Surge of mega-ship capacity to hit the water in 2018

Posted by Daily Shipping Times on 13-11-2017        Tweet

LONDON: The global container fleet is on track to grow faster-than-expected demand and scrapping - even if a quarter of the capacity is delayed, according to an analysis of IHS Markit data.

IHS Markit forecasts demolitions next year will come in at 351,065 TEU, which would result in net capacity growth in the global fleet of 7.1 percent if no deliveries of the 78 mega-ships over 10,000 TEU totaling 1.2 million TEU are delayed. The fleet would expand 5.6 percent if a quarter of deliveries are pushed back.

“In 2018, there will be many deliveries,” Maersk Line CEO Soren Skou said on the company’s Nov. 7 third-quarter earnings call, but he said the additions will not undermine the market. “The idle fleet has been absorbed and supply growth broadly looks manageable in the coming years, even if bumps on the road can be expected from some orders.” Skou said he expects global supply to increase between 5 and 6 percent next year.

“With the comment around possible bumps, the other thing that I want to reiterate is that overall supply demand fundamentals look good,” he said.

“We have broad-based strong economic growth in the United States, in particular, but certainly also in Europe. We have seen strong growth in China and India, and even Russia.”

Global container trade will grow 4.9 percent next year to about 144 million TEU, according to IHS Markit forecasts. By comparison, this year demand is on track to outpace capacity growth by 1.8 percentage points, which helped sustain higher freight rates through much of the year. The industry scrapped more than 650,000 TEU in 2016 and has scrapped more than 400,000 TEU so far this year. IHS Markit forecasts scrapping activity for 2017 will hit 671,989 TEU before falling 47.8 percent year over year in 2018.

If 25 percent of the orders slated for delivery next year is delayed, mega-ship tonnage entering the market would be slightly above the amount that entered in 2015, which contributed to an oversupply of capacity and spurred heavy losses at container lines by injecting volatility into freight rates. Industry analyst Alphaliner forecasts that the global fleet will grow 5.8 percent in 2018 as container volume rises 4.8 percent.

To bring supply and demand into alignment, fleet and volume growth would have to mirror that of 2017 for at least the next year, after volume growth in 2014 and 2015 lagged behind capacity growth. As the fleet expanded 6.5 percent in 2014, capacity grew 4.3 percent, and the gap grew wider in 2015, with the fleet rising 8.1 percent as volume increased just 1.1 percent.

The gap between fleet and demand growth in 2015 set the stage for the bankruptcy of Hanjin Shipping and rapid consolidation of the container shipping industry, with a slew of mergers and acquisitions including CMA-CGM/APL, Cosco/China Shipping Container Line, Hapag-Lloyd/United Arab Shipping Company, and Maersk/Hamburg Süd.

The shock from Hanjin allowed container lines to secure higher annual contract rates for 2017, many of which were close to breakeven levels for carriers. Although some trans-Pacific contracts were signed at historic lows of $700 per FEU in 2016, contract rates this year were about double that rate. However, the steady slide of spot market shipping rates through a peak season defined by robust volume growth indicates that substantial overcapacity remains on the water.

The order book also reveals that mega-ships are making up a growing proportion of the new deliveries, a trend likely shaped in part by the opening of the larger Panama Canal, which tripled the size of ships able to pass through its lock to 14,000 TEU.

The jump in mega-ship deliveries is likely the reason for Maersk Line saying on its third-quarter earnings call that it would not follow in the footsteps of its 2M Alliance partner MSC in ordering new tonnage.