The peak season of the year also saw the greatest volatility of the year. Following the steady freight rate development on the Far East to Europe route up until September, BIMCO was blind-sided when trying to forecast a continuance of that trend. We believed the industry was not going to imitate the freight rate development of last year, as it was following such a tight line until then, matching supply with demand. At the same time, almost all of the fleet that was standing idle was re-activated, which was quite an achievement. However, the fairy tale has paused for a while at least. Since September, rates have gone down an all too familiar road.
Demand from Europe appears to be more of a restocking issue than a 100% consumer-driven revival. Regardless of its origin, volume growth has been impressive. According to CTS, European box imports were up by 8% y-o-y in the first nine months of 2014. Since Asian imports from Europe went up by just 0.2% in the same period, the imbalance between front haul and backhaul has widened again, reversing the recent trend of stronger backhaul growth. Asian exports to all US destinations have grown by 5.6% in total (CTS). BIMCO data shows a 4.4% import growth on the US West Coast for the first ten months whereas exports fell by 1.75% during the same period.
These two quite different demand situations reflect the macroeconomic realities as highlighted so many times in our economic analysis. The US is firing on three out of four cylinders now, whereas Europe is running only on one, it seems. Intra-Asian trade is still running high, as out-of-Asia exports keep up and growing prosperity in the region grows volumes organically.
Now that we have got the idling of ships down to almost nothing, the big question on the supply side of container shipping is what next? Will some liner companies begin to speed up? Fuel costs have come down, but remain at a high level. Consider this: earnings are still poor, the charter market is horrific. Idling was a sign of a deeply troubled industry and the disappearance of it now is not a sign of an industry with disappeared troubles.
If higher speeds were reintroduced, less tonnage would be needed in current trades. From this, cascading would intensify, fuel consumption and costs would go up and we have just seen how tight the market balance is. The demand side is not all-conquering, and why reverse all the cost-cutting initiatives that have brought a certain level of profitability back to the industry? According to Alphaliner, average operating margins in Q3 were 3.3%, building on a rising trend from -1.7% in Q1.
In isolation, a rollback of slow steaming for an individual company is a trade-off between the reduced costs of taking a ship out of a loop against the extra cost of higher bunker consumption for the remaining ships in the loop when they speed up. Falling bunker prices bring the latter down and may therefore in some cases, all other things being equal, result in marginal costs that favour higher speed. A fight for market share naturally also plays a part in this.
The demolition of container ships has stalled completely, following a hectic first half of 2014. This led BIMCO in June to make an upward revision in of our initial estimate of 290,000 TEU to 500,000 TEU for the full year. In contrast, the monthly average for the first half of the year was 46,700 TEU; the average in second half has been just 16,400 TEU.
This, in turn, now leads to an increase in the overall supply growth estimate, as the demolition amount is unlikely to exceed 400,000 TEU, thus bringing the net change to the fleet stock to a three-year high at 6.2%.
One hundred and eighty six new ships have been delivered, giving us the second largest delivery year on record in 2014; second only to the bumper year of 2008, that saw 1.5 million TEU introduced.
New contracting for the year to date is now at 853,000 TEU, the aggressive new ordering of 29 ships in September is now behind us, with only five ships of 1,800-1,900 TEU being ordered during October and November.
The total fleet size passed the 18 million TEU-mark in November and is now heading for a 19 million TEU-mark in approximately eleven months’ time.
Following the return of great volatility in freight rates, it is bound to take some time for market conditions to re-establish a more stable market. This is especially true in a declining market, where absolute volumes are reduced in Q1 and particularly around the Chinese New Year in early February, before building up to the next peak at the end of Summer in the Northern hemisphere. When adjusting supply, being “caught out” just behind the curve may lead only to falling rates, despite an attempt to strike the balance.
In conjunction with the 0.1% sulphur implementation in Emission Control Areas (ECAs) on 1 January 2015, BIMCO is calling on the governments of countries bordering ECAs to exercise a robust enforcement of applicable sulphur limits to ensure a continued level playing field for all ships.
“Failure to do so would seriously expose compliant ship owners and operators who are bearing the high cost of ultra-low sulphur diesel oil”, BIMCO President John Denholm states.
What have owners done to meet this challenge? Only a few have a trading pattern for the individual vessels that makes them choose to invest in a scrubber. They simply do not spend enough time inside the ECA zone to see a payback time short enough to make the investment pay off. Most owners and operators have chosen to comply with the regulation by using ultra-low sulphur diesel oil. However, the fact that ultra-low sulphur diesel oil is 50% more expensive that Heavy Fuel Oil may be an incentive to stick with slow steaming schedules inside the ECA zones at least.
Ro/Ro shipping is currently one of few sectors with scrubbers on board several ships. Surcharges to shippers have already been widely announced on selected Far East to Northern Europe trades, all trans-Atlantic and all trans-Pacific trades in and out of the North American ECA