BCG: Container industry overcapacity to increase through 2020

Based on trends from the last two years, growth in containership capacity will continue to outpace demand in the next few years despite record ship scrapping so far in 2016, according to a recent report from the Boston Consulting Group.    The rampant overcapacity that has caused container freight rates to plummet to historic lows in the past year is only going to get worse in the short term, according to a report from the Boston Consulting Group (BCG).
   BCG Perspectives said in the report, titled The New Normal in Global Trade and Container Shipping: Sailing in Strong Winds, recent developments confirm the container shipping industry still faces “daunting challenges.”
   BCG noted that until 2015, global container volume growth had been “decent,” averaging 4.5 percent annually from 2010 through 2014.
   “It was overcapacity that presented the primary threat to shareholder returns,” the group said. “In 2015, for the first time, the industry faced weak demand, surprising all observers.”
   The “surprising” slump in demand for global container shipping, combined with persistent oversupply in terms of vessel capacity, compounded an already difficult environment for carriers, driving rates through the floor. As a result, the industry has undergone consolidation on a massive scale in the last 18 months – China’s two state-run container carriers COSCO and CSCL have merged, CMA CGM of France purchased APL parent Neptune Orient Lines, Hapag-Lloyd is in talks to merge with United Arab Shipping Co., the bankruptcy and likely break-up of South Korea’s largest line Hanjin Shipping, and most recently, the “Big 3” Japanese carriers – NYK Line, MOL and “K” Line – have agreed to merge as well.
   Based on trends from the last two years, as well as compound annual growth scenarios for container shipping demand and growth in vessel supply, analysts with the BCG projected container demand will grow between 2.2 percent and 3.8 percent annually from 2015 to 2020, compared with a historic average of around 5 percent.
   Container capacity, on the other hand, has expanded rapidly over the past few years and accelerated to an 8.6 percent growth rate in 2015, a year in which demand grew just 1.9 percent due to weak global manufacturing output caused primarily by economic slowdowns in China and the European Union.
   With the current supply-demand gap in the container industry estimated at 7 percent, the BCG report projects the gap between global trade volumes and containership capacity will increase to between 8.2 percent to 13.8 percent by 2020.
   “By the end of 2020, oversupply in vessel capacity will stand at 2 million to 3.3 million TEUs – equivalent to some 90 to 150 or more Triple E class ultra-large container vessels,” BCG said in its report. “The year 2016 seems ready to set a new record for a reduction in capacity: seven months of scrapping (January through July) affected roughly 300,000 TEUs, and the age of vessels at their scrapping – 20 years – dropped to a two-decade low. However, it’s uncertain how much more reduction is to come.
   “Industry players are in a race for lower slot costs to ensure competitive advantage,” it noted. “The bigger, newer, and more efficient the vessel, the lower the slot cost, which is why companies want to invest in larger vessels.”
   Should this projection hold true, it could be a very difficult next few years for the container carriers. Industry analysts have already projected combined losses of up to $10 billion for the industry in 2016 alone, and if the supply-demand imbalance worsens, rates will likely continue to fall, making it nearly impossible for lines to turn a profit.
   “The supply-and-demand fundamentals of this industry appear to indicate the emergence of a new normal,” said BCG. “Before 2015, the industry’s major challenge was overcapacity. During 2015, demand proved weak, and trend analysis suggests that this lower demand will characterize the industry. In today’s challenging environment, carriers have to do even more to survive, never mind thrive. We believe they will need to craft increasingly sophisticated battle plans that enable them to further improve their own performance, so they can successfully ‘sail in strong winds.'”