Container shipping rates finally tick up but industry oversupply could return in 2018

23 October 2017, Global – The global container shipping sector’s spot market freight rate index finally strengthened by 3% w/w after declining for 14 weeks. With the monthly newbuild vessel deliveries trending lower q/q in 4Q17 and the global trade demand remaining strong, we see limited downside risk to freight rates near term. We forecast the global container shipping demand to grow 5.0% y/y, ahead of our projected capacity growth of 3.9% y/y in 2017. However, 2018 could be a challenge again for the global container shipping industry as it will have to tackle more aggressive capacity growth.

NEXT YEAR’S MORE AGGRESSIVE CAPACITY GROWTH IS WORRISOME UNLESS GLOBAL TRADE DEMAND GROWS ABOVE 6% OR MORE THAN 3% OF THE GLOBAL CONTAINERSHIPS ARE SCRAPPED

Based on the existing orders, newbuild vessels are expected to add 1.6m TEUs to the global container shipping capacity next year. We forecast the global container shipping net capacity to grow 5.9% y/y in 2018, well ahead of our projected demand growth of 4.7%.

Therefore, the global trade demand growth will have to accelerate to 6.0% which looks ambitious, vessel scrapping needs to remove more than 3% of the global container shipping fleet capacity or some of the newbuild vessel deliveries are deferred to 2019 in order to keep the global container shipping industry’s demand and supply growth balanced.

2019 will be a more favourable year for the global container shipping industry as we expect the industry’s net capacity growth to drop to 2.0%, well below our projected demand growth of 4.1%.

Chart: Global container shipping demand and supply growth and idle fleet ratio versus freight rate growth (2007 to 2020)

Chart: Global container shipping demand and supply growth and idle fleet ratio versus freight rate growth (2007 to 2020)

 

THE PACE OF VESSEL DELIVERIES PICKED UP IN 3Q17 BUT IS EXPECTED TO SLOW IN 4Q17 BEFORE RISING AGAIN FROM 2018

As mentioned in our previous reports, we highlighted the oversupply risk as the pace of vessel deliveries are expected to pick up in 2H17 and they have. In 3Q17, 0.12m TEUs were delivered per month in the global container shipping sector. This is 34% higher than the average monthly capacity added in 1H 2017 and 58% higher y/y.

Newbuild vessel deliveries are expected to slow to 0.09m TEUs per month in 4Q17. However, they will accelerate again to 0.14m per month in 2018 which could result in industry oversupply and drive freight rates lower again.

Chart: Global containership capacity delivered (2014 to 2017)

Chart: Global containership capacity delivered (2014 to 2017)

SPOT MARKET FREIGHT RATE INDEX FINALLY TICKS UP AFTER DECLINING FOR 14 WEEKS

Spot market freight rates rose 3% w/w to US$747/TEU during the week ending 20th October 2017, a turnaround from their declining trend in the past 14 weeks. They are still 4% lower compared to a year ago.

Chart: Container shipping spot market freight rate index (2014 to 2017)

Chart: Container shipping spot market freight rate index (2014 to 2017)

HOWEVER, THIS WAS NOT BROAD-BASED AND PRIMARILY DRIVEN BY THE CHINA-DUBAI TRADE 

The w/w spot freight rate increase was primarily driven by a sharp spike in freight rates on the China-Dubai trade lane in the past week and not broad-based. Notably, the spot freight rates on China-Dubai routes have surged 39% w/w and 56% in the past two weeks.

Listed Asian carriers with the largest capacity exposure to the Indian Subcontinent & Middle East trade lanes are Wan Hai  2615:TT (31%, 1.2x P/B) and OOIL 316:HK (16%, 1.3x P/B).

 

Chart: China-Dubai spot freight rates (2014 to 2017)

Chart: China-Dubai spot freight rates (2014 to 2017)

FREIGHT RATES WERE LARGELY STABLE OR LOWER W/W IN ALL THE OTHER TRADE LANES 

The carriers have made multiple attempts to raise freight rates in 2H17 with limited success so far, mainly due to higher capacity growth in 3Q17.

The Intra-Asia Pacific freight rates have been fairly stable. The China-South East Asia and China-Australia/New Zealand freight rate indices held steady w/w and y/y.

The Asia-Europe freight rate index also held steady w/w but was still 11% higher y/y. On the Transpacific trade, both the Asia-North America West Coast and East Coast freight rate indices fell 2% w/w and were 17% and 13% lower y/y.

This is despite strong shipping volume on these two major long-haul routes. Container shipping volume on both the Asia-Europe and Asia-North America trade lanes have risen 5.3% y/y ytd. As such, it is mainly the excess capacity, and not the lack of market demand, that has capped freight rate recovery on the Asia-Europe and Transpacific trade lanes.

Listed Asian liners with the largest capacity exposure to the Asia-Europe trade are Yang Ming Marine 2609:TT (39% of total capacity, 1.2x P/B), Nippon Yusen Kaisha 9101:JP (38%, 0.7x P/B) and Evergreen Marine 2603:TT (32%, 1.3x P/B).

Listed Asian carriers with the largest capacity exposure to the Transpacific trade are Kawasaki Kisen Kaisha 9107:JP (55% of total capacity, 1.2x P/B), Mitsui OSK 9104:JP (48%, 0.7x P/B) and Hyundai Merchant Marine 011200:KS (33%, 1.9x P/B).

Chart: Asia-Europe freight rate index (2014 to 2017)

Chart: Asia-Europe freight rate index (2014 to 2017)

Chart: Asia-North America West Coast and East Coast freight rate indices (2014 to 2017)

Chart: Asia-North America West Coast and East Coast freight rate indices (2014 to 2017)

 

Related Articles:

CMA CGM mega ship orders may drive market share race & Asian shipbuilder equities

Orient Overseas (316:HK)’s long-haul exposure rose, unit cost ex-fuel fell, stronger 2H17 outlook

Global Container Shipping Outlook 2017: Capacity discipline is needed to support & lift freight rates; increased industry concentration helps

 

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