Container industry’s overcapacity struggle continuing

IMO’s low-sulfur mandate and European review of liner shipping consortia exemption creating further uncertainties for the industry.    The container shipping industry “will continue to struggle with overcapacity, notably for larger vessel segments,” says Danish Ship Finance (DSF) in the latest edition of its twice-a-year Shipping Market Review. In addition, it says low freight rates and surging fuel costs are depressing the profitability of liner companies.
   “Upcoming regulatory initiatives add to the uncertainties involved in running a liner business,” analysts for the specialized shipping lender say.
   “Demand in the container industry is shifting towards more regionalized trading networks, which is expected to have a negative impact on demand growth for large container vessels, while it could increase demand for the smaller vessels. Nevertheless, the supply side continues to pursue a strategy of cost leadership by ordering larger vessels.”
   Earlier this week it was reported by The Wall Street Journal that Maersk “is in talks with China’s Jiangnan Shipyard for up to 10 small containerships,” each with capacity of around 2,200 containers.
   The review says the current containership orderbook is split between 252 vessels smaller than 4,000 TEU and 144 ships larger than 8,000 TEU, and while “the orderbook for smaller vessels can be absorbed by scrapping of units older than 20 years, the age profile of the fleet above 8,000 TEU includes limited demolition opportunities.”
   As a result, it says the industry will struggle with overcapacity, and says delivery of more Ultra Large Container Ships in coming years “will exert significant downward pressure on the midsize segment,” ships with capacity of 3,000 TEU to 9,000 TEU. About two-thirds of those ships are owned by tonnage providers, companies that own ships and lease them to liner operators. Those owners “are expected to suffer the most from cascading pressure, as reemployment risk remains significant due to the growing overcapacity.”
   DSF also said upcoming regulatory initiatives “further add to the uncertainties of running a liner business.”
   These include both the requirement by the International Maritime Organization that ships reduce sulfur content in their engine exhaust by using low-sulfur fuel or exhaust gas scrubbers by January 2020 and the upcoming review by the European Commission on whether to extend the liner shipping consortia exemption past April 2020.
   The IMO mandate is expected to increase fuel costs considerably, and DSF said, “Irrespective of which solution is chosen, we expect slow steaming to be a central element of fuel-compliance strategies, as past experience suggests that this is an efficient way of achieving lower fuel consumption and emissions rapidly, at the same time as reducing the overall effective fleet capacity.”
   If the EC does not extend the liner shipping consortia exemption, DSF analysts said carriers might build additional ships to maintain existing service coverage, which “could trigger a new wave of newbuilding orders” and see the industry “spiral into severe overcapacity.”