In order for the current short-term bounceback in the container market to turn into a true recovery, carriers must stop ordering new larger vessels and continue high levels of ship scrapping, according to speakers at the 2017 IANA Intermodal Expo.
Will 2017 represent the end of the liner shipping crisis, or is it merely the end of the beginning? How has the unprecedented consolidation among container carriers affected the North American intermodal and trucking markets?
These were among the most discussed questions during the 2017 IANA Intermodal Expo, put on in Long Beach, Calif. in September by the Intermodal Association of North America (IANA).
According to projections from speakers and panelists at the expo, the container shipping industry has yet to fully recover from a disastrous 2016 that saw freight rates plummet to near historic lows, spurring widespread consolidation among major carriers as well as the single largest bank- ruptcy ever. And a full recovery likely isn’t in the works for the industry in 2017 either, primarily due to vessel capacity—i.e. supply—still significantly outstripping cargo demand. A true, long-term rebound could be possible, however, in the next couple of years, according to one speaker.
Scrapping Supply. An industry recovery could be possible as soon as 2019 or 2020, but only under some very specific conditions, including a complete freeze on new mega-vessel orders, said Alan Murphy, the chief executive officer of Copenhagen, Denmark-based container shipping monitoring firm SeaIntel Maritime Analysis.
The bad news on the recovery front, Murphy said, are the reports in recent months of CMA CGM ordering up to nine 22,000-TEU containerships and rival Mediterranean Shipping Co. (MSC), the second and third largest carriers worldwide, respectively, ordering another 11. Good news, however, came in the form of the heads of world’s-largest carrier Maersk Line and MSC in recent months admitting that the race for ever-larger containerships is not sustainable and could lead to another nightmarish rate cycle.
Along those same lines, Murphy said carriers also need to continue the high levels of vessel scrapping seen last year. In 2016, containerships representing about 675,000 TEUs of capacity were sent to the demolition yard, a huge increase from the less than 200,000 TEUs during 2015 and roughly 400,000 TEUs in each of the two previous years.
During the first half of 2017, however, containerships with an aggregate capacity of just under 200,000 TEUs were scrapped, Murphy said.
He also noted that the average age of vessels being demolished has dropped significantly in the past five years. According to SeaIntel data, vessels scrapped in 2011 had an average age of 30 years, while those scrapped in 2016 averaged about 19 years old. That number rose slightly to just over 20 years of age in the first half of 2017, according to SeaIntel.
And unfortunately for the carriers, Murphy said demolition is expected to continue to slow in the second half of 2017 despite oversupply continuing to apply downward pressure on freight rates, a trend that could be exacerbated by the abovementioned new mega-vessel orders. As far back as January, Hellenic Shipping News reported that the containership demolition market had come to a near standstill, while also acknowledging that the industry needs more scrapping in order to bounce back.
Demand Development. Another factor cited as necessary to a potential recovery for the container shipping industry is healthy growth in global headhaul demand, specifically of 4 to 6 percent. Headhaul routes are those with higher volumes than their counterparts on a given trade lane— i.e. eastbound from Asia to North America in the transpacific trade or westbound from Asia in the trade between Asia and Europe.
This looks feasible, according to SeaIntel, even though the compound annual headhaul growth rate has only been 2.9 percent the past eight years. Four percent year-over-year demand growth from 2017 through 2020 would balance capacity by 2020, while five percent year-over-year growth from 2017 through 2019 would balance capacity by late 2019, the firm’s projections show.
Murphy also said that in order for pricing to recover, carriers must not engage in another rate war in an effort to capture market share.
“The main risk is carriers with large orderbooks relative to their charter ratio. If their fleet grows faster than the return of charter tonnage, they will have to grow market share to retain utilization,” he said. “COSCO and Evergreen will be challenged, unless they can sub-charter to their alliance partners.”
“The main risk is carriers with
large orderbooks relative to
their charter ratio. If their fleet
grows faster than the return
of charter tonnage, they will
have to grow market share
to retain utilization.”
chief executive officer,
SeaIntel Maritime Analysis
According to SeaIntel’s projections, operators will also need to shutter services between Asia and Europe as new ultra-large containerships are delivered and deployed on the trade lane.
“Carriers will have to close down Asia-Europe services in tune with the delivery of mega-vessels, as the vessel size will increase faster than demand,” Murphy said. “At 5 percent demand growth, three services should be closed in 2018, with the option of one reopening in 2019.”
He also warned against new entrants to the industry becoming overly ambitious in terms of chasing market share.
“New market entrants may want to take advantage of the discounted newbuilding prices and attempt to grow market share through a price war,” Murphy said. “SM Line is the latest entrant to the transpacific trade, targeting an aggressive PNW (Pacific Northwest) market share of 10 percent.”
Formed by South Korean construction conglomerate Samra Midas (SM) Group in the wake of now-defunct compatriot carrier Hanjin Shipping’s bankruptcy last year, SM Korea Line Corp. controlled about 1.5 percent of transpacific capacity as of mid-2017, and that number is expected to increase to about 3.5 percent by next April, according to SeaIntel.
As if that weren’t enough already, Murphy said a major increase in oil prices, as well as any additional new regulations, could serve as headwinds to the recovery of the container shipping market. Oil prices, which are the primary determinant in fuel costs for carriers, are unlikely to increase significantly, however, as bunker fuel prices have fallen significantly since the fourth quarter of 2014, according to the SeaIntel CEO.
Intermodal Activity. Ocean shipping wasn’t the only sector of the container industry that flirted with recession in 2016, according to Lee Clair, a managing partner with Highland Park, Ill.-based consulting firm Transportation & Logistics Advisors LLC. He said last year was indeed a recession for the North American trucking market, but things have been improving in 2017, with volumes and rates both slowly rising. A dwindling driver base and fluctuations in fuel costs are constant issues, Clair said, but are stable for now.
According to analyst estimates, the industry is currently short more than 40,000 drivers despite carriers raising pay of late. New and heightened regulations—such as the federal electronic logging (ELD) device mandate, detailed in this month’s feature story, “Down to the wire” (pg. 30-34) —are also cutting into productivity, he said, and limitations on who can be a truck driver are also contributing to the driver shortage.
Regarding fuel prices, Clair said they are relatively stable, but noted that fuel still accounts for roughly 25 percent of total trucking costs.
In the longer term, however, Clair said platooning and self-driving trucks, as well as alternative fuel technologies, have the potential to significantly impact the market in terms of both the driver shortage and fuel costs.
Platooning, which would allow a cluster of trucks equipped with connected vehicle technology to follow closely behind one another, possibly with only one driver in the lead truck, could greatly increase productivity and reduce the need for so many drivers, he said. And fully autono- mous trucks, now considered by most in the industry to be an eventuality, rather than a curiosity, could one day bring big cost savings for operators, as driver-related costs represent about 40 percent of total operating costs.
And since automated trucks could run 24 hours a day, they would also greatly increase the productivity of those assets. A subsequent reduction in accidents could also translate to a 6 percent decrease in insurance costs, Clair said.
In his IANA expo presentation, Larry Gross, a partner with Bloomington, Ind.-based freight forecasting and analysis firm FTR Transportation Intelligence, said there is reason for “cautious optimism” in the intermodal industry and that “better times [are] ahead, at least for a while.”
“There is reason for cautious
optimism in the North
American intermodal industry.
Better times [are] ahead,
at least for a while.”
FTR Transportation Intelligence
According to Gross, international loaded TEU movement in North America is up 4.9 percent year-over-year through the first half of 2017. Individually, inbound container volumes jumped about 11 percent, while outbound box volumes were relatively flat, up about 1 percent compared with the same 2016 period.
Gross also noted that carriers have not shifted a tremendous amount of cargo from U.S. West Coast routes to the East Coast this year, as some expected after last year’s completion of an expansion of the Panama Canal that allows larger vessels to traverse the Central American waterway.
So although analysts can see a path toward continued short-term improvements in the container shipping industry, due to persistent ocean carrier overcapacity and an influx of new mega-vessel orders, the prospects for a long-term recovery remain relatively slim.