrip supply growth for the second year in a row. The last time we saw that, was in 2010-2011.

BIMCO

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Global Ferry Market Surges

Last month I participated in the Interferry conference in Split, Croatia, as a presenter, panel member and very interested observer and networker.

Over the past twenty-seven years I have attended nearly half the Interferry conferences and have invariably found them to be interesting, stimulating and very useful.

Indeed, I was the one who persuaded the then board of the International Marine Transit Association to change its name to the much more manageable and appropriate Interferry that I had previously reserved as a domain name. I was pleased to give it to the association. That was in Cebu in the Philippines in 1999.

Since 1990, the association has progressed from being very North American focused to truly international in outlook and approach. This has improved its utility and appeal enormously.

The great and good of the global ferry industry, plus a couple of others, are regular attendees at Interferry. This year was the biggest yet with more than 370 delegates plus about 80 “accompanying persons". The programme is tight with two full days of conference deliberations lightened somewhat by breakfasts, lunches, dinners, a “technical tour", a golf day and a sailing regatta.

The conference offers a really good mix of serious and social activities that facilitate knowledge sharing and networking. Deals are done and almost all attendees return home looking forward to the next event.

So, you get to talk, eat and socialise with a wide range of ferry owners, ship builders, naval architects, financiers, lawyers, bureaucrats, classification society people, ship brokers and engine and equipment suppliers from all over the world. That enables the enthusiastic participant to gain an unusually wide perspective of the state of the global ferry market that would be unobtainable elsewhere.

Flourishing ferries

So, what did I learn? First and foremost, the global ferry market is in good and improving shape. I won't say it is booming but it is flourishing and appears likely to improve further. The tourist industry is strong, marine tourism, particularly, is very strong and the commuter ferry market is being encouraged by ever increasing road traffic congestion in the world's major cities.

The last ferry boom took place about twenty years ago. Many of the vessels launched then are up to their second refurbishments and some are being replaced. The previous ferry flurry was about fifteen to twenty years before that, in the early 1980s. While many vessels from that period are still happily and economically operating, many others require substantial upgrading or replacement.

Technical developments, as with cars and aircraft, mean that it is often more economical to replace a ferry than to refurbish it. Newer vessels are usually significantly more fuel and environmentally efficient; safer; more economical; and, more comfortable. Design, construction, engines, propulsion systems, electronics, seating, air-conditioning, berthing arrangements, and passenger handling systems all continue to improve as many of the Interferry presenters advised us.

Operating methods and procedures are changing, too. As Incat Chairman, Robert Clifford, in his comedy duo presentation with his competitor, Austal's Mike Wake, informed us.

Faster turnarounds, such as he showed us at Denmark's Mols Linien, reduce the need for flat-out speed. Mr Clifford has been saying for years that his ferries do not always need to run at 35 knots plus. Often they could be operated very effectively and much more economically at half that speed.

The other attributes of catamarans and trimarans, their great stability and safety, remain whatever their operating speeds, both members of the duo agreed.

Mr Clifford's biggest complaint was that so many of his early ferries built around 35 years ago are still going strong. He has been hoping to build their replacements for years but their owners are perfectly happy to keep them operating.

On demand

However, demand for both commuter and tourist ferry travel is increasing practically everywhere. In London, for example, Thames Clippers has grown from one primitive 54-passenger boat in 1999 to a fleet of sophisticated 180 passenger ferries less than twenty years later. Bangkok's Chao Phraya Express Boat Company continues to grow its fleet with an increasing proportion being devoted to tourists.

A quick examination of the Passenger Vessel World news section of www.bairdmaritime.com reveals an ever and rapidly growing list of ferry orders and launchings. In almost every case their quality, efficiency, comfort and safety is significantly better than the vessels they replace.

Interferry certainly had a strongly positive atmosphere. I can't remember anyone I spoke to harbouring any negative thoughts about the global ferry industry or market. I have a very strong feeling that we are in for a few very good years.

Plan ahead. The next three Interferry conferences will be held in October 2018 and October 2019 in Cancun, Mexico and London respectively. Hobart, Tasmania will follow in 2020.

Neil Baird



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