OceanHub > Feed > Containerships: Balances still looking fragile
Head of Research, Affinity Shipping LLP
1 year ago

Containerships: Balances still looking fragile

After several years in trouble, conditions in the liner industry seem to be improving as fleet supply and demand develop in carriers’ favour. However, this doesn’t necessarily mean that rates will miraculously improve in the near term, but the entire sector sends signals on behaving more rationally, focussing on meeting the rising needs and expectations of their customers. Maersk Group’s chief economist, Graham Slack, commented: “This focus on freight rates is not getting us anywhere. And the reason it is not getting us anywhere is because we’re not delivering a good enough product to service the customer”.But the market could be brought closer towards balanced, as containership supply and demand move in parallel. After the first half of 2018, which is still going to be rather intense in terms of modern vessel deliveries, longer term forecasts now suggest that demand growth will start balancing out the supply side. But this year will not be easy. A good example has been the Trans-Pacific trade, with the capacity employed in services covering these routes to expand by up to 9 per cent this year, much higher than the 6 per cent growth expected for demand.

But positive sentiment is growing back by the likes of the International Monetary Fund’s recent increase of its forecast GDP growth rates to 3.9 per cent for 2019, allowing optimism to develop that container shipping demand could grow faster than the global GDP. Capital spending has been rising as well, a major driver for global trade. In the meantime, idle fleet capacity still remains rather low and there is relatively limited activity to report so far in the newbuilding market, despite orders for the construction of more “Megaships” both in late 2017 and so far in 2018. Generally however, ocean carriers seem to behave more conservatively before taking any decisions to expand, although the risk of their views changing in favour of a new wave newbuilding contracts are still there. This will become particularly relevant as 2019 approaches, which is expected to be much better for the entire industry, as the market fundamentals keep on improving.

Owners have proved rather weak in the past in terms of not rushing to order fresh capacity when competitors decide to do the same. Fitch, the New York credit rating agency, said that the weakness in sector fundamentals will continue this year deterring longer-term recovery. If deliveries remain strong, overcapacity could push this year's freight rates. "Sustainable recovery of freight rates depends on continuous and consistent capacity discipline in the industry," as mentioned in their latest report.

Maersk Line, the sector’s leader, had operating profit of USD 634 Mn last year versus a loss of USD 421 Mn in 2016, while Hapag-Lloyd and Cosco Shipping also reported better results. Hyundai Merchant Marine cut its container segment's operating losses by half in 2017, reported at (negative) USD 280 Mn. Supply is still expected to exceed demand this year, expanding by 5.5 per cent by the end of 2018. The Shanghai Containerised Freight Index increased 27 per cent in 2017 compared to 2016, but the fourth quarter and first quarter of 2018 moved lower than a year ago. It might prove challenging to sustain the profitability of 2017.

In terms of recent newbuilding activity, Maersk Line exercised an option for two new units of 15.2 k Teu each, with delivery scheduled in 2019. Last September, CMA CGM placed an order for the construction of nine mega ships of 22 k Teu each. Deployment of larger ships on Europe-Asia trading lanes pushes for further cascading. "In the medium term, continued consolidation in the sector should lead to more prudent capacity management and support freight rates," Fitch commented.

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