Operators Are the Greatest Danger to Container Market

Vessel orders are threatening to blight the container shipping sector whose growth remains subdued, meaning there is little hope of the trades coming into balance any time soon.

News ID: 73842

Date: 09 May 2017 - 15:03

According to MANA The causes of this affliction are two-fold with global macro-economic growth sluggish and the persistent ordering of vessels in an effort by operators to realize economies of scale on the one hand, and taking advantage of low prices from the yards making newbuildings an attractive option.
Ten years ago the owners’ mantra was that they did not build ships for the short-term, but that they were looking at a 25-year period for their investment. That strategy and the belief that trade growth would remain at high levels, up to 15% on some trade lanes, convinced owners to keep ordering. A change of strategy has yet to be seen and in the years since the banking crisis in 2008 container capacity growth has continued to be a feature.
According to the report some 16% of the current fleet is on order, 3.6 million teu, and of that number 2.6 million teu are orders for vessels of more than 10,000 teu.
“This means that what is considered as the ULCS fleet has about 50% of current capacity on order. About 1.3 million teu, or about half of total capacity on order, is scheduled for delivery in 2017. However, we would not expect to see all the units delivered by the end of the year.”
However, according to the IHS Markit report, “One of the most important developments for container shipping in this past decade has been the accelerated level of globalisation and trade made possible by the remarkable flexibility of container shipping to respond to expansion and structural changes to global trade.”
In addition, China’s accession to the World Trade Organisation and massive investment into China and other developing countries ensured growth in the pre-crisis period remained strong. After 2008 a change has come about and growth levels are considerably lower, in China the expectation is that growth will be 6% this year, less than half the growth rate of the pre-crisis era.
As reported in the container market report, “The first sharp growth [in China] was recorded in 2004, when teu trade grew by almost 15% year on year.” The trade continued its growth until the second half of 2008.”
With container trade now set to achieve between 3 and 5% increases over the coming five years, a steady if not scintillating rate of development, and with capacity still outpacing economic growth particularly in the next two years, there will be an “adverse effect on freight rates returns,” says the IHS Markit report.
And finally the report notes that, “Although increased volumes of trade are supposed to put upward pressure on rates and bring better returns to owners and operators it remains to be seen if overcapacity will remain a persistent issue in this trade.”