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Mega-ships set to sabotage shipping industry’s recovery?



2017 is continuing to shape up to be a bumper year in the container shipping sector with a recovery well under way, according to market intelligence platform Xeneta. This after a year that saw the collapse of Hanjin and the top 20 market players posting combined net losses of US$ 5 billion (Wall Street Journal).
“Higher freight rates propelled revenues upwards by 8.4% to almost US$ 10 billion for the quarter. Meanwhile, reports suggest that Hapag-Lloyd will triple its earnings this year.
“Rates have jumped since their historical lows last year. For the Chinese main port to Northern Europe route last May, the three-month rolling average for long-term rates for a 40-foot container stood at US$ 655. This May it was US$ 1438, an increase of 120%, and the same average is now up at US$ 1618. Meanwhile we see US containerised ports are busier than ever, handling a projected 1.75 million TEUs this month (Global Port Tracker) alone, the most on record. This comes despite the uncertainty caused by President Trump’s ‘America First’ doctrine and his withdrawal from initiatives like the Trans-Pacific Partnership. US container imports actually seem to be growing.”
Strong consumer demand, the restructuring of industry alliances – 90% of all container ship traffic is now accounted for by three major alliances (THE Alliance, OCEAN and 2M) – and Hanjin’s demise all help push up utilisation and rates, Berglund says, but there remains uncertainty. And, the Xeneta CEO points out, the industry may be unwittingly planning to sabotage its own success.
“We remain optimistic with regards to the remainder of 2017, but the longer term becomes more complex,” he argues, pointing to one ‘huge’ issue – the increase in mega-ship capacity.
“A staggering 78 new mega-ships are due to come online for the Asia-Europe trades over the next two years, pushing capacity up by over 23%,” Berglund comments. “Mega-ships make obvious sense in terms of economy of scale and optimising transport costs, but when you have this much of a capacity injection it requires a huge demand increase… and, well, where will that come from?
“Mega-ships of 18 000 TEUs need to command utilisation rates of at least 91% to achieve cost savings. Even in the high volume Asia-Europe trades that is difficult and may necessitate lower than average rates for some volume, which, inevitably, will hit overall rate development.
“Each of the key alliance partners is playing catch up with one another, trying to reap the mega-ship benefits. In doing so they’re going to flood the market with new capacity and risk reversing current positive trends. This is a potential mega-problem in waiting.”
Berglund says that all stakeholders in the container shipping supply chain need to pay close attention to the market to stay ahead of developments and get the best rates for their assets, services and cargoes.