Recent data from the Baltic and International Maritime Council (BIMCO) and London-based maritime consultant Drewry suggests the underlying imbalance of supply and demand in container shipping may be improving.
Container carriers are benefiting from a better balance of demand for ocean transportation and vessel supply, but the performance of the three major east-west vessel sharing alliances will be key in 2017, according to a recent forecast from the Baltic and International Maritime Council (BIMCO).
“Gains from a low-fleet supply are instantly reaped, whereas the benefits from new network structures take a bit more time,” said Peter Sand, chief shipping analyst at BIMCO.
He also cautioned that the majority of container shipping, as measured in TEU-miles, takes place on trade lanes not controlled by the alliances.
BIMCO estimated demand for container shipping grew 2.7 percent in 2016, lower than the 3.4 percent average annual growth seen from 2012 to 2016.
Still, Sand said demand growth outpaced the 1.3 percent expansion in the containership fleet, which was dampened primarily as a result of “decisive actions by shipowners who sold excess tonnage for demolition.”
“This meant that the fundamental market balance improved for the first time since 2011,” he added.
Researchers at Drewry gave slightly different estimates, but reflected the same trend of demand outpacing supply. They said demand in 2016 was up 2.2 percent from the previous year, helped by an uptick in the fourth quarter, some of which may have been attributable to cargo that was delayed when Hanjin Shipping went bankrupt in August 2016.
“For 2017, we’re certainly expecting slightly stronger performance on the demand side,” said Neil Dekker, director of container research at Drewry.
Dekker agreed that container carriers have benefited from limited growth in supply, which Drewry pegged at 1.7 percent in 2016. This was far less than the firm had anticipated, the result of record scrapping of about 659,000 TEUs of capacity, as well as delayed ship deliveries.
This year, Drewry expects the world container fleet to grow 2.2 percent as some shipowners, including Maersk, CMA CGM and containership lessor Costamare, have delayed delivery of new vessels until 2018.
Sand estimates containerships with a combined 3 million TEUs of capacity are currently on order and 86 percent of that capacity will be delivered in 2017 and 2018.
But few companies are ordering new vessels. Shipyards booked orders for ships with an aggregate capacity of about 250,000 TEUs in 2016, and through April of this year, orders were “negligible,” according to Dekker, who said he did not expect a pick-up in newbuild orders any time soon.
Simon Heaney, senior manager of container research at Drewry, also noted that carriers have become skilled at controlling capacity by idling ships and “voiding” sailings—eliminating a weekly voyage if demand dips.
However, this practice can anger shippers if it disrupts their supply chains. The European Shippers Council, for example, decried a lack of eastbound capacity for European exporters this past spring, when ships whose westbound voyages had been voided around Chinese New Year were not available weeks later, when those ships would normally have been en route back to Asia with their merchandise.
In April, Drewry estimated that carriers collectively recorded an operating loss (earnings before interest and taxes) of $3.5 billion in 2016, but will post a combined operating EBIT of between $1.5 billion and $3.3 billion in 2017, depending on how much freight rates improve.
Heaney noted the great variation in operating profit margins among carriers in recent years, a trend he expects will continue this year.
“The only difference is that you will see more winners than losers,” he said. “The relative success of each carrier will depend on their exposure to the least and most profitable trades, as well as their operating expenses.”
Although Drewry was optimistic about 2017, Heaney warned a spike in bunker costs or a rate war in one of the key trades “could condemn many of the lines to another year of loss-making.”
According to Sand, BIMCO expects the container shipping industry to “continuously optimize networks and make them more efficient.”
“Cutting costs where it’s still possible and making the most of the fleet available remains essential to reaping the benefit of the individual alliance members,” he said. “As cost cutting is a huge part of this, the effect on freight rates is not the only indicator of a successful implementation.”
BIMCO estimates the 2M, OCEAN and “THE” alliances control 77 percent of global ship capacity and as much as 96 percent in the east-west trades.
“Before getting carried away, we should remember that 57 percent of all demand, as measured by TEU miles, is generated by non-east-west trades—trades that are particularly impacted by the recent years’ cascading of tonnage from the east-west trades,” said Sand. “Another two-tier market is in the making.”
Drewry expects rates—both on east-west trades and globally—will continue to improve in 2017 and “help carriers remove a lot of the red ink from their income statements.”
Blending both contract and spot rates (including fuel charges), Drewry is projecting rates on east-west trades to increase 14 percent from 2016 levels, and global pricing to rise between 11 percent and 12 percent. And Heaney said the firm might up that estimate further as the year progresses.
“We can say with a high degree of confidence the market has definitely turned, and carriers are now once again price givers, not price takers,” said Heaney.