Keeping supply in perspective
Lost amid all the recent deliveries of massive containerships and ordering activity is this significant development: containership supply is actually pretty well in balance.
That's largely because a huge swath of ships that were supposed to be delivered in the last two years never made it to the global fleet. And the trend is forecast to continue in 2011.
'The supply side didn't grow quite as much as people might have expected,' Trevor Crowe, senior container shipping analyst for Clarksons, said at the Containerisation International conference in London in April. 'Forty-five percent of containership capacity due to hit the market in 2009 didn't get delivered. That's a significant amount.'
A further 39 percent didn't get delivered in 2010, meaning about 4.2 million TEUs didn't get delivered in the two years. And in alliance with non-deliveries, there was a huge amount of scrapping, Crowe said.
The last three years were the three highest individual years on record for scrapping, with 2009 far and away the highest. In all, roughly 600,000 TEUs of capacity were scrapped, and not all of it was old, small vessels. About 200,000 TEUs of scrapped capacity came from vessels larger than 3,000 TEUs.
Around 50 ships younger than 25 years old have been scrapped, while 72 percent of ships older than 28 years have been scrapped. Forty-two percent of vessels 20 to 24 years old, and even 7 percent of capacity that's 15 to 19 years old has been scrapped.
To Crowe that means container lines have room to maneuver to balance supply with demand.
'There's still a release valve for the industry to scrap ships if there's a market downturn,' he said.
Looking forward, there are about 4 million TEUs of capacity still on order, roughly 28 percent of the current fleet. Of that, 1.4 million TEUs are due for delivery in 2011 and 2012 each.
'Not all orders will be delivered on time,' Crowe cautioned, saying Clarksons forecasts 1.04 million TEUs to be delivered in 2011 and 1.35 million in 2012. That would represent 35 percent to 40 percent non-delivery in 2011, roughly what was seen in the last two years. That would also mean 7 percent capacity growth in 2011 and 9 percent in 2012. And virtually all of that growth comes from the addition of vessels larger than 8,000 TEUs.
Crowe said not to discount slow steaming's impact. It's allowed 110 to 115 extra ships, soaking up 730,000 TEUs of capacity, to be operated just on the Asia/Europe and transpacific trades.
'That effectively brought supply growth in 2009 to negative levels and to 3.5 percent in 2010,' he said.
Meanwhile, the massive ships being delivered and deployed on the Asia/Europe trade have 'unlocked the cascade,' Crowe said, sending larger vessels to the transpacific, where 3,000-TEU ships are getting knocked out and deployed on north/south trades.
'There's still a substantial amount of capacity on order, but not as substantial as before,' Crowe said, referring to the lull in ordering in 2009 as a huge 'holiday.'
'I think the container shipping industry has done a good job of managing the order book. Whereas from 2003 through 2008, the order book as a percentage of the current fleet was higher than in the bulker or tanker market, now it's back below the other two industries.'
Exporters face government, carrier hurdles
Also at the CI conference, U.S. agriculture export advocate Peter Friedmann spoke forcefully about the expanded role the U.S. Federal Maritime Commission is playing on behalf of shippers.
'The FMC has never, in its history, been as oriented to U.S. exporters and importers as it has now,' said Friedmann, executive director of the Agriculture Transportation Coalition. 'It's a sea change.'
While admiring the role the FMC has undertaken, he also said the biggest impediment to U.S. exporters is the U.S. government.
'The challenge for U.S. exporters versus European exporters is that the EU has been better at negotiating free trade agreements,' he said. 'If a poultry exporter faces an 18 percent duty and a European exporter doesn't, that's a bigger issue than rates.'
Bridging the disconnect between carriers and ag shippers is a tricky task, and Friedmann has spoken to American Shipper in the past about letting the market decide what rates should be and which customers carriers should serve.
'I think carriers think shippers are only concerned about rates, and I think shippers think carriers are like a utility and have to provide a service,' he said.
Friedmann said he believes in a system without rate regulation, where 'whatever carriers and shippers agree on should be the rate.'
But he added, with regards to rising fuel costs, that if carriers 'are going to break out a cost, they better be able to justify that it is a cost and not just a profit center. If the ocean carrier wants to include fuel in the base rate, they can charge whatever they want, but if they want to break it out, they have to justify it.
'Is it believable that every single carrier has the same fuel costs,' he said. 'Don't some hedge? Does it affect them all at the same time?'
Sartini: Fuel costs skyrocket
CMA CGM Senior Vice President Nicolas Sartini said liner carriers must maintain an ability to account for hikes in fuel costs.
Sartini compared the costs on a typical Asia/Europe sailing from January 2009 to one in March 2011. Operating costs outside of bunker fuel (including port fees, canal fees and vessel chartering) represented roughly 71 percent of a carrier's costs in January 2009 while bunker costs were 29 percent. By March of this year, bunker costs accounted for 56 percent of operating costs.
In that time bunker prices have more than tripled, from about $190 per ton to more than $600 per ton.
Sartini also addressed rates and the balancing act carriers perform in determining whether vessel utilization or revenue per box is more important.
'When our vessels leave the last port in Asia, any empty slots are wasted,' he said. 'Those slots should be sold at dynamic prices, based on the theory that any revenue is better than no revenue.'
But the problem, Sartini continued, is if carriers resort to such measures to fill ships and garner extra revenue, that dynamic (lower) rate becomes a basis for future rate negotiations.
'There's no elasticity in demand,' he said. 'Those low rates going to the last few slots would not give you better utilization on the way back. They just would spoil the rates in the market.'