Many of the industry publications are focusing on the possibility that shipping rates may rise due to global fuel regulations. The incoming International Maritime Organization rule stipulates the use of Low-Sulphur bunker fuels. This could lead to a price increase in freight rates of anywhere between 40% and 100% by the time we clock 2020. The IMO ruling will affect the 172 nations that are part of the agreement so there is an expectation that the impact on the industry will be significant and extensive. It is anticipated that eventually, the carriers will pass on this cost by way of fuel surcharges. Moreover, the USA is expected to outstrip other developed nations in terms of growth. For example, cargo volumes increased by 6.6% in January 2017 and are expected to hit a high mark increase of 8.2% in April that same year.
Trans-Pacific Market Strength Is Unclear
Most of the big ships that are being commissioned are destined for the Asia-North European market. This means that the smaller ships are bound to be relegated to alternative routes such as the Asia-Mediterranean trade, Asia-Middle East and Transpacific. That sets off a downward trend in demand which simultaneously occurs with an increase in capacity. Another area of concern are the North-South trades which suffer from chronic weak demand. Key milestones include the introduction of 13,000 TEU ships which were to be operated by MSC along the Asia-to West Africa route. It is unclear where the demand to fulfill all this capacity will come from.
Uncertainty About the Strength of the Asia-Europe Market
There are indicators that the Asia-Europe trades are going to be plagued by overcapacity. This is partly due to the advent of smaller ships and companies that have a very limited likelihood of ever having the demand required to sustain their activities over the years. It is true that freight rates are generally on the rebound. However, the gains in the trades are nowhere near what they need to be in order for the market to be in full recovery mode. The high number of ship deliveries is not helping the cause.
A Case for Recovery
The optimists argue that there is room for improvement and that the industry is well on the mend. For example, it has benefitted from increased spot rates as well as the consolidation trend which tends to push out the weaker operators. It is assumed that consolidation will eventually lead to even higher rates. It is also notable that some carriers have been very effective at balancing the capacity requirements for the East-West trades. This is evidenced by the significant improvement in the utilization index as well as the freight rate recovery statistic. Of course, this potential success is somewhat tempered by the pressures that are building along the North-South trades where there is a marked decline in utilization. There are also pockets of optimism amidst the general despair. For example; the problems that Hanjin is facing have helped to tighten up the supply of containerships, hence relieving the market significantly.
A Case for Decline
The decline in the industry could be driven by overcapacity as well as the multiple-mega-ship delivers that are anticipated. In 2017, it is expected that there will have to be room for up to 1.7 million TEU of new builds. The vast majority of these new ships are being commissioned by the stalwarts of the industry including Maersk, MSC and CMA CGM. The implications of this fact is that these companies will continue to dominate the top five positions in the industry. Meanwhile, Hanjin is headed towards liquidation, a sad indictment on the state of the industry as a whole. The Seoul Central District Court found that there was a dearth of sponsors ready to take on the ailing company. Samra Midas has now acquired its Asia-USA routes.
Key Statistics
There are a number of key statistics that point to the health or ill-health of the shipping industry in the coming years.
Container volumes: Over 50% of the estimated new builds are expected to have in excess of 14,000 TEU capacity per unit. It has been reported that average ship sizes are increasing at a rate that outstrips the demand for their services, particularly on the East-West trades. The only exceptions to this worrying trend include the westbound transatlantic line. There is a 20% jump in the size of vessels that run the Asia-East Coast (North America) trade, partly due to the widening of the Panama Canal.
Schedule reliability: The loss of major players like Hanjin is unlikely to significantly affect scheduling since there are plenty of ships that are waiting to take their place. Nevertheless; there has been quite a lot of scrapping over the past year, which might change certain schedules. For example, scrapping was up by up to 260% in 2016. This led to the loss of nearly 700,000 twenty-foot units.
Container pricing: The IMO ruling on Low-Sulphur fueling is estimated to increase the costs of doing business in the industry by about $5 billion right up to $30 billion. It would not be surprising if the shippers decided to pass on these costs to the consumers by way of increased prices. One of the key recovery points are the Trans-Pacific spot rates which have risen by as much as 50% in December 2016.
Trade Statistics: The average deployed tonnage on the Asia-to-West Africa routes has risen by about 16%. A deficit was subsequently discovered when it was noted that the southbound leg had experienced a fall in trade activity of about 11%. Similar trends were noted on the Asia-East Coast South America trade where capacity was up by 7% but trade was simultaneously down by 20%
Any carrier that wants to survive needs to consider the option of consolidation or alternative specialization as overcapacity is going to put pressure on prices. However, as we have seen before; some of the closures can actually remove the excess capacity. All a shipper needs to succeed in the current climate is to make the right strategic decisions at the most opportune time. Of course, with all of the fuel regulations, shippers will need to pass on some of the price increases in order to remain profitable.
