So much supply, so little demand

Nov 20, 2012, 9:54PM EST
Of all the problems afflicting container lines, the most difficult to address has got to be excess capacity.

Freight rates can always go up, the fuel price can always come down, but once delivered, a container ship immediately becomes a hole in the water that has to be filled with money.

With shipping line profitability a cruel joke and such economic uncertainty gripping the world you would expect the brakes to be placed on orders. Except ships have to be ordered at least three years in advance, and once under construction their delivery can be slowed but not halted.

Consider this: In the next three years, 120 vessels greater than 10,000 TEU capacity will be delivered, injecting an incredible 1.62 million TEUs into the global fleet, according to shipping market watcher PR News Service.

Over at fellow research outfit Alphaliner, the analysts looked at the total fleet growth over the next three years. This year the global containership fleet will grow by 6.7 percent, reaching 16.68 million TEUs. Next year the fleet will increase by nine percent and in 2014 by 5.9 percent.

With so much capacity coming online, and so little demand for that space, the world’s shipping lines are facing a dilemma, to put it mildly. Alphaliner reckons the idle container ships could add up to more than one million TEUs over the winter season.

Already planned rates increases on the transpacific have been postponed for two weeks in order to “more closely align the scheduled increase with year end cargo trends”.

Those year-end cargo trends are leaning towards the dismal. It is the traditional slack season anyway, but the economic meltdown in Europe and consumers restraining their spending in the US is making this peak season one to remember. Or better still, one to forget.

Too many of the last five years have been years to forget. And that sentiment always begins to take hold as a nothing third quarter dribbles its way into the last three months.

2009 was one such year. With no way to stop the calendar after Lehman Bros and the rest collapsed during the global financial crisis – or the Jay Eff Say, as the Aussies call it (GFC) – a shocked container shipping industry could only watch in horror as factory orders and exports shuddered to a halt.

There have been a couple of spikes since then, but the years after the GFC have remained largely bleak and filled with too little demand and too much capacity. Profitability now for container shipping lines is as hard as it has ever been and there are still hard yards to go. “K” Line executive Keisuke Yoshida doesn’t expect to see an improvement for at least two years, and China Shipping Container Lines is selling 20 percent of its containers for US$358 million to shore up its financial position.  NOL even sold its Singapore head office building recently to boost its coffers. That doesn’t exactly scream confidence in the market.

Alphaliner reports that the scrapping of ships has been speeded up and newbuildings delayed to make room for incoming capacity. The average age of scrapped ships is 24 years, a historic low, with 37 ships sold as scrap being under 20 years old. Its analysts forecast at least 200,000 TEUs of capacity being scrapped in the next year and another 100,000 TEU deferrals and slippage in the same 12 months.

It is worth asking where all the 10,000 TEU-plus ships coming online in the next couple of years will be deployed. Maersk’s 18,000-box monsters are all headed for Asia-Europe from 2013-15 and much of the other capacity will replace the 8,000-10,000 TEU ships on the Asia-North Europe/Mediterranean trade.

They are all too young to scrap, too big to work major trades and there is not enough cargo to fill them. So where will the displaced capacity go?

 

 
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