Supply growth will dampen rate outlook in 2018 – Drewry

A combination of rising
demand and disciplined
capacity has supported
recovery in all trades over
the past year, but supply
growth is expected
to slightly overtake
demand in 2018,
putting pressure
on carriers to
repeat their
deployment
juggling act,
according
to the
latest
research
from
shipping
consultancy
Drewry.
“World
container trade
is back on
track after two
lean years,”
says Drewry’s research
manager Simon Heaney.
“We believe the industry
is moving in the right
direction and will make an
operating profit of $6bn
this year – and that sum
should rise next year.”
For most of the
decade supply growth
has outpaced demand
– but that was reversed
in 2016/17 and helped
to absorb pent-up
overcapacity. “The bad
news for carriers is that the
trend will repeat itself in
2018.”
On the demand side,
world container port
handling rose 6% in first
half but is expected to slow
in the second half, giving
a full-year growth rate of
5.5%. “Recovery in world
container trade has been
surprising – and if we look
at it in hindsight we can
appreciate the appalling
state of world trade over
past years,” says Heaney.
As business expectations
improve, more companies
are building up stocks.
There have also been
recovery plays in a
number of economies
whose prosperity is
tied to the price of
oil.
“We expect
the second
half to
deliver
similar
volumes
to the
first half
although
growth
is not as
strong.
“For 2018
Drewry
believes
restocking
will decelerate
and result in a decrease of
port handling to around
3.6%.”
According to Heaney,
recovery was universal this
year. “Asia is still the hub
of container activity – and
market share
will grow
incrementally
although the
pace will slow
to under 4%
from 6% in
2016.”
In North
America
and Europe
consumer
confidence
is rising, and
while falling
oil prices
caused a few
economies that depend
on oil to seize up in 2016,
this year the bounce-back
in oil prices helped them.
A similar hike in the oil
price is not predicted
next year and is one of the
reasons why 2018 growth
in oil-dependent regions is
expected to be more muted.
But next year will be
more challenging in terms
of the sheer number of
TEUs coming on board
and capacity is expected to
exceed demand. “The order
book is heavily skewed at
the top end of the range
with the 18 000-plus
TEU vessels which have
very limited deployment
options and take up about
40% of the current order
book,” says Heaney. “This
will make deployment
and cascading harder for
carriers – but the number
of ships does come off after
2018.”
Some notable new
orders have come from
CMA CGM and MSC, says
Heaney. “And given the
overcapacity problem that
has blighted the industry
over the years, those orders
have raised eyebrows. But
these carriers are making
decisions with regard to
their own standing rather
than the
impact on
the wider
industry.
“From
an industry
perspective
there’s no
good reason
to add new
ships to
overcrowded
waters.”
Carriers
have however
become
pretty skilled
in the art of capacity
management, he points
out.
“In an oversupplied
market they have managed
capacity very skilfully –
but what they achieved in
terms of ship utilisation
on the east-west trades has
been as the expense of the
north-south routes where
they have had to rehome
ships.
“The number of shipping
lines is shrinking and
when all the M&A activity
has played out there will
only be around seven major
carriers with global scope,
having market share of
over 5%. This move to
a liner oligopoly is why
Drewry is upbeat about
the chances of sustained
profitability.”
A key area that will
change in the future will
be an improvement in the
lines’ responsiveness to
capacity management,
in Heaney’s view. “So in
the more concentrated
trades we believe carriers
will be able to swiftly set
capacity levels appropriate
to demand. And as a result
we should start to see more
stable freight rates.”
In terms of the
future outlook
for freight
rates, Drewry
expects a
continued
rise – but at a
slower pace,
with high
single-digit
increases.
“And we
expect carriers
to struggle to
maintain the
pace of recovery
next year
given the
challenging supply
pressures as extra slots hit
the water,” says Drewry’s
head of research products
Martin Dixon.
“This year east-west
rates started the year
strongly until August – and
since then rate levels have
declined to what we saw in
2015. But the difference is
we expect rates to stabilise
through the rest of the
year.
“On the north-south
trades we have seen a lot of
rate recovery. On the South
China to Brazil route rates
increased 70% between
February and July. This
has fallen back a bit and
is now $2770 per 40 foot,”
says Dixon.
“The South China to
South Africa benchmark
gained 60% from the
beginning of the year to
July before retreating
about 15% and currently
stands at $2640 per
40 foot.”
The recent weakening
in rate levels
is however
expected
to be
temporary.
INSERT & CAPTION
We expect carriers to
struggle to maintain
the pace of recovery
next year given the
challenging supply
pressures.
– Martin Dixon