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Container shipping growing more slowly than in 2018

BIMCO questions whether Chinese goods are being transshipped through Europe, then onward to the U.S. East Coast to avoid tariffs.

Container volumes are growing more slowly than in past years. (Image: Jim Allen/FreightWaves)

BIMCO’s chief shipping analyst Peter Sand says in a commentary that global container shipping volumes in the first seven months of 2019 were 1.2% higher than in the same period of 2018, While that reflects a pick-up in activity, as in the first quarter this year volumes were only 0.8% higher than in the first quarter of 2018, he says this is “substantially below what the industry has been used to with growth in the first seven months of 2018 equal to 4.4%.”

Furthermore, he says there are large differences in growth rates on different trade lanes. He says a 5% rise in exports from the Far East into Europe “is good news for the shipping industry as the large distances lead to a more than proportional increase in ton-mile demand.”

But he adds, “despite this growth, spot freight rates on the trade between the Far East and Europe have continued to fall. On Aug. 30, spot rates are down 24% from the start of the year and 18.8% from the same week in 2018.”

Sand said based on BIMCO data, the U.S. East Coast also had “high volume growth” of 7.2% in the first half of the year, compared with the 7.4% and 10.6% in the first six months of 2018 and 2017 respectively. BIMCO compared laden container imports from all destinations to the ports of New York/New Jersey, Baltimore, Virginia, Charleston, Savannah and Houston to support its conclusion.

BIMCO noted there is a disparity between spot and contract rates. The Shanghai Containerized Freight Index indicated that it cost $2,691 to ship a 40-foot container from Shanghai to the U.S. East Coast on Aug. 30, a 22.7% drop since the same time in 2018. However, the China Containerized Freight Index, which tracks contract rates, showed a less dramatic 4.4 percent drop.

Freight rates are off their late 2018 highs. SONAR WCI.SHANYC

In contrast, Sand says “other major container trades have experienced more sluggish growth.” For example, he says BIMCO’s own data shows laden container imports into the U.S. West Coast (USWC) in the first seven months of 2019 were down 1.5%.

BIMCO said, “High growth rates on both the Far East to Europe, as well as imports into the USEC raises the question whether containers are being sent from the Far East to the USEC through Europe.”

“We raise this question, as several indications point to the possibility that, much like in Asia where goods originally from China are being transhipped through neighbouring countries before heading to the U.S., goods are being sent from the Far East through Europe and then on to the USEC (U.S. East Coast) to avoid tariffs. There is no concrete data backing this up, hence it was left as a question in our container report, however it is a likely scenario,” said Emily Stausbøll, another shipping analyst at BIMCO.

BIMCO expects container fleet capacity will grow by 3.5% this year, including the delivery of four ships with capacity of 22,000 TEU or more.

Sand said there are 165 ultra large container ships (ULCS) operating with capacity of 14,500 TEU or more; 71 more ULCS are on order with aggregate capacity of 1.3 million, and all but four are contracted to be delivered by the end of 2021.

“These ULCSs will be deployed on the Asia-Europe route at a time when freight rates indicate that there is no need for additional capacity, and existing sailings are being blanked despite the 5.2% volume growth rate, indicating that there is no urgent need for these extra ULCS,” said Sand.

He added, “Growth rates on intra-Asian container trades are viewed as an indicator of what is to come on long-haul routes, as volumes here indicate the health of supply chains in the region and therefore what finished goods are likely to be exported from Asia in the near future. With a volume growth rate of 0.8% in the first seven months of 2019, low growth levels can be expected in global demand for container shipping for the remainder of the year.”

For decades, the growth in container shipment volumes have generally outpaced world economic growth. Hofstra University Professor Jean-Paul Rodrigue wrote on his website, The Geography of Transport Systems, that the 1990s “marked a period of fast containerization… particularly with the beginning of offshoring” with container volumes growing four times as fast as global GDP. He said that container volume to GNP “multiplier” dropped to about three through 2008, then two after the financial crisis of 2009.

The first half 2019 earnings presentation by Hapag-Lloyd included a graph estimating the container volume/GNP multiplier dropping from 1.4 last year to one in 2019.

Sand wrote that, “the continued slowdown in global manufacturing and the broader global economy will impact container shipping. BIMCO expects the GDP multiplier to stay around one for the foreseeable future.”

“The slowing demand growth means that despite the comparatively low fleet growth expectations which BIMCO has of 3.5%, the fundamental balance of the container shipping market will worsen this year,” said Sand. “Furthermore, with the fleet currently projected to grow by 3.2% in 2020, this is unlikely to change much next year, with the industry heading deeper into a hole. Cutting costs will remain in focus to be able to weather the storm.”

The added cost of utilizing low sulfur fuel in order to comply with an International Maritime Organization mandate “paints a disturbing picture for the rest of 2019 and 2020 for container shipping,” he added. He believes the oversupply of capacity is likely to make it difficult for both container and dry bulk shipowners to recover the additional fuel costs.

Speaking about the outlook for container shipping and intermodal transportation at the Intermodal Expo of the Intermodal Association on North America this week in Long Beach, Lars Jensen said that the container shipping industry is likely to see lower volumes in the final months of 2019 than in 2018 because of the large amount of merchandise that was shipped from China to the U.S. late last year in an attempt to avoid tariffs.

He suggested comparison to late 2017 volumes would provide a fairer picture of demand for container transport.

He mentioned two factors that will dampen the impact of tariffs.

While there has been some shift in production by manufacturers from China to Southeast Asia, he said while this may result in a shift in cargo routing, for example use of more feeder services, overall cargo volumes are unlikely to decrease as a result.

And while tariffs will make many goods more expensive, he expects consumers may buy less expensive versions of the same goods they are buying today.

“Instead of buying that $100 t-shirt in a department store they will buy a $10 t-shirt down at Walmart. From a container line perspective, the t-shirt takes up the same amount of space in the container.”

He expressed greater concern about the possibility that businesses might reduce their spending.

“The danger is if we see a replay of the recession you had over here in the beginning of 2001, which was inventory driven. The consumers held up nicely, but the businesses were worried and they ran down inventories. That had massive impact, especially on the transpacific eastbound where you had negative demand growth because of the inventory rundown. That was a temporary, but very profound impact on the market.”

Carriers have “long since given up on trying to predict demand,” said Jensen and are “wielding their new found power as an oligopoly which they spent 20 years getting to and they are increasingly dynamically adjusting capacity by blanking sailings. That’s a tool they have been using with ever-larger frequency the last couple of years and are very likely to continue.”

“In the financial crisis it took them six months to start to pull out capacity in earnest because they were not accustomed with how to deal with this. This time is different, so if we do see that inventory-led recession, carriers will be extremely fast in pulling capacity out of the market.”

He said while the amount of new container ship capacity on order from shipyards is low, it is concentrated in ultra large container vessels bound for the Asia-Europe trade. That will lead to more cascading of 10,000-14,000 TEU ships into the Asia-U.S. trade.

He said that will result in a reduction in the number of service strings to the U.S. and cargo arriving at ports in “ever larger lumps in a short span of time” which will impact the intermodal industry by creating congestion issues at terminals.

Chris Dupin

Chris Dupin has written about trade and transportation and other business subjects for a variety of publications before joining American Shipper and Freightwaves.