Shipping industry to end 2016 significantly transformed

Shipping industry to end 2016 significantly transformed

Will the consolidation and alliance revamping that will carry over into 2017 lead to more capacity discipline by carriers? There is some evidence that things may be headed in that direction.

Recent industry comments suggest carriers are being cautious in ordering new capacity — new ship orders are down substantially versus 2015 — and also will be cautious on capacity as alliances roll out their service networks. This is leading a number of observers to suggest that the container market gradually may be returning to equilibrium. 

One carrier told JOC.com recently that its alliance is planning its network based on the liftings of the member carriers in 2016 and a small provision on top of that for growth, not for market share gain. The alliance members, the executive said, don’t want to be saddled with the cost of unused capacity. Chartered tonnage that won’t be needed for alliance networks are being returned to owners.

“The charter market as well as asset values have fallen to historic lows as liner companies in an effort to contain costs are releasing surplus charters in capacity and seeking charter concessions, and flexible hire periods from the vessel owners,” John Coustas, CEO of shipowner Daneos told investors in August. 

In Maersk’s third-quarter earnings call on Nov. 3, Group CEO Soren Skou said: “There are two choices: You can deploy a lot more capacity than what is needed, or you can return ships to charter owners. 

“We have plenty of flexibility in our charter book, and we do not plan to grow our deployed capacity significantly above market growth in 2017. So when we get delivery of new ships and it’s spread out over the year, we will adjust the total deployed capacity by returning charter ships so that we don’t have a growth that is significantly above the market growth.

“So I do expect the industry to continue to, in a way, push part of the capacity-overcapacity problem onto the leasing companies or tonnage providers and also continue to scrap vessels. We expect, at least as far as Maersk Line is concerned, to continue to have a very disciplined approach to deploying new capacity,” Skou said. 

The approach to chartered tonnage helps put in context why carriers we have spoken to in recent weeks are optimistic that no repeat of 2016 will be seen when contract rates in the year beginning May 1 plummeted to historic lows, some as low as $700 per 40-foot container on the eastbound trans-Pacific leg. Even before the Aug. 31 Hanjin collapse, spot rates were trending higher, and since then they’ve only gone higher. Spot rates were $1,843 per FEU as of Nov. 8, up from a low of $623 in April. Carriers feel that although May 1 is months away, the current spot rate direction will carry over into the new year and give them the momentum they will need to force increases on shippers.

A number of market participants are saying they believe the extraordinarily level of market concentration seen this year will leave the remaining players and alliances more focused on capacity discipline than in years past. If the lines used to be more focused on their internal economics and as a result over-ordered big ships to reduce their own unit costs, they are taking more of an industry-level view now as carriers have merged. 

“I think that this time they are much more serious,” Gerry Wang, founder and CEO of container ship lessor Seaspan, said in a Nov. 1 earnings call transcribed by Seeking Alpha. He noted a plummeting of new vessel orders this year. “Our leaders in the industry, like they must have made it very clear. There is no intention for them to order new ships, and their focus will be to absorb whatever ships that are available in the market.

“So I think the industry is moving (toward a) more healthy situation with the help of more consolidation. I think the industry probably would pick up the pace toward more demand-supply equilibrium,” he said. 

How much of what is surely a long-term adjustment to market equilibrium will play out in 2017 is unclear. One carrier we spoke to said it would try for a doubling of eastbound contract rates to $1,600 per FEU. But spot rates since Nov. 1 have pulled back somewhat and may pull back further as the market gets deeper into the slack season. Some shippers we have talked to say they anticipate increases, especially after Hanjin Shipping’s collapse, but not a doubling of current rates.

Still, one fact remains: The industry will leave 2016 in a significantly transformed state following several major mergers, acquisitions, and Hanjin’s collapse. For carriers, the slate is clean in terms of an opportunity to reinvent their industry.  

Contact Peter Tirschwell at peter.tirschwell@ihsmarkit.com and follow him on Twitter: @petertirschwell.