It continues to be good times for global shippers, as container shipping rates remain at historically low levels, as capacity continues to far outpace demand in another very weak year for volumes.
However, it appears the industry may finally be serious about cutting back some of that capacity.
Supply Chain Digest Says... |
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| "Recycling won't solve overcapacity on its own," said Maersk CEO Soren Skou. "Only market growth can do this." |
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Demand has indeed been week yet again in terms of container volumes. The industry analysts at Alphaliner recently wrote that global container volume is expected to grow by only 0.3% this year, as the weak volume growth recorded in the first half of 2016 dragged somewhat more optimistic full year volume projections made earlier in the year down.
2016 is now expected to yield the second lowest annual growth rate since 2009, when a record year-on-year decline saw global container volumes shrink by -8.3% in the aftermaths of the financial crisis and recession.
Total volumes at the world's top 30 container ports is estimated to have grown by only 0.2% in the first six months of the year, with weak growth recorded across all main regions.
That as world trade numbers continue to fall, recently plateauing now for nearly 18 months, with growth rates well below that of global GDP, in a reverse of what was for many years the case. (See Global Trade has Actually been Shrinking Since the Start of 2015, New Report Says.)
With supply still ample, that has naturally led to a sharp fall in rates. The China Containerized Freight rate index is currently hovering around 700, versus 1100 in much of 2014, a decline of about 37%, as shown in the chart below.
Volumes have been weak for several years, but that didn't stop the industry from order more ships, most of them so-called megaships that promised to offer much lower operating costs per container, with the giant ships for the first time exceeding 18,000 TEU capacity with Maersk Line's order of 10 "Triple E" vessels in 2011.
In June of 2015, Maersk ordered 11 more of the monster ships, now over 19,000 TEU in capacity, only later in the year saying it was not going to exercise options for six more of the same ships due to weak growth prospects in container traffic.
Now, the Wall Street Journal reports that new ship orders are setting record lows. In the five years through 2015, there were orders for new ships that averaged 1,450 annually. This year orders through July fell to 293 vessels, or 11.6 million tons, according to UK marine data provider Vessels Value.
And scrapping of existing ships is up big time as well. About 1,000 ships that have the combined capacity to haul 52 million metric tons of cargo are likely to be scrapped and sold for the metal in 2016, That is second only to the record amount of capacity of 61 million tons that was scrapped and recycled in 2012.
Dry bulk ships make up the preponderance of that total. However, the 7.1 million tons of container ship capacity scheduled to be scrapped in 2016 is about three times the level in 2015.
Another industry estimate says about 170 container ships are likely to be scrapped this year, compared with 85 last year and 164 in 2014.
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It's still not enough. Many container carriers have 30% excess capacity right now, leading to the plummeting rates that are often not even equal to the variable costs needed to run the ships. Maersk Line, for example, lost $151 million in Q2, versus a $507 million profit on Q2 2015. Other carriers lost more money in the quarter, at least as a percent of revenue.
"Given the tremendous overcapacity, it will take much more recycling and at least two to three years of no growth in capacity to see some balance between supply and demand," Basil Karatzas, chief executive of New York-based Karatzas Marine Advisors Co., told the Wall Street Journal.
"Recycling won't solve overcapacity on its own," said Maersk CEO Soren Skou. "Only market growth can do this," he said. Maersk actually hasn't scrapped many vessels this year - only about 1% of its capacity - but it expects to recycle more ships over the next three to five years.
Others container carrier are being more aggressive. German carrier Hapag-Lloyd scrapped 16 ships last year, or 60,000 containers, roughly 6.2% of its total capacity. That hasn't stopped it from losing $158 million in the first half of 2016.
The beating for ocean carriers continues even as they scrap ships, due to low scrap steel prices. Not long ago, recycling a ship generated about 25% of the price of a new vessel of the same type and size. But owners say a sharp drop in the price of steel has cut the rate of return to an average of just 10% to 15% of the price of a new ship currently.
Do you think container carriers will finally take enough capacity out of the market to send rates higher? Let us know your thoughts at the Feedback section below.
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