Rising Asia-Europe demand won’t fill new mega-ship capacity

Posted by Richard Strauss

 

Source: JOC – Greg Knowler

A stream of mega-ships continues to flow into service on the Asia-Europe trade.

Carriers on the Asia-Europe trade are reaping the benefits of a bullish container shipping market, but the steady flow of ultra-large vessels into service at the rate of one a week will continue to put pressure on the supply-demand balance.

Alphaliner that said the sustained cargo volumes were being largely soaked up by the current fleet and the ongoing ULCS deliveries, and that brand new vessels of 14,000-21,000 TEU would continue to flow into the Asia-Europe market throughout the summer.

However, during the first six months of this year, 26 ships of more than 14,000 TEU were delivered, and a further dozen newbuildings of this size are expected to join the container shipping fleet at a rate of at least one a week before the annual low season begins in October.

Fortunately for carriers, the onslaught of very large and ultra large ship deliveries coincided with a cargo rally and the onset of the peak season just as the new east-west carrier alliances were being launched in April. Service contracts on Asia-Europe, settled at significantly higher levels

than those negotiated in 2016, and more disciplined capacity management has ensured higher levels of profitability for container lines.

SeaIntel said while the year-over-year comparisons on Asia-Europe were impressive, comparing

2017 with 2015 was a more realistic benchmark than 2016. The container shipping analyst forecast that carriers on the trade stood to gain $1.2 to $1.7 billion in higher rate levels for full- year 2017 versus 2015.

Spot rates were well above 2016 levels through the first half when carriers were waging a debilitating rate war, but those comparisons have begun to fall off. Even though the rate for shipping a 20-foot container between Shanghai and North Europe rose 4.8 percent to $963, and the rate to the Mediterranean was up 3.6 percent to $883, year-over-year the rate to North Europe is down 14.4 percent while that to the Mediterranean is 12.1 percent lower. The weekly movement of spot rates, supplied by the Shanghai Shipping Exchange’s SCFI, can be tracked at JOC.com’s Market Data Hub.

The rising rates and growing demand were reflected in Orient Overseas Container Line’s half- year results. The Hong Kong-listed carrier reported higher volumes as the European economy, driven by strong retail sales and domestic demand, expanded 0.6 percent in the second quarter from the first, according to IHS Markit, which has revised upward its 2017 forecast for Eurozone GDP growth 0.1 percentage point to 2 percent.

The three Japanese carriers also reported improved profitability coming out of their Asia-Europe liner divisions, and this is expected to be also reflected in the interim results that will soon start flowing in from the other lines.

The improved cargo market has emboldened carriers to bring forward the delivery of large ships that had initially been deferred back when the trade outlook for 2017 still looked gloomy, the analyst said. Carriers and ship owners have also frozen scrapping decisions since April, although the analyst said some of this can be attributed to the postponement until 2019 of the enforcement of the Ballast Water Management convention that has removed a powerful incentive to scrap some mid-aged ships.

While containership demand has been resilient so far this year, it has not been strong enough to overcome the supply overhang that continues to weigh down on charter rates. Alphaliner said current rates are only profitable for those non-operating owners that bought tonnage at distressed prices from bankrupted or ailing companies. Owners that were carrying the full capital costs of newbuildings, especially those contracted at the peak of the market in 2005-08, were suffering massive losses.

The analyst said that even ships ordered after the 2009 financial crisis were loss-making at current charter rates. As a result, during the past 18 months, numerous non-operating owners have deferred newbuildings and have had to accept severe daily losses when finally taking delivery of the ships.

“Non-operating owners continue to bear the brunt of the overcapacity and the current newbuilding overhang still delays a re-balancing of ship supply and demand,” Alphaliner noted. “Even a relatively robust vessel demand in the coming months, with only a mild retreat for the winter slack season, will not prevent a rise in idle capacity.”