Global container shipping stabilizes just as pitfalls deepen

Global container shipping stabilizes just as pitfalls deepen

The trans-Atlantic trade was the main growth contributor to Europe's first-half container imports. Photo credit: Shutterstock.com

Market predictions of an approaching supply-demand balance in global container shipping that will support a recent upswing in pricing are looking less certain with fresh emerging market concerns, uncertainty over the impact of tariffs and prospects for more, and a persistent oversupply of capacity.

The changing fundamentals risk upsetting ocean carrier attempts to make 2018 a bridge year in which they could build on last year's profitability when the industry earned a collective $7 billion, its first profit in six years.

In reporting the damage of higher bunker fuel prices and lower-than-expected rates in the second half, carriers said they expected better pricing for rest of the year. Shipping executives were quick to highlight the positive factors of fewer ship deliveries, solid volume on the key east-west trades, and rate levels that are well up on those of a year ago.

Maersk Line CEO Søren Skou said after his carrier’s $26 million profit (mostly a result of discontinued operations), “For the rest of the year we expect improvements in our profitability driven by lower unit cost and higher freight rates.”

After reporting a doubling of Hapag-Lloyd’s net loss to $116 million, CEO Rolf Habben Jansen said, “For the remainder of the year, we see a slow but steadily improving market environment, but we recognize that there are still significant geopolitical uncertainties that could influence the market.”

Eli Glickman, Zim Integrated Shipping Services president and CEO, said after a $67.3 million first-half net loss that the carrier would continue to be one of the industry’s top performers since returning to profitability in 2017.

Supporting this profitability outlook is Drewry’s composite World Container Index that has risen to $1754.45 per FEU, up by 16.8 percent in year-over-year comparison. Freight rates from Rotterdam to Shanghai increased $101 to $923 per FEU. Similarly, rates from Shanghai to New York are up by $26 to $3,426 per FEU.

But industry optimism is bumping into the reality of meager volume growth on the Asia-Europe trade, the constant influx of new capacity, and growing concerns over the trans-Pacific impact of US driven trade tariffs.

Despite record container throughput recorded at some North Europe ports in the first half, much of it from growing trans-Atlantic business, volume on the crucial Asia-Europe trade actually declined in the second quarter, according to data from Container Trade Statistics.

Inbound volumes into Europe rose 4.1 percent to 646,000 TEU in the first six months. The long-distance Asia-Europe route, which accounts for half of the European imports and 10 percent of global volume, was only up 1.3 percent in the first half, CTS data show.

It is a different picture on the trans-Pacific, where in the first six months US import volume was up 7 percent, and the race to get cargo shipped ahead of China-US trade tariffs has driven up recent demand.

However, this will provide only a temporary respite to the industry supply overhang that SeaIntel CEO Alan Murphy says will still require a significant increase in demand to balance the scales.

'Front-loading doesn't solve the problem'

“Front-loading doesn't solve the problem, but rather kicks the can down the road,” Murphy told JOC.com. “Carriers have been very good at taking some hard cuts to capacity [on the trans-Pacific], and several services have been outright canceled, but if demand growth stays as it has in the first half of the year, there will be considerable excess capacity even after the cuts.”

If market predictions have indeed overstated demand growth on the major trades, it will come at a particularly inopportune time with capacity growth continuing and rising bunker prices keeping pressure on unit costs.

A balance between supply and demand is crucial to carriers as it gives shipping companies greater leverage in raising freight rates to levels better able to absorb the higher operating costs that this year have been driven up by rising bunker prices.

Bunker fuel is currently over 20 percent more expensive than it was in April and 44 percent higher than a year ago, which played a large role in dragging down profitability. Other than Wan Hai, which reported a profit of 262 million New Taiwan dollars ($8.5 million), Maersk is the only other carrier so far to report a second-quarter profit, albeit one achieved through discontinued operations.

The optimistic view from market watchers is that the long awaited balancing of supply and demand will be reached in the second half. Data from IHS Markit’s Container Ships Forecast predict the global container fleet will increase 5.4 percent this year, as container volume rises 5.3 percent. The order book of 2.5 million TEU is also at a low of 11 percent of the global fleet of 21.8 million TEU.

In a container shipping note to customers, Jefferies analyst David Kerstens said spot container freight rates in August recovered to the highest level since 2014, and a further recovery was likely on the back of improving market conditions.

“We expect active industry container shipping capacity to remain relatively stable in the second half after a 9.5 percent surge in [the first half of 2018], driven by a slowdown in new vessel deliveries and expected increased idling,” he noted. “Volume growth has remained relatively resilient at 4 percent in the first half, despite increasing trade tensions, with so far about 2 percent of global container trade affected by tariffs.”

Another view falling on the positive side of the scale was from Thomas Eskesen, of consultancy Eskesen Advisory. He said the distressed profitability of carriers — Wan Hai and Maersk Line were the only container lines to report a second-quarter profit — was largely a factor of two key elements: supply versus demand and the sudden rise in the cost base for fuel and charter vessels.

Eskesen said the supply of new vessels and the orderbook was now at a historically low level. The International Maritime Organization’s low sulfur regulations that will be enforced from Jan. 1, 2020 would likely result in more scrapping, and the retrofitting of scrubbers would take tonnage out of circulation during dry docking that could be an average of 30 days, depending on the yard size.

“The demand side looks fairly robust so barring any massive trade wars, particular between China and US, it is fair to assume consensus growth of about 4 percent CAGR [compound annual growth rate], which essentially absorbs all newbuilds, everything else being equal,” he said, adding that trade variations and size variations could still generate bottle necks.

Morningstar's outlook

Investment group Morningstar said in its note after the Maersk half-year results that, “The competitive landscape of the container shipping industry has been altered materially over the past 12 months, and while not setting our hopes too high, we believe that increased consolidation should encourage more economic rationality in the space.”

However, Morningstar cautioned that the container shipping sector was notoriously commoditized and characterized by constant cost-reduction actions, such as the ordering of larger vessels, even at the expense of increasing capacity and lowering freight rates.

“As such, we do not believe that the most recent wave of consolidation and the conservative capacity growth estimates are indicative of a sea-change in behavior in the sector, which we believe will continue to witness periods of volatility as freight rates move in accordance with capacity tightening and loosening,” the analyst said.

Taking a more negative view of the market, at least for the second half, was BIMCO container shipping analyst Peter Sand, who has adjusted his expectation that market fundamentals will improve through the rest of the year. He pointed to an unbalanced first six months that saw container volume grow at 3.8 percent while the year-to-date container shipping fleet rose 4.4 percent.

Sand said the trend pointed towards lower demand growth this year and capacity of the fleet was simply growing too fast for the demand to cope with it.

“The yards have delivered 947,000 TEU of new containership capacity, slightly above our expectations. What has been completely off our expectations has been the fact that only 36,833 TEU of capacity was demolished by early August,” he said. Reductions and reactivations of the idle fleet has also been pushing the active supply growth up, resulting in falling freight rates as demand grew at a lower pace.

“BIMCO expected the fundamental balance to improve in 2018 and higher freight rates across the board as a result of the fleet growing slower than demand; now it seems as if it’s not going to happen,” Sand said. “This is partly because of demand growing marginally less than expected, but mostly because of much faster fleet expansion.

“While still at a solid level of 3.8 percent, global demand is growing more slowly than last year. In combination with a year-to-date fleet growth of 4.4 percent, a worsening of the fundamental market balance, resulting in lower freight rates, is inevitable.”

Another inevitability for container shipping is that it will begin to feel a greater impact from the range of US trade tariffs being levied against China, the European Union, and Mexico.

Half of US-China containerized trade is exposed to tariffs between the two countries, according to analysis by PIERS, a sister product of JOC.com.

The US tariffs have so far hugely impacted the trans-Pacific container shipping trade. With the Asia-US peak season under way, capacity is so scarce on the eastbound trans-Pacific that US importers from Asia, both large and small, have to pay in some cases $400 to $600 above already higher-than-usual rates to get space on ships. Thousands of containers are being rolled as ocean carriers prioritize higher-paying spot cargo in favor of lower-priced contracted cargo.

The latest reading of the Shanghai Shipping Exchange’s Shanghai Containerized Freight Index (SCFI) shows that spot rates rose again this week, the sixth week running, to $2,126 per FEU to the US West Coast and $3,329 per FEU to the US East Coast. Rates on both US trades are 38 percent higher than at the same point in 2017. Weekly rate movements on the east-west trades can be tracked at the JOC Shipping & Logistics Pricing Hub.

On the Asia-Europe trade, the peak season appears to be progressing smoothly so far this year, according to shippers contacted by JOC.com.

“Remarkably, no issues at the moment. We’re fighting for space every week but managing to get it with nothing rolling and no delays,” said the head of supply chain for a UK high street retailer.

The global supply chain manager of a retail chain was also upbeat about Asia-Europe. “We are not facing many problems at the moment, and I have spoken with other operators here and for them it is the same,” he said. “When it comes to rates, we have them fixed for the year, so no possible impact there. Availability has not yet been an issue.”

A spokesperson for Italy-based forwarder Savino Del Bene said with the upcoming Golden Week in early October, the space situation out of Asia to Europe was tightening up, but without any particular problems.

“We have had some delay and some cargo rolled, due mainly to the bad weather conditions in Asia. Savino Del Bene is forecasting a good growth on this trade, particularly on the West Mediterranean,” he told JOC.com.

Spot market rates on Asia-North Europe were at $933 per TEU in the week ending Aug. 31 and are at the same level as this point last year. Asia-Mediterranean rates also fell slightly, according to the SCFI, and are at $908 per TEU.

There is a sense that after the recent consolidation, and the sustained increase in bunker fuel costs, a change in carrier conduct, and pricing power is beginning to emerge, according to Eskesen.

“We are still going through the integration of Hamburg Sud-Maersk, ONE [Ocean Network Express], and Cosco-OOCL, and this will further change the pricing power in favor of fewer carriers, which should lead to increased prices but also better service and stability,” he said.

Forcing carriers to charge shippers more will be the low sulfur cap on bunker fuel that will place an enormous financial burden on container shipping companies. Maersk Line estimates that its annual fuel bill will rise by at least $2 billion once the global sulfur cap is introduced. A challenge for all carriers will be how to price in the sustained increase in fuel, with the grim first-half financial results suggesting that there is still some way to go in this area.

Contact Greg Knowler at greg.knowler@ihsmarkit.com and follow him on Twitter: @greg_knowler.

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