Solid demand growth reduces spot rate volatility

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Freight rates are coming back from the abyss and becoming less erratic, as the fundamental balance improves amid rising demand and enhanced capacity control, according to a new report by the Baltic and International Maritime Conference (Bimco).

The improved freight rates during the first half of 2017 come on the back of strong demand, which grew by 5% compared to the same period last year, said the report.

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 the last quarter of 2016.

On both the key long front-haul trades out of the Far East into Europe and North America, demand grew rapidly in the first six months by 5.2% and 10.0%, respectively.

As of August 7, there were 182 ships (474,000 TEUs) idled. 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,” said the report.

Demolition slowdown

But Bimco observed that lately there has been a significant slowdown in demolition. As the rates have climbed and managed to stay up, “owners shy away from scrapping their ships,” it noted.

June saw only seven small units sold for demolition (9,639 TEUs in total), a drop of 90% from the all-time high level in January where 99,899 TEU (29 units) left the fleet.

Bimco forecasts a full-year demolition of 450,000 TEUs, out of which 306,824 TEUs 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.”

Increased ultra-large container capacity

The organization also predicts the launch of more ultra-large container capacity in the final months of 2017. The scheduled order book shows 31 units with a capacity higher than 10,000 TEUs, out of which 11 are larger than 20,000 TEUs. Bimco estimates that up to 25 of these ships will be delivered.

For now almost no new orders are being placed. Less than 400,000 TEUs have been contracted since December 2015 compared to July 2015 alone which saw orders for 435,268 TEUs placed. In the same period, the orderbook has come down from 4 million TEUs to 2.6 million TEUs, the lowest level since 2003.

Bimco said it 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 the industry is back above the 20 million TEU mark again. The fleet now holds capacity of 20,356,656 TEUs. Year-to-date, the fleet has grown by 1.8%.

Bimco forecasts that the rate will hit 3.3% for the full year.

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

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

Consolidation continues

Since Bimco’s last report in mid-April, the consolidation among 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 August saw the formation of the Korea Shipping Partnership.

Bimco said it sees 2015-2016 as the real low point of the present crisis and 2017 as 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.”

Photo: jgmorard