By Jonathan Roach, container trade and shipping analyst for Braemar ACM Shipbroking in London.
The liner business hasn’t fully recovered from the fallout of the 2008 financial crisis. Last year was an ‘annus horribilis’ for most concerned in the box business. Weak financial results have driven liner consolidation, in an aim to cut cost and remove a tier of competition.
2016 was a big year for liner company consolidation and this coping mechanism of M&A activity in a distressed market place is likely to continue.
In 2010, the top 15 carriers controlled about 85% of the container ship fleet, (in terms of TEU capacity). In 2017, and allowing for recent merger activity, the top 15 carriers’ share of the fleet will grow to over 90%, creating a small group controlling the global liner business.
Removing tiers of competition, should be good news for liners in terms of tackling freight rate deflation. For shippers on the other hand, mergers will mean less bargaining power when chasing the cheapest freight rate.
It’s fine to cut out cost and competition, but the ‘elephant in the room’ that remains is the vest amount of new ultra-large tonnage due for delivery in the next couple of years.
In 2017, we estimate 81 newbuildings of 10,000TEU+ will be delivered, in 2018 another 68 and in 2019 the deluge of new big ships scheduled drops to 20.
What went wrong? It seems likely that liner operators and non-operating owners underestimated the tepid levels of container demand experienced since the financial crisis. At the same time, vast numbers of ultra-large tonnage were ordered with the view of improving slot cost efficiency. Fleet planning is not the easiest task, and liner companies have had to pre-order tonnage for a multitude of drivers ranging from liner consortia commitments to making sure of sufficient modern tonnage for an uncertain future.
Prior to the financial crisis in 2008, annual container demand annually averaged 10% growth (2001-2008), post-crash 2009-2016 container demand realised annual average growth of about 3%, and those contrasting figures basically sum up the reason for the current overcapacity crisis.
As container trade volumes have disappointed over the past couple of years, non-operating owners (NOO) and liner companies delayed newbuildings, especially in terms of big ships (10,00TEU+).
In 2016, we’ve estimated that in the region of 30% of capacity due for a 2016 delivery was rolled over in to 2017. It looks as if the same thing is happening this year too. At the beginning 2017, we estimated that 1.75m TEU was scheduled for delivery in 2017, by the middle of March, we’ve downwardly re-adjusted our 2017 delivery estimate to 1.6m TEU, a reduction of nearly 9% during the first quarter alone.
Perhaps soon we will see some big box ship newbuilding cancellations. So far this hasn’t happened but if additional liner mergers take place in 2017/18, newbuilding cancellations could become a possibility. Newly merged mega-carriers may have sufficient tonnage to cover their liner consortia commitments without requiring additional newbuildings and cancelling some big ship newbuildings could be part of a future merger plan.
For a positive, and we could do with some of those, the global economy is likely to see a marginal improvement over the next couple of years. Annual container demand is expected to respond with annual growth in global TEU throughput of approximately 2% during the period of 2017-19.
With this backdrop of underwhelming demand, demolition is another counter-measure in full swing to stop the rot in the liner business.
During 2016, 3.3% of the trading fleet in terms of TEU capacity was removed and it is on the cards that we will see removals at this level in 2017. Historically, annual container ship demolition averaged 1% of the trading fleet.
All in all, with careful vessel management, sustained vessel removals, restrained new ordering and a good helping of container demand, the light at the end of the tunnel could be just around the corner.
Jonathan Roach is a Container Trade and Shipping Analyst for Braemar ACM Shipbroking in London where he provides ship owning, operating and investor clients with analysis and advice on containerised trade, fleet, ship design and market outlook.
Jonathan has 31 years of experience in the shipping industry. Before joining Braemar in 2007, he was a fleet and newbuildings and container trade analyst at publishers Containerisation International and LR Fairplay (2001-07). Prior to his career in journalism-research, Jonathan worked in sales and customer services for container lines OOCL and Hapag Lloyd for 13 years, before which he sailed with offshore ship owner Zapata Gulf Marine in North Sea.