Outlook 2018: Box shipping looks to turn a corner in 2018

This article by Greg Knowler originally published on Fairplay.IHS.com.

Container shipping is in far better shape than it was 12 months ago, when years of heavy losses culminated in the Hanjin Shipping bankruptcy and thrust the industry into a tumultuous period of restructuring. Ironically, that historic collapse helped container shipping along its current path to profitability.

Painful as the South Korean carrier’s collapse was, it forced the industry to change. Drewry senior manager for container research Simon Heaney believes the failure of the world’s seventh largest carrier was a watershed moment in the history of container shipping. “It may be the single event that paved the way to a liner paradise of sustained profitability,” he said, pointing to the creation of new box alliances after Hanjin’s failure forced the redrawing of the vessel-sharing agreements. Four global alliances became three on 1 April 2017 with the launch of the Ocean Alliance, THE Alliance, and an updated 2M Alliance-plus Hyundai Merchant Marine.

Regardless, carriers are a long way from reaching their nirvana, and sustaining profitability through this year will not be easy. With new tonnage surplus to requirements flooding into service, managing capacity is going to be the battleground for global carriers, not just in 2018, but to 2020 and beyond.

“A lot will depend on whether carriers can refrain from undercutting one another and stick to the capacity management they displayed in 2017,” Heaney said.

The orderbook unexpectedly sparked back to life in September 2017 when, after two years of virtually no new orders, 11 22,000-teu newbuildings were contracted by Mediterranean Shipping Company (MSC) and nine 22,000-teu vessels were ordered by CMA CGM. The first of the 20 vessels will be delivered in 2019.

The orderbook was high even before those contracts. COSCO Shipping has 11 20,000-teu vessels already under construction at Chinese yards and set for delivery by 2019, vessels that will slot in well with the nine-ship series subsequently ordered by Ocean Alliance partner CMA CGM. According to IHS Markit data, COSCO and its Ocean Alliance partners have the largest orderbook of the new alliances, at more than 1.2 million teu.

While the CMA CGM and MSC orders will not upset the market by themselves, these additions plus the COSCO series do not bode well for the easing of capacity on the Asia–Europe trade, the only global route able to regularly accommodate ships of more than 14,000 teu. Container shipping analyst SeaIntel said that by the end of 2020, 88% of the ships on the Asia–Europe route will be in excess of 14,000 teu – and the number of vessels of more than 18,000 teu will double.

“Looking at the Asia–Europe data specifically, we are already close to the limit of what this trade can reasonably expect to absorb until 2020 in terms of vessel upgrades,” SeaIntel CEO Alan Murphy said. “Further bouts of mega vessel ordering in the 18,000-teu-plus category is highly likely to result in excess capacity issues.”

Carriers themselves have mixed feelings about the merits of mega ships. APL CEO Nicolas Sartini is firmly in the mega ship camp and defended parent CMA CGM’s decision to order the 22,000-teu vessels.

“These ships are not speculation,” he said. “They are being ordered by shipping companies that know their business, their networks, and their needs, and that want to follow the growth in the market. What they want is reduced costs, but certainly not to offer cheap rates.

We know what cheap rates mean. Cheap rates mean Hanjin, and that is not the way we are going forward.”

“Bigger vessels have to spend more time in port, go at higher steaming speeds to catch up, and productivity at ports is just not keeping up,” he said. “We will need some 20,000-teu ships. Horses for courses. Put them in respective trades, but they are not a universal type of product that can just clip into your other trade lanes, and until we get port productivity sorted out, the barge feedering and trucking connections smoothed out, all you are doing is putting pressure back on the land side and technically not giving such a good service to your shippers.”

Analysts are likewise unconvinced. Drewry agreed with Nixon that the scale-economies argument for wanting ultra-large container ships is false, as savings at sea are offset by higher costs at port.

In a study of the operational and financial effects on lines, terminal operators, ports, and other supply-chain stakeholders as vessel size increases up to and beyond 18,000 teu, Drewry found that scale economies from mega ships only work for the total supply chain if terminals can increase productivity in line with increases in vessel size. The study showed combined shipping line and port total system cost savings peaked at only 5% of total network costs, and economies of scale actually diminished as vessel sizes rose beyond 18,000 teu. But for better or worse, giant vessels are on the way. SeaIntel’s Murphy believes that mopping up the incoming capacity is contingent on there being no new ship orders, continued high levels of scrapping and vessel idling, and strong demand growth – and even that may not be enough.

“Even the most positive outlook would not be able to soak up the massive amount of capacity that will be delivered over the next two to three years,” he warned. “At 6% demand growth, there would still be overcapacity, and at 8%, the carriers would still need to close services.”

Paris-based container shipping analyst Alphaliner backed this outlook, with its projections showing that the idle container-ship fleet would only be eliminated by the third quarter of 2019, by which time it would have taken more than a decade to fully clear out the supply overhang that has plagued the container shipping market since 2009.

Alphaliner estimated that idle vessel capacity totalled 800,000 teu at the end of last year, and a further 1.6 million teu of capacity is due for delivery this year. It believes that without a significant surge in scrapping, the overall capacity increase is unlikely to be absorbed by the end of 2018.

Like other industry pundits, Alphaliner said that much would depend on the pace of demand growth in 2017–18, which will have a significant effect on how quickly oversupply can be eliminated. “Demand would need to grow by more than 8% each year for the overhang to be cleared in 2018, while an annual growth rate of less than 5% each year will see the overhang extend into 2020,” Alphaliner predicted.

It is not all doom and gloom, however. Despite ongoing challenges, Drewry remains largely positive on container-shipping prospects. The London-based consultancy believes industry consolidation will support higher margins and greater profitability as larger carriers take advantage of stronger negotiating positions with customers, terminals, and vendors.

Drewry director of research products Martin Dixon estimated that by the end of 2017, carriers had recovered almost half of the losses experienced over the previous four years, with aggregate freight rates up across all trades. In 2018, “we expect rates will continue to rise, but at a slower pace than we have seen [in 2017], with high single-digit increases anticipated”, he said.