Slow steaming changes game

Slow steaming changes game Analyst: Slow-steaming measures could redress supply/demand balance by 2011, if carriers stick to their guns

By Eric Johnson

      Container-shipping analysts have drastically rearranged their view of the industry at the beginning of 2010 based on the assumption that shipping lines will continue with slow-steaming initiatives, as well as other measures aimed at reducing excess vessel capacity.
      That ocean carriers have been so diligent in pulling capacity, even as demand surged at the beginning of 2010, suggests that severe overcapacity forecasts through 2012 or beyond may no longer apply.
      'We're now forecasting that overcapacity could go away in mid-2011,' said Tan Hua Joo, executive consultant with maritime news service Alphaliner. 'But that's still 12 to 18 months before equilibrium is reached. Of course, this is only one of several possible scenarios, and it depends on slow steaming to continue, if the current 500,000 TEUs of capacity soaked up by extra-slow steaming grows to 1 million while demand grows.'
      Speaking at the Trans-Pacific Maritime conference in Long Beach, Calif., held in March by the Journal of Commerce, Joo said nearly 20 percent of excess containership capacity has been soaked up by slow-steaming initiatives.
      'There are 1.1 million TEUs of capacity Alphaliner thought would have to be idled that have been removed through various measures,' he said.
      Of that 1.1 million, 45 percent has been deferred, 40 percent has been soaked up through slow steaming, 15 percent has been scrapped, and 10 percent has been outright canceled. Slow steaming has had the most unexpected impact on capacity.
      'Slow steaming is a complete reversal of what lines were offering to customers until two years ago,' he said. 'Fifteen of the 38 transpacific loops are slow steaming, and we expect more carriers to adopt that measure.' Most Asia/Europe services are already slow steaming.
      That canceled capacity is the smallest of the four measures is mostly down to the unwillingness of shipyards to allow cancellations to happen. Scrapping, meanwhile, was widespread, also much more so than Alphaliner projected.
      'We initially expected 250,000 TEUs scrapped in 2009,' Joo said. 'But it was closer to 400,000 TEUs, three times the level of the previous record in any one year. We can expect to see 250,000 to 300,000 TEUs removed through scrapping this year as well. However, scrapping will not be able to correct the overtonnage situation alone because the containership fleet is actually pretty young.'
      Joo said at least half of the orders due to be delivered in 2009 were deferred six months or longer.
      Idle capacity, meanwhile, started building in September 2008.
      'It's unprecedented to see so much idled capacity in the market for such a long duration of time,' Joo said. 'But the situation for carriers is a lot better now than what it looked like 12 months ago. Alphaliner had forecast 2.5 million TEUs of capacity could be idled. The supply/demand outlook is relatively benign compared to one year ago.
      'We expect the idle fleet to decrease through the peak season,' Joo continued. 'However, major carriers are only now getting to breakeven on the transpacific, so there is still some way to go before carriers view things optimistically and introduce new capacity.'
      Alphaliner, in its March 8 newsletter, said it expects idled vessels to return to the active fleet in March and April as services resume ' both loops that were suspended during the winter months and new services on the transpacific and intra-Asia trades.
      In his presentation, Joo said transpacific capacity dropped 20 percent in the last 18 months, to the point that January and February ship utilization rates were at or near 100 percent.
      Meanwhile, CKYH and New World alliance carriers, as well as Zim, have increased capacity since March. But with 300 vessels with capacity of 5,100 TEUs or more due to be delivered through 2012, demand will have to rebound soon.
      As new larger vessels are delivered, 'vessels cascaded from Europe will go to the transpacific, but how much gets cascaded depends on what rates carriers can get in transpacific negotiations,' Joo said.
      Another factor to consider is that idle rates from operating carriers have dropped in 2009 and will drop further in 2010 simply for the reason that lines returned chartered capacity without entering into new charters to replace that capacity. For instance, Maersk Line's idle capacity has fallen 75 percent since March 2009, mostly due to returned chartered capacity.
      Yet Joo said surplus global capacity shouldn't make shippers believe there is excess capacity in every trade.
      'Carriers are managing capacity and revenue per TEU more effectively,' he said. 'There's less emphasis on competing on faster transit times and there's less of an emphasis on market share at all costs.'
      Another analyst, Man Johnson Leung, senior shipping analyst at Tufton Oceanic Far East, said the way carriers are managing capacity has actually changed the entire dynamic of the industry.
      'Capacity is becoming a follower to freight rates instead of the other way around,' Leung said. 'Carriers are managing capacity better as freight rates come down.'
      Yet Leung insisted the container shipping industry has 'structural problems.'
      'Outsourcing may have reached a plateau and the multiplier effect is not sustainable,' he said.

'Capacity is becoming a follower to freight rates instead of the other way around.'

Man Johnson Leung senior shipping analyst, Tufton Oceanic Far East

      As for the surge in volume at the beginning of 2010, Leung pinned it on a short-term restocking binge: 'The upside risk of restocking is preferable to the downside risk of not restocking. There's a fair amount of divergence between the macroeconomic data and what we see on the ground.'
      One of the factors that will influence growth on the transpacific is, of course, China.
      'China is still on a growth curve,' said Erxin Yao, president of OOCL (America). '2009 is a year we here all want to forget, but for China it was another year of growth.'
      Yao said China's exports were up 21 percent in January, but that its imports rose 85 percent, and that the country actually ran a trade deficit during the month. In fact, due to heightened demand for goods and commodities in China, Beijing is projecting that China will have a trade deficit in more months than not in 2010.
      'FDI outflow now exceeds inflow, showing the strength of China's reserves,' he said. 'China's demand for goods will help fuel the global recovery. The increasing living standards of China will lead to demand for imported goods and that could bolster the westbound transpacific. Westbound will grow faster than eastbound. But the imbalance will remain, because the import areas and new emerging export areas (in China) are not the same.'
      A major factor affecting China's prowess in two-way trade is its increasing urbanization.
      'China's current population is 54 percent rural and 46 percent urban, but that's changing by 1 percent per year with people who are becoming urban,' Yao said. 'That's 13 million people moving to urban areas every year.'
      That urbanization, and pending rail development, will unlock untapped markets.
      'In two to four years, we will see a giant leap forward in China's rail system,' Yao said. 'Freight and passengers trains currently share the same track, but they will be split with containers moving by double-stack and high-speed rail.'