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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Goundarshipping

Safer ferries for the Pacific islands

In April I was fortunate to be able to participate in an excellent regional workshop on ship safety management in Port Moresby, Papua New Guinea.

Organised jointly by the International Maritime Organisation (IMO), the Pacific Community (PC) and the National Maritime Safety Authority (NMSA) of PNG, it was one of the most productive, sensible and realistic conferences I have ever attended. Congratulations are due to all concerned with its organisation.

While the workshop overall was concerned with all kinds of vessel safety, it soon became obvious that domestic ferry safety was foremost in the minds of most participants. That is unsurprising given the Kiribati disaster in January that killed 99 people and the still recent (2012) Rabaul Queen sinking in PNG that resulted in 350 fatalities. Both vessels concerned were owned by serially offending operators!

As I discovered from delving into the Baird Maritime Passenger Vessel Accident (BMPVA) database while preparing for my presentation, the Pacific islands have a terrible record for domestic ferry safety. Indeed, since January 1, 2000, the PC member states have a slightly worse fatality record than either Indonesia or the Philippines, which are, along with Bangladesh, generally regarded as the most dangerous places for ferry travel on the planet. Obviously, this is compared on a per head of population basis. Absolute numbers are not quite so terrifying given the tiny populations of most of the island nations other than PNG.

Even more frightening is the news of the importation of an ancient former BC Ferries Ro-Pax ferry to Fiji and the looming threat of three more. It seems that "political interference” has been a factor in that project.

The first vessel is entirely inappropriate to Fijian climatic, sea and economic conditions. Apart from being 63 years old, it was designed for operation in sheltered waters in a rich country with excellent maintenance facilities and generally high crewing standards. It also happens to be so riddled with asbestos that it could not be sold in North America, even for scrap!

It became obvious as the conference proceeded that political interference was a major problem in many of the island nations. While closely related to comparative poverty, it is a separate but significant factor that severely inhibits ferry safety.

Of course, in unusually archipelagic and comparatively poor nations such as the Pacific islands, Indonesia and the Philippines, the major causes of domestic ferry fatalities remain, unsurprisingly, unseaworthy and overloaded vessels.

Given the shocking safety record of elderly monohull Ro-Pax ships in developing countries – they accounted for 32 per cent of fatalities globally from 2000 to 2015 – there is no doubt that the sale of ancient Ro-Pax ferries such as that to Fiji should be banned. The neighbouring island nation of Tonga knows of their dangers from the bitter Princess Ashika experience. That elderly and wholly inappropriate Japanese Ro-Pax vessel sank in 2009 with 78 fatalities.

An analysis of the BMPVA database also clearly shows that multihull ferries, when properly designed, constructed and maintained, are infinitely safer than their monohull counterparts. Their fatality toll is a tiny fraction of that of monohull ferries on every basis of comparison.

It is, therefore, painfully obvious that new, or at least good second-hand, catamaran or trimaran ferries would be the answer to the safety woes of the island nations. They need not be fast nor complex or sophisticated, just safe, stable, buoyant, reliable and low maintenance. FRP or steel construction should be possible as well as aluminium.

The obvious problem with this proffered solution is relative poverty. The island nations cannot really afford such vessels or the all-important crew training that should accompany their introduction.

There is, however, an obvious answer to that. The island nations and, for that matter, Indonesia and the Philippines are all significant recipients of aid from richer countries. Of course, much of that aid is poorly directed and administered and much is overly aimed at gaining strategic advantage. Donor countries, if they carefully thought about it, could get much better value for their aid dollars.

In the May/June issue of sister magazine Ausmarine I recommended that Australia and New Zealand, as world leaders in the design and construction of fast multi-hulled ferries, should introduce the provision of appropriate ferries into their aid programmes.

Now, having participated in the Port Moresby workshop, I have thought further. Other rich nations around the Pacific Ocean such as the USA, Canada, Japan, Korea, China and Singapore could beneficially modify their aid programmes to incorporate the provision of appropriate ferries to the dangerous archipelagic nations described above.

Not only would they benefit the island inhabitants and tourists, their generosity would start at home by providing business for their own naval architects, ship builders and maritime colleges.

Rather than funding inappropriate cultural centres, roads to nowhere and basket weaving classes that have little or no economic or social benefit, why don't those rich countries re-focus their aid programmes on something more practical and valuable?

Neil Baird



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