The evolution of a tilting market: capacity to increase 20% by 2024

“During the pandemic, for the first time we saw no slack capacity in liner shipping. We saw multipurpose ships in container services, everything that could sail did sail, and that created this bullish market. But also, the shippers that needed to move the cargo bidding up against each other and driving up the rates. Now there will be too much capacity. It’s a serious balance change,” says Stefan Verberckmoes, Shipping Analyst Alphaliner, who spoke in exclusive with MundoMaritimo to discuss the current drop in cargo demand and freight rates and what the container shipping world is doing to handle the pendulum swing into the return to overcapacity.

“We are facing a hard landing in the sector. Since September we see a massive drop in cargo demand. This is not a normalization of the market but something like a ‘crash.’ I am really amazed at how quickly it is going. We have a very worrying situation,” says Verberckmoes, who warns about the dangerously close the market is to rates of January 2020.

Spot vs contract

Normally, the balance between spot and contract market plays out favorably for one-time users in the spot market and long-term provider-client in the contract enjoying the benefits of stable rates. But the volatile market has placed spot rates at much lower levels than contract rates negotiated months ago under an inflated scenario. The rapid descent of freight rates has destabilized the contract market, forcing carriers to renegotiate contracts to keep clients happy. “We see a reversal of fortunes, with spot rates very close to pre-pandemic levels. If we have a couple of weeks more, we will be back to January 2020. Bunker prices are 70% increase. Charter vessels are higher. Carriers are facing much higher costs,” summarizes the expert analyst, adding that “at this time, I would not invest my money in a liner shipping company. Normally there is a steady grow in cargo, but now we see a drop. It is very difficult to make predictions on cargo drop stabilization.” 

Orderbook overflow

Hapag Lloyd CEO Rolf Habben Jensen said it well: orderbook should represent 15%; and now it is close to 30%. “Two years ago, the orderbook was representing about 8% of total capacity. The current orderbook will put in 20%+ capacity in the next 2 years; however, it is unlikely to see a cargo demand of 20%+ in that period,” says Verberckmoes, who adds that 5.1mn TEU (more recent data points to 5.9 mn TEU) of new capacity is expected to be delivered in 2023-2024. “Compared to the total fleet it is an increase of 20%. On a normal year, the orderbook delivers 1mn TEU. So, this is concerning because there is no cargo demand growth. Total orderbook is 7.5mn TEU through 2025. We [Alphaliner] expect shipowners to delay deliveries.”

Ships over 20 years of age could be scrapped early, but that only represents 2.5 mn TEU versus the 7.5 mn TEU expected to come in. “It is unrealistic to expect the scrapping of all ships built before 2003 in the next 2 years. Neo-panamax ships of 13,000-16,000 represent the largest segment of the orderbook, but there is no scrapping potential for that size. All candidates for scrapping are under 10,000 TEU capacity. So, influx of tonnage is uneven, which will create a fleet cascade effect on all the trades, where larger vessels will replace smaller ones, until eventually classic Panamax ships of 4,000 – 5,100 teu will be phased out,” comments the analyst, who adds that “there is a completely new ship type in development, not comparable in the service: very compact 7,000 TEU as wide as the neopanamax but shorter. That’s interesting because they will replace the classic Panamax ships. There is a massive delivery planned; they represent 11% of the orderbook.”

Active capacity management

“This is cyclic. There’s too much capacity-not enough cargo; too much cargo-not enough capacity,” says the expert who emphasizes that the determining factor for rates is always cargo demand-ship capacity. “The largest volumes come from Asia. But currently we are seeing a drop in exports from Asia into the western world. Therefore, the Transpacific and Asia-Europe trades are starting to feel the effects of too much capacity and not enough cargo,” counter comparing the Transatlantic trade still doing very well in terms of cargo volume and rates.

However, it’s not a matter of one trade or another, but rather sooner than later, all trades will be faced with excess capacity for a handful of cargo. That’s where active capacity management calls for creative ideas. “Scrapping ships is one thing, delaying orderbook deliveries is another. Layup vessels from traffic and leave them for a couple of months or even years, that’s also an option, although it will cost money, but it may be the best thing to do. Blanking sailings is an intermediate ‘weapon,’ but at this moment it’s not enough to stop the rate decreases.”

Normalization?

“Everything will evolve on the cargo demand. There will be some capacity management, that will be needed. But cargo demand is highly unpredictable,” says Verberckmoes. And its true: carriers have their pockets full thanks to the pandemic’s sky-high rate stravaganza, so they have money to spend on ships packed with novel environmentally friendly tech that complies with the wave of IMO regulations and the alternative fuel era. However, “new emissions regulations by IMO will force ship conversion and even slow steaming, making the fleet less efficient,” notes Verberckmoes.

For now, it is all too unpredictable. Russia-Ukraine is key to watch, as well as what goes on in China.

“In recent years we have seen liner shipping reacting to crisis that no one could predict would happen. There’s always something happening, so we have to keep watching.” 

By MundoMaritimo