Even though shipping lines’ rates have rebounded – in some cases significantly – since 2016, the industry still faces tough times ahead, an analyst told attendees of the Georgia Foreign Trade Conference.
The challenges are, at least in part, due to the increasing number of 18,000+ TEU vessels due to come online in 2017 and 2018, said Hua Joo Tan, a Singapore-based executive consultant at Alphaliner. “It’s a scary amount” of capacity, he said. “These are the critical years that the carriers will have to navigate before we can see any sustained recovery for the container shipping lines.”
The Georgia Foreign Trade Conference is sponsored by the Georgia Ports Authority.
Tan said that today’s overcapacity can trace its origins to 2009, the first year the container industry had ever experienced negative growth. “This triggered off a crisis for the industry. There was significant oversupply at the time, but recovery came very quickly, because in 2010 we saw a significant rebound in volumes.”
It proved to be a short-lived rebound, Tan said, but what did stick around was a return of confidence to the market, which led to moves by Maersk in 2011 to order the first 18,000+ TEU ships.
“What this was supposed to do was give Maersk a significant cost advantage which they believed their competitors would not be able to match,” Tan said. “But what actually happened was that a couple of Maersk competitors went ahead and replicated the order for these 18,000-20,000 TEU ships, despite the fact that a lot of these companies had fairly depleted balance sheets.”
Maersk realized, Tan said, that it was going to have difficulty filling its new EEE ships, and set about creating an alliance which ultimately became the 2M, which was quickly followed by other container line alliances, and another round of price cutting. “This resulted in significant casualties in terms of losses the carriers had to suffer, but the most obvious casualty in this round was clearly Hanjin,” he said.
The looming overcapacity also resulted in the consolidation of several large names: the disappearance of APL into CMA CGM, the merger of COSCO and China Shipping and the purchase of UASC by Hapag-Lloyd. This round of consolidation, in turn, required another reconfiguration of the existing alliances.
In 2017, Tan said, lines remain embroiled in a fight for market share. “Maersk has very clearly told the market that they’re going to change their strategy from one of growing along with the market to one that said they will grow and go for market share. This is clearly putting up a challenge to the rest of the market, to say catch me if you can,” Tan said.
In the meantime, there is still a significant inflow of new vessel capacity, despite the fact that last year saw a record number of older ships being removed, including ships as young as seven or eight years old.
“Ships in our industry last for 25 or 30 years. To have a ship as young as seven years being put to scrap is unprecedented, but this is the state we are in today,” he said.
In 2016, shipping rates hit rock bottom, Tan said. “To ship a container from Asia to Europe [in early 2016] cost only about US$150. You can’t even get across the city with a truck for that kind of price.”
Hanjin’s demise provided a bit of breathing room for the remaining lines, but Tan said the decreased capacity is unlikely to last. The removal of Hanjin’s capacity, which had a global market share at that time of about 4%, was not replaced except in the Asia to US West Coast trade, and in that trade Hanjin had a much larger share, about 8% of that market.
“This allowed the rest of the carriers to push the rates up, and it has been significantly higher than the first half of the year, and has remained relatively stable.”
But the rate increases, while welcome, aren’t enough, said David Arsenault, president of Logistics Transformation Solutions, who spoke during an earlier panel discussion. “A 40% increase in trans-Pacific – if that’s [where it ends up] – still doesn’t bring rates back to where they were in 2015.”
Tan said the liner industry has seen little in the way of innovation – except when it comes to building larger ships.
“From now until the end of 2018, there are still a significant number of new ships that are due to come in,” he said. “This poses a significant challenge for the container market, because the demand that we have seen in the past, which has historically averaged about 7-8%, is no longer there. The new demand growth that we’re seeing today is roughly in the 2-3% range. In the meantime, capacity that was ordered back in 2011, 2012 and 2013, is still coming on stream, [representing annualized growth] of about 6% before scrapping or about 4% after scrapping.
“Four percent may not sound like a big number, but in an environment where demand is not even growing by 4%, this is a significant issue the industry has to face,” Tan said.
In 2017 alone, 11 ships of the 18,000+ TEU size are expected to come online, as well as another 24 ships of between 9,000 and 15,000 TEU for the 2M Alliance alone. The OCEAN Alliance also has a significant amount of new ships due, 19 in the 10,000 to 14,000 TEU size, but with additional vessels in the 18,000+ TEU range.
“What are they going to do with all this new capacity? The danger is that they’re going to add additional capacity at a point where demand is simply not there,” Tan said. “To me, this is a sign that there is a significant danger of another price war being triggered off, just by the fact that this capacity is not going to go anywhere, other than to come in and fight for market share.”
The picture for 2018 is equally dire. “If 2017 was the year of 2M growth, 2018 is going to be the year where the OCEAN Alliance is going to go big. The OCEAN Alliance has 23 [new] 18,000+ TEU ships,” he said.
Tan told attendees of the conference that there is improvement ahead, but that it won’t happen until 2019, at least. “In 2019, the orderbook situation will have cleared up. The fact is, last year there were practically no orders being placed. What’s coming in over the next two years were ordered 2-3 years before. The benefits that the market expects to see from the slowdown in ordering of new ships is only going to be in 2019 onwards.”
By Gregory Glass
Asia Cargo News | Saint Simons Island, Georgia