The tide of lower freight rates is reversing and global shippers have been warned to brace for an average 16% increase on all routes this year with the upward trend continuing into 2018.
That’s according to Martin Dixon and Philip Damas of maritime consultants Drewry who pointed out during a webinar on the container market and freight rate outlook last week that it was a trend not seen in the past six to seven years and augured well for ocean carriers.
“The recent merger and acquisition frenzy has resulted in fewer carriers while a break from ordering big ships will see the industry returning to profitability after a long wait,” said Damas. “The industry is likely to move from a large deficit in 2016 to a profit estimated at $5bn this year,” he said.
The consultancy is predicting that growth in demand will recover to 4% this year based on a more buoyant global economy with restocking falling back to 3.5% next year.
“Worldwide economic growth has improved which is supporting trade growth; restocking in Europe and North America has boosted imports into these regions and Chinese imports have accelerated faster than anticipated,” he said.
“2016 marked a major correction in vessel capacity growth for the first time in five years,” said Dixon. “Capacity growth undershot global demand at just over 1% driven by a large increase in scrapping to 660 000 TEUs of capacity, with many deliveries deferred to this year or beyond. Vessel ordering also remained subdued last year – and we expect vessel supply to accelerate to 3%, rising to 5% in 2018,” he said.
And even though demand growth of 3.5% is forecast for 2018 versus supply growth of around 5%, he believes carriers will still hold most of the cards in freight negotiations.
“Overall the trend towards a tightening of capacity will stop and will be reversed a bit. But these numbers will not be large enough to stop the momentum which is currently in favour of carriers.” Vessel ordering dramatically outpaced scrapping in the period leading up to 2015 but last year this was reversed in every quarter.
“Scrapping has fallen back this year on the back of the charter market surge at the beginning of the year,” said Dixon. “We don’t expect vessel ordering to take off again given the continuing oversupply, limits of the economy of scale in ship size and overall weak level of demand.
“The orderbook currently stands at over 300 million TEUs in total capacity – and a lot is scheduled for delivery before 2019.”
There is consensus that the biggest structural shift for the industry over the recent past has been carrier consolidation.
“The bankruptcy of Hanjin last year and frantic liner merger and acquisition (M&A) activity has constituted a fundamental structural shift in the carrier base and the competitive forces in container shipping. Most noticeably, this is evident in the reduction of global liner operators from about 20 to 11 in just two years, a restructure that will force shippers and suppliers to look for new strategies to do business with shipping lines and help lines manage excess supply and potentially prices in the coming years.
“It will have deep repercussions for shippers and suppliers and the level of competition between carriers,” said Damas.
“The consolidated industry is moving towards an oligopoly which will give them much more control than in the past.”
In terms of further consolidation, Damas believes that the big wave of M&As has concluded. “The recent sale of OOIL/OOCL means there aren’t many other takeover candidates left on the shelf.
Such is the scale of the carriers within the top seven that any merger within that group would find it difficult to pass regulatory approval – although there could still be some minor regional acquisitions.” And the impact on freight rates will continue to filter through. “2017 marked the start of a new trend in prices.
After years of steadily decreasing freight rates we have seen a marked reversal in this trend. “For European exporters to Asia, contract freight rates were up 99% on average between the second quarter of last year compared with this year – admittedly from a very low base,” said Damas.
“In the opposite direction contract freight rates were up 19% but on some routes rates have doubled. “Asia to US contract rates were recently renegotiated and are much higher.”
According to Damas these figures are based on actual contract rates provided by shippers, which paint an accurate picture. Last year Drewry made it clear that spot rates were not sustainable – and they were proved right.
“Rates have more than doubled since May in the spot market and have been stabilising since the end of last year.
“Contract rates started at a low level, decreased until the end 2016 and in 2017 we saw a reversal of that trend.
“Other than the anticipated rise in freight rates, we expect consolidation in the industry to provide the large carriers with synergy and economies of scale benefits which will feed into the bottom line. However, this will be tempered by rising bunker costs over the medium term and higher operating costs which have been held back by weak profitability,” he said.
FTW will examine South Africa trends in the wider global context in a future issue.
INSERT
20 to 11
The reduction in the number of container liner operators in two years.
