Capacity Outlook: Grim

The outlook for container carriers as described by Alphaliner’s Hua Joo Tan at this month’s Journal of Commerce TPM Asia conference in Shenzhen was nothing if not cheerless. His message boiled down to this: Carriers’ recent decisions to favor the largest ships when placing orders will likely result in vessel supply outstripping demand through 2013.

Although the current order book represents roughly 30 percent of the existing fleet — half of what it was in late 2007 — half of the tonnage on order is for ships capable of carrying more than 10,000 20-foot equivalent container units and 70 percent is for ships greater than 7,500 TEUs. That will likely mean global capacity expansion will amount to approximately 9 percent annually through 2013, a figure that will be difficult to match on the demand side given stumbling Western economies and the unlikely prospects for developing nations making up that slack.

The predictable result? Weak and volatile rates will keep the market on edge for the foreseeable future. “There is still too much capacity that has been ordered. Capacity growth is going to exceed demand growth over the next three years, according to our estimates,” Tan told the conference. “If demand does not grow as much as supply, we will continue to face the same kind of downward rate spiral and rate pressure that we saw this year.”

He attributes the dire scenario to an irrational rush by the largest lines to order ever-larger ships with no guarantees that the resulting glut in capacity will drive competition out of the market and thus set the stage for stable or growing rates. His premise is that despite the worst recession in its history culminating in 2009, the industry saw no major bankruptcies and that even that wouldn’t prevent ships from finding their way back into the open market.

“I don’t think in the end it will pan out the way some carriers are hoping,” Tan said. “Fact is, we have seen major retailers go bankrupt, but we have not seen a major shipping line go bankrupt, and I don’t expect that to happen.”

The sobering experience of 2011 should serve as guidance for where the industry is likely headed without remedial actions, such as another massive program to lay up ships. “When we started this year, there was still a lot of cautious optimism as to where this year is headed,” Tan said. “But it’s clear to most of us by now that 2011 is turning out to be a disaster as far as the carriers are concerned,” with the gains from 2010 all but wiped out.

Carriers are beginning to respond, albeit slowly, by removing some tonnage from the market; the idle fleet was 2.5 percent of the total fleet as of Oct. 10, up from 1 percent three months ago and a figure Tan said is likely to climb to 5 percent by the end of the year as the slack season begins. But he noted, “There is not sufficient capacity being withdrawn to push the rates back up again.”

That would require taking idle capacity well north of the 5 percent range, something carriers did once in 2009 when they started losing money on every box they carried. Although rates have plummeted to approximately $1,500 per 40-foot-equivalent unit on the trans-Pacific eastbound and $734 on Asia-Europe lanes, according to the Shanghai Container Freight Index, even those low rates can generate positive contribution for carriers, so the situation still isn’t as desperate as it was in 2009, Tan said.

Thus, he said, carriers need to realize that limited capacity withdrawals and even slow-steaming, which itself has removed 5 to 7 percent of capacity, still won’t be enough to balance supply and demand, so carriers need to take additional action.

“Even with idling and slow-steaming, it is not enough to narrow the gap with demand,” Tan said. “More needs to be done in terms of capacity management by the carriers,” which he said are “more concerned about market share; capacity management has been put on the back burner, and this is a dangerous situation that the lines have put themselves in.”

The signs of a weakening market headed into the final quarter are there for all to see: Transpacific Stabilization Agreement carriers postponing their annual rate increase plans for the following year, Hapag-Lloyd postponing its initial public offering, possibly by more than a year; shipping line stock prices down 55 percent for the year; and Alphaliner estimates 2011 losses in the trans-Pacific alone will exceed $300 million. Some operators at the Shenzhen meeting suggested privately the $300 million figure was beginning to look conservative.

“This is a group of carriers that is not very healthy right now,” TSA Administrator Brian Conrad said in his TPM Asia presentation.

Something needs to change. The question is, will carriers wait for change on the demand side, or act on the supply side?

Peter Tirschwell is senior vice president at UBM Global Trade. Contact him at ptirschwell@joc.com, and follow him at twitter.com/PeterTirschwell.

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