Further expected container shipping liner losses throughout the first half of 2016, exacerbated by the awful prevailing spot and contract freight rates will lead to a major trigger point at some stage later this year, according to shipping consultancy Drewry.
“This will happen either through radical capacity management at the trade route level and/or a much more sensible and logical approach to commercial pricing,” Drewry’s Container Forecaster report shows.
Drewry estimates that global freight rates will deteriorate further this year while at the same time carriers will no longer be able to reduce costs at the same pace, given that the main advantages of lower fuel prices have already been realised.
The consultancy further adds that ocean carriers’s vain belief that the lower slot costs of the 14,000 TEU and 18,000 TEU vessels will bring them success doesn’t hold water as economic argument for ordering ever bigger ships diminishes.
On the other hand, the latest Container Shipping Forecaster from Maritime Strategies International (MSI) suggests a more positive market outlook for the container shipping sector in 2016 than the analysis of most of its peers.
Though its supply-side predictions are broadly aligned with those of Drewry and Alphaliner, MSI makes a more optimistic forecast on the demand side – indeed its trade growth estimates for 2016 are more than double those of the others.
Much of this positivity rests on an interpretation of the dynamics of trade volumes on the Asia-Europe route, with MSI ascribing much of the weakness in 2015 to short-term currency and inventory effects and 2016 seeing a reversion to fundamentals-driven growth.
Container freight/charter markets not happy places
As disclosed, the market gyrations around Lunar New Year mean that the sector will have to wait another month before it becomes clearer which of the analysts’ competing views better fits the live trade data.
In the meantime, no one should mistake the container freight or charter markets as happy places, says MSI Senior Analyst James Frew.
“The inevitable seasonal weakness in Q1 has meant that earnings remain on the floor in both the freight and charter markets. Freight rates across the board are extremely subdued, with the Asia-Europe spot freight markets falling throughout February to reach new record lows in March. We anticipate that strong scrapping volumes will increase further in the remainder of the year, but this will be more than offset by an uptick in delivery volumes as cash-strapped yards are unable to push out final delivery much further,” he added.
While spot freight rates on the main routes remain at lossmaking levels, with non-mainlane trades looking equally weak, in the near term MSI expects that on these trades liner companies will mount increasingly determined efforts to boost freight rates, particularly in the light of the upcoming contract negotiations.
“Helped by improved fundamentals, with stronger trade growth driving increased vessel utilisation, liner companies will be less reliant on GRIs to artificially boost freight rates and the stronger lines will look to consolidate their positions through increased market share. This will in turn present some downwards pressure on box earnings, but not before it has boosted vessel demand and injected some upwards momentum into the charter market,” MSI writes.
According to Drewry, some 66 void sailings in February in the major east-west trades did nothing to prop up freight rates. A global idle fleet that hit one million teu (5%) by March also seemed to do little to sentiment.
While global handling growth is forecast to reach an estimated 2.1% in 2016 and this is by no means back in 2009 negative territory, the industry could get very ugly by the second half of this year if current commercial trends continue. Drewry believes a trigger point will be reached when more radical action on the capacity front will have to take place.
“This inflection point will only deliver any kind of market stability if carriers start to use their in-house rate profitability models and offer commercially sustainable freight rates. Ocean carriers should be looking at revenue per teu rather than industry load factors. In a world where overcapacity is a given on every trade, headhaul load factors of, for example, 85% need not be considered a disaster by any means. With 2.6 million teu of new capacity to be delivered by the end of 2017 this kind of load factor and potentially even lower is the new reality, so get used to it,” Neil Dekker, Drewry’s director of container research concludes.