New alliances, structural change and positive economic trends have transformed the container shipping market over the past year, driving growth and pushing business performance figures from deep red into black. However, despite long-term rates that are, in some cases, up 120 percent year on year, the future remains uncertain due to a looming shadow on the horizon. And, according to Xeneta, it’s not being cast by the ‘usual suspect’.
Xeneta, the global benchmarking and market intelligence platform for containerized ocean freight, says a recovery of the container segment is well underway. From a 2016 that saw the collapse of Hanjin and the top 20 market players posting combined net losses of $5 billion (according to the Wall Street Journal), 2017 is shaping up to be a bumper year, as Xeneta CEO Patrik Berglund explains.
“Maersk’s recent 2017 Q2 financial report provides an interesting snapshot of the industry,” he notes. “Higher freight rates propelled revenues upwards by 8.4 percent to almost $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 $655. This May it was $1,438, an increase of 120 percent, and the same average is now up at $1,618. Meanwhile we see U.S. containerized ports are busier than ever, handling a projected 1.75 million TEU 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 percent 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 utilization 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 percent,” Berglund says. “Mega-ships make obvious sense in terms of economy of scale and optimizing 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 utilization rates of at least 91 percent 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.”